Europe must boost growth or borrow less to keep debt sustainable, IMF says

By Jan Strupczewski

BANGKOK, Oct 16 (Reuters) - European economies must grow faster or borrow less to keep debt on a sustainable path, the International Monetary Fund said on Friday, warning that doing nothing was not an option.

The IMF forecast economic growth in the euro zone would be 1.1% in 2026 and 1.2% in 2027, unchanged from forecasts published in April. It forecast that inflation in the 21 countries sharing the euro would be 3.1% this year, 2.8% next year and 2.2% in 2028.    

"Around three-quarters of European countries will need a combination of structural reforms, to increase growth and ease spending pressures, together with deficit-reducing consolidation measures of about 3.5 percent of GDP on average, over the medium term, to keep debt sustainable," the Fund said. 

The fiscal consolidation planned under the EU's medium-term fiscal-structural plans, which every EU country had to agree on with the European Commission, averaged at about 2% of GDP, which was below what will be required in some countries, the IMF said.

"Even the consolidation envisaged may prove challenging, given that baseline projections of IMF staff show that fiscal consolidation will undershoot for most countries," the IMF forecast for Europe said.

"About one-quarter of European countries would need to consolidate by more than 5 percent of GDP, to keep public debt sustainable, more than what has generally proved feasible in the past, leaving no option but to rethink the scope of government activity, and increase the role of the private sector, to fill the gap," it said.

European Commission projections from May show the European Union's debt-to-GDP ratio was set to rise from 82.8% at the end of 2025 to 84.2% in 2026 and to 85.3% by the end of 2027. In the euro zone, debt is projected to rise to 90.2% in 2026, from 88.7% in 2025, and then hit 91.2% in 2027.

"Given the long-term spending challenges that most European countries face, related to ageing, higher defence needs and the continuing energy transition, public debt could grow substantially, to up to twice the current level in the average European economy without policy changes," the head of the IMF's European department Mateusz Szczurek told Reuters.

"In some of the faster-growing countries in Central Europe, the pace of this debt acceleration could be even higher," he said.

"If the definition of sustainability is whether you are able to stop this growth and stabilise it, that requires fiscal action and consolidation," Szczurek said. "It is always cheaper to move faster. The later you start, the more difficult it is to adjust."    

The biggest obstacle to faster economic growth in Europe was weak productivity, the IMF said, urging governments to remove barriers within the European Union's internal market and invest in innovation and the scaling up of businesses.

"Although some reform efforts are underway, a still-incomplete European Union single market and national barriers make it harder for firms to adjust, scale up, and access a larger market," the IMF said.

The Fund also called for the EU to continue moving away from fossil fuels into renewable sources of energy and diversify its global supply chains, including for critical minerals -- all policies the EU is already pursuing.

(Reporting by Jan Strupczewski; Editing by John Mair)