IMF: EU debt and spending alarm, public services at risk

“Growing spending pressures from an aging population, climate transition, defense and interest burdens collide with already high debt levels and little political willingness to increase fiscal pressure or implement large-scale cuts. If left unaddressed, these forces would put public debt on an unsustainable trajectory and gradually undermine the quality and credibility of public services,” analysts warn. of the IMF. In this scenario “the objective is to keep public debt at sustainable levels. If nothing is done, the average public debt in the EU would double in the next 15 years, with average debt ratios in European countries reaching 130% by 2040”.

The recipe? For the Fund’s experts, a three-pronged strategy is needed: reforms, recovery and long-term institutional evolution. First, “the extent of the necessary consolidation depends largely on the ambition of the reforms”, they write, explaining that for a ‘typical’ country a moderate reform package could reduce consolidation commitments “by a third” to avoid a debt explosion. Simulations in hand, in the absence of reforms, the typical European country will have to implement a budget consolidation equal to approximately 5% of GDP cumulatively over five years (approximately 1% of GDP per year). With a moderate package of reforms, however, fiscal consolidation falls to around 3.5% of GDP over the period (0.75% per year). However, “the combination of reforms and fiscal consolidation is, ultimately, a decision that is up to each country, based on social preferences and political feasibility”.

This analysis, however, does not apply to countries with high debt, such as Italy which the report does not specifically mention but which according to government estimates will rise to over 130% of GDP this year under the weight of the superbonus. “Even with strong reforms and fiscal discipline, countries with high debt will likely face difficult choices regarding the scope of public services and the role of the state,” reads the IMF Paper. “In around a quarter of European countries, recovery needs exceed what has historically been achieved, even with moderate reforms” thus requiring “a broader debate on the sustainability of the European socioeconomic model, with its generous public services and its expansive welfare state”.

In these cases “policymakers may need to pragmatically reconsider the perimeter of the State, transferring part of the financing from public to private sources, through greater targeting of benefits, reform of subsidies and increases in user fees for higher income groups, as well as the restructuring or privatization of state enterprises, while protecting essential services and vulnerable families”, say IMF experts. “The potential savings from these fundamental changes are huge. For example, aligning the share of public financing in the health, education, infrastructure and climate sectors with the OECD average could save almost 3% of GDP for an average European country. Such changes, however, could undermine the very heart of the social contract and, to be successful, will require careful reflection, broad consultations, clear communication and integration into well-structured medium-term plans,” they conclude. by Luana Cimino