SDG 8: Decent Work and Economic Growth | SDG 16: Peace, Justice and Strong Institutions
Institutions: Ministry of Finance | NITI Aayog
The IMF’s Regional Economic Outlook Note, How Can Europe Pay for Things That It Cannot Afford? delivers a stark warning: Europe faces daunting fiscal pressures from rising defense spending, escalating costs of population aging (pensions and health care), and a rising interest bill on high debt. Without prompt policy action, the average European country’s public debt levels could more than double to 130 percent of GDP by 2040, reaching nearly 150 percent of GDP when accounting for a negative debt-growth feedback loop. These pressures, totaling an estimated increase of 4.5 to 5.5 percentage points of GDP by 2040, risk slowing already sluggish economic growth and undermining market confidence.
To keep debt on a sustainable “reference path” (below a 90 percent of GDP anchor), a comprehensive policy adjustment is needed. This package requires one-third of the adjustment to come from “moderate” reforms (e.g., pension adjustments, market deepening) and two-thirds from fiscal consolidation (tax reform, stricter spending prioritization). However, for the roughly one-quarter of European countries that already have high debt, these measures alone will be insufficient.
Policy Relevance: Combining Reforms, Consolidation, and Reprioritization
The IMF strongly advocates that delaying action will only worsen the fiscal position. The strategic approach for policymakers involves three pillars:
Structural Reforms: Implementing ambitious domestic reforms (business regulation, labor markets, governance) and EU-level reforms (deepening the single market, pension reform) can alleviate about one-third of the required adjustment.
Fiscal Consolidation: Medium-term consolidation (over the next five years) is necessary in most countries, combining revenue measures (e.g., strengthening administration, increasing carbon pricing) and expenditure measures (e.g., curbing wage bills, enhancing efficiency in healthcare).
Difficult Choices: For high-debt nations, meeting the fiscal challenge will require a more fundamental rethink of the scope of public services and the social contract to fill the remaining financing gap.
Why must high-debt European countries potentially rethink the social contract?→ High-debt countries, where reforms and conventional fiscal consolidation are insufficient will likely have no option other than a deeper rethink of the scope of public services. This means making tough decisions to adapt the socio-economic model by differentiating between basic and premium services (e.g., health, pensions, education). Only basic services would remain publicly funded and free, while premium services may need to be privately financed by individuals, particularly those on higher incomes.
Follow the full note here: How Can Europe Pay for Things That It Cannot Afford?