“European governments face an unprecedented financial challenge”: strengthening reforms and fiscal consolidation is essential to avoid a doubling of average public debt to 130% over 15 years. This warning comes from an IMF paper titled ‘Fiscal tightening in Europe: how to address rising spending pressures’.

The IMF analysts warn that rising spending pressures from population ageing, the transition to a low-carbon economy, defense needs and higher interest costs are colliding with already-high debt levels and limited political willingness to raise taxes or implement large-scale cuts. If left unaddressed, these forces would push public debt onto an unsustainable path and gradually undermine the quality and credibility of public services. In this context, the goal is to keep public debt at sustainable levels. Without action, average public debt in the EU would double over the next 15 years, with mean debt ratios in European countries reaching 130% by 2040.

The prescription, according to IMF experts, is a three-part strategy: reforms, fiscal consolidation and long-term institutional evolution. First, the size of the required consolidation depends largely on the ambition of reforms. For a ‘typical’ country, a moderate reform package could cut consolidation needs by about one third. Simulations show that, without reforms, the typical European country would need cumulative fiscal consolidation of roughly 5% of GDP over five years (about 1% of GDP per year). With a moderate reform package, consolidation falls to about 3.5% of GDP over the period (0.75% per year). Ultimately, the combination of reforms and consolidation is a decision for each country, based on social preferences and political feasibility.

This analysis, however, does not equally apply to high-debt countries, such as Italy — not named specifically in the report but estimated by the government to exceed 130% of GDP this year in part due to the superbonus. Even with strong reforms and fiscal discipline, high-debt countries will likely face difficult choices about the scope of public services and the role of the state. In about a quarter of European countries, consolidation needs exceed what has historically been achieved, even with moderate reforms, requiring a broader debate on the sustainability of Europe’s socioeconomic model with its generous public services and expansive welfare state.

In such cases, policymakers may need to pragmatically reconsider the perimeter of the state, shifting some financing from public to private sources through tighter targeting of benefits, subsidy reform and higher user fees for higher-income groups, as well as restructuring or privatizing state-owned enterprises, while protecting essential services and vulnerable households. The potential savings from these fundamental changes are sizeable: for example, aligning the public financing share in health, education, infrastructure and climate with the OECD average could save nearly 3% of GDP for a typical European country. These changes could, however, affect the core of the social contract and would require careful reflection, broad consultations, clear communication and integration into well-structured medium-term plans, conclude the IMF experts. by Luana Cimino