Key facts
- Around three-quarters of European countries need fiscal consolidation of about 3.5% of GDP on average.
- Planned fiscal consolidation averages about 2% of GDP, below required levels for some nations.
- EU debt-to-GDP ratio projected to rise to 85.3% by end of 2027.
- Euro zone debt projected to hit 91.2% by end of 2027.
- Weak productivity is the biggest obstacle to faster economic growth in Europe.
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 April forecasts. Inflation in the 21 countries sharing the euro is forecast at 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% 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 averaged about 2% of GDP, which is below what will be required in some countries.
The IMF forecast for Europe said that even the envisaged consolidation may prove challenging, as baseline projections show fiscal consolidation will undershoot for most countries. About one-quarter of European countries would need to consolidate by more than 5% 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.
European Commission projections from May show the EU'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.
Mateusz Szczurek, head of the IMF's European department, told Reuters that given the long-term spending challenges related to aging, higher defense 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. He added that stabilizing debt growth requires fiscal action and consolidation, and that it is always cheaper to move faster.
The IMF identified weak productivity as the biggest obstacle to faster economic growth in Europe, urging governments to remove barriers within the European Union's internal market and invest in innovation and the scaling up of businesses. 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.