IMF Advocates Brussels to Examine the Effects of Rising Military Expenditure on Sustained Public Debt Levels
Let's Chat: The International Monetary Fund (IMF) is giving the European Union (EU) a solid kick in the pants, urging them to seriously consider the consequences of increased defense spending on their public debt sustainability. With a shaky global economy due to trade disputes, commercial wars, and geopolitical risks, the IMF's not messing around. In their latest report, they predict moderate growth of 0.8% in 2025 and 1.2% in 2026. However, they're skeptical about these projections due to the potential boost from defense and infrastructure spending wearing off.
The EU's anticipated slowdown in investments and consumption, despite lower interest rates and increased real incomes, is causing a stir. Inflation is expected to hover around 2%, and service prices will moderate, lowering the underlying rate for 2026. Kristalina Georgieva, IMF honcho, warned that Europe could slip behind other advanced and emerging economies if they don't get their act together at the EU level, risking stagnation.
Problems Ahead
The IMF outlines several challenges that could impact inflation, including the decreased cost of non-energy goods, trade diversion, low activity and wages, and the euro's appreciation against the dollar. They also worry that public spending might exceed expectations and that geopolitical conditions could disrupt the global supply chain or increase the prices of imports due to further escalations of global tariffs.
Game Plan at the EU Level
The IMF insists that strategic policies are essential at the EU level to boost growth in the face of aging populations and a tough external environment. Their objectives call for strengthening potential growth, focusing on areas like innovation, reducing internal barriers, facilitating business expansion, and fostering a common regulatory framework. To achieve these objectives, they recommend deepening the single market, reducing internal barriers equivalent to a 44% tariff on goods and 110% on services, creating a common regulatory framework to facilitate business growth and the movement of capital, fostering the unification of capital markets, completing the banking union, boosting labor mobility, and integrating the energy market.
Home Grown Solutions
The IMF suggests that the EU should commit to closing 50% of the "priority policy gaps" regarding the most growth-friendly regulatory frameworks. According to the IMF, doing so would increase the EU's GDP by 5.7% in the medium term. They advise focusing on the labor market, human capital, structural fiscal issues, business regulation and credit and capital markets.
Tackling taxation issues is also deemed necessary. For indebted countries, urgent reforms are necessary to address tax-related problems, while less drastic adjustments can be made for less indebted countries. The IMF proposes moving from the current average deficit of 1.5% in the eurozone to a surplus of 1.4% by 2030.
Shared Priorities
Regarding defense spending, the IMF suggests limiting the "escape clauses" for supporting increased defense spending by the Twenty-Seven. Coordinating projects and investments could make them profitable, while jointly channelling investments in clean energies could reduce costs by 7%. These examples illustrate shared priorities among Union members, compelling states to decide whether they want to deepen shared priorities or remain within their national borders.
The Financial Stability Evaluation Programme (FSEP) concluded that the European banking network is adequately capitalized and liquid, but fragmentation prevents the benefits of banking union and the creation of a resilient financial system.
In essence, the IMF's recommendations for the EU revolve around coordinating policies, deepening market integration, boosting financial and labor market flexibility, investing more in public goods like research and development and infrastructure, and reforming fiscal frameworks—all aimed at reducing barriers, fueling innovation, and unlocking higher EU growth potential by up to 3% in a decade.
- The IMF suggests that limiting the escape clauses for supporting increased defense spending by the Twenty-Seven could make projects and investments profitable, demonstrating shared priorities among Union members, and emphasizing the need for countries to choose between deepening shared priorities or remaining within their national borders.
- In the Financial Stability Evaluation Programme (FSEP), the IMF concludes that while the European banking network is adequately capitalized and liquid, fragmentation prevents the benefits of banking union and the creation of a resilient financial system, necessitating efforts to address this issue.
