IMF Warns: European Economy Faces Risk of Stagnation, Recommends 50% Increase in Budget

On Thursday, Eastern Time, the International Monetary Fund (IMF) warned that Europe could face the risk of economic stagnation if it does not take urgent measures to address slowing economic growth, weak investment, and escalating geopolitical threats.

The IMF stated that barriers in the European single market are hindering economic development and recommended deepening the EU single market and increasing fiscal budgets.

Europe is facing the risk of economic stagnation

The IMF said that the eurozone economy is grappling with an increasingly challenging global environment, including tariff hikes, heightened uncertainty in trade policies, and geopolitical risks.

The IMF expects that despite the eurozone's unemployment rate projected to hit a record low this year and inflation approaching the target, economic growth will only reach 0.8%, with a possible rebound to 1.2% next year.

In its report, the IMF wrote:

"Heightened trade tensions and uncertainties have dimmed the prospects for domestic demand and exports (in European countries), offsetting the expected boost from increased defense and infrastructure spending. Moreover, despite expected easing of monetary policy and growth in real incomes (in Europe), the geopolitical situation in Europe is expected to dampen market sentiment and drag on investment and consumption."

Calls for deepening the single market and increasing fiscal budgets

To revitalize productivity, the IMF called on the EU to decisively promote the deepening of the single market, adding that fragmentation stifles innovation and corporate growth.

According to IMF data, the cost of national barriers within the EU is equivalent to imposing a 44% tariff on goods and a 110% tariff on services.

The IMF said that eliminating these gaps through coordinated regulation, capital market reforms, and labor mobility could increase the EU's gross domestic product (GDP) by 3% within a decade.

The IMF also highlighted four key actionable priorities: reducing regulatory fragmentation; advancing the Capital Markets Union (CMU); enhancing labor mobility within the EU; and integrating the EU energy market under a coordinated energy system transformation strategy to provide lower and more stable energy prices.

Regarding fiscal policy, the IMF stated that as defense spending, population aging, and climate change significantly increase fiscal costs, countries with fiscal space should invest, but highly indebted member states will need to make significant fiscal adjustments to reduce risks.

The IMF called for the EU to increase its fiscal budget by 50% to achieve common goals. Additionally, it proposed that the EU also needs to undertake fiscal reforms to make the budget more streamlined, responsive to changing needs, and efficient by incentivizing good performance.

The IMF also warned that European companies, particularly those with trade exposure to the US, may face the risk of a deteriorating business environment, which could put pressure on banks' otherwise healthy balance sheets.