A dramatic new forecast from the International Monetary Fund (IMF) warns that Europe’s sovereign debt situation could quickly get out of hand unless the region takes immediate and action steps to its public finances.

A fresh policy note from IMF economists makes it clear that the ad hoc strategy to debt management is fast coming to an end. aging population, global transition to a new energy system and rearmament needs are all increasing pressures on nations.

Unless they are resolved over the long haul, analysts say debt dynamics could be put on an “explosive path” in many European nations. Relying on a push and pull at the edges of the system will probably not work because of the magnitude of the changes needed, and such a push and pull will also likely lead to “reform fatigue” across the system.

The new study is the latest in a series of reports warning of the financial strain on sovereign countries. A decade after a serious debt crisis almost split the eurozone into two halves.

Breaking out of marginal tinkering

Some of these nations are under close watch now, including the United Kingdom, France and Belgium, where public debt is as high or even higher than the size of the economy.

So to reverse that, the politicians need to shift their focus to a proactive and forward-thinking approach. But the IMF believes this must be coupled with fiscal consolidation and with tougher and more pragmatic decisions on the scale and funding of public services generally.

Based on IMF research, national spending will grow by 5% on average of total economic output by 2040. The rise comes at a time when the public has a low appetite for either more taxes or significant spending reductions and the economy is experiencing modest growth. As a result, public debt is taking an unsustainable trajectory and will increase to an average 130% of GDP – approximately double the current level.

A moderate set of reforms can fill in of the order of one-third of this fiscal deficit. Economists point to reforms of pension systems and measures to boost growth as the biggest benefits, but fiscal changes will still be needed in most countries.

Structural reforms can reduce the burden of fiscal consolidation, but are not enough to address the issue of sustainability in the long term. For some highly indebted nations, it may even be necessary to rethink the core concept of the services that they provide.

To rethink the role of government doesn’t automatically mean to break up the European social model. Rather, it calls for a practical review of the services which should be publicly funded, those where there may be a stronger role for the private sector, and the effective reallocation of responsibility.

The IMF pointed out that deep reforms are increasingly center stage in policy discussions. In Austria and Croatia, public wage bills have been thoroughly examined, for example, and in Belgium, France and Norway, there is a need to improve social spending. Other countries, such as Germany, Slovakia and Türkiye, have a great deal of potential to cut down on broad-based energy subsidies.

Finally, fiscal decisions will be more restricted, more contested, more consequential. The IMF’s conclusion is that the ‘muddling through’ and ‘reactive’ policies that have been adopted by many countries are fast reaching their limits when it comes to easing the pressures.