Europe could soon be engulfed in another sovereign debt crisis, unless it adopts “bold” policy responses, the International Monetary Fund (IMF) has warned.
In a report on Europe’s economy, the Washington-based fund also said the euro zone – while avoiding a “deep growth shock” from recent crises – had converged on a low growth path and that the impact of US tariffs was now beginning to “bite”.
It warned that public spending pressures in several countries had put debt on a potentially “explosive path”.
“Elevated public debt, an increasingly difficult financing environment and new spending pressures are creating a fundamental sustainability challenge at a time when countries face political polarisation, dissatisfaction with cost of living and reform fatigue,” it warned.
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Over a 15-year horizon, and with no growth reforms, no fiscal consolidation and no change in public programmes, debt for the average European country would reach 130 per cent of GDP (gross national product) by 2040, it said.
“This is roughly a doubling from today’s level, which would endanger debt sustainability,” it said. The debt surge could be even steeper if interest rates increase.
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“Addressing Europe’s fiscal needs requires a comprehensive policy package combining growth-boosting reforms, medium-term consolidation and, depending on circumstances, substantive fiscal reforms possibly involving difficult trade-offs,” the IMF said.
Both France and the UK have spiralling public debt and big budgetary gaps and face populist backlashes against proposed reforms.
“The next financial crisis is definitely coming ... and it will be a sovereign debt crisis,” German chancellor Friedrich Merz said recently.
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In its report, released to coincide with the IMF and World Bank autumn meetings in Washington DC, the IMF said that after weathering several recent shocks, the euro zone economy had now converged on “mediocre” growth pattern which was below the pre-pandemic average.
“Since 2020, growth rates have zigzagged as shocks (from the pandemic and Russia’s invasion of Ukraine) materialised, and policies responded,” it said.
“A feared deep growth slump was avoided but growth has now settled on an output trajectory well below the pre-Covid-19 trend,” it said.
The boost to growth seen in the first half of 2025 from the front-loading of exports (a trend it links to Irish pharma exports) is reversing “as tariffs start to bite and bond markets are pricing in elevated risks amid continued uncertainty”, the fund said.
It warned that the changing global landscape was now weighing on growth with euro zone growth predicted to be in region of 1.2 per cent this year, above the 1 per cent forecast in July, and 1.1 per cent in 2026 – a downgrade from 1.2 per cent.
Trade between the United States and the European Union which accounts for almost a third of global goods and services trade and 20 per cent of EU exports, had “become more costly”.
The October 2025 IMF forecast is based on the estimated effective US tariff rate on EU goods following the US–EU trade deal of 16.3 per cent, a rate 4.3 percentage points higher than that anticipated in July and 15 percentage points higher than that in 2024, it said.
