The IMF recommends Europe implement strategic macroeconomic policies, structural reforms, and increased green investment to address challenges such as reduced fiscal buffers, an ageing population, and low productivity growth.
The International Monetary Fund (IMF) has released its 2024 Concluding Statements on Common Policies for member countries, highlighting both the progress and the persistent challenges facing the euro area economy.
Following the disruptions caused by the pandemic, Russia’s gas supply halt, and the ongoing war in Ukraine, the region is gradually recovering.
Inflation rates are moving towards target levels, and banks have demonstrated resilience amid rising interest rates.
Nonetheless, significant challenges persist, such as reduced fiscal buffers, an ageing population, and sluggish productivity growth.
The IMF’s recommendations focus on implementing strategic macroeconomic policies and structural reforms to foster growth and stability.
Economic forecast and risks
The IMF forecasts modest growth for 2024, with further strengthening in 2025, driven by higher real wages and household savings reductions.
“Increasing real wages and some drawdown of household savings are expected to contribute to a consumption-led recovery,” the IMF notes.
However, long-term growth may be hindered by demographic trends and low productivity.
Inflation is expected to reach target levels by the second half of 2025, aided by previous monetary policy tightening and falling commodity prices. Despite this positive outlook, growth risks remain, particularly from potential external shocks such as geopolitical tensions and reduced global demand.
The IMF warns that “growth can also be lower due to adverse external developments, such as intensifying geopolitical tensions.”
According to the IMF’s World Economic Outlook released in April 2024, the Euro Area is projected to experience a 1.4% growth in 2024, with inflation anticipated to average around 3%.
IMF sees further gradual rate cuts
The IMF advises the European Central Bank to gradually ease its monetary policy based on incoming economic data.
The IMF states, “continued, gradual monetary easing would achieve a balance between keeping inflation expectations anchored and avoiding an overly restrictive policy stance.”
In June, Frankfurt reduced its main interest rates by 0.25 percentage points. However, it did not commit to further rate hikes, stressing a “meeting-by-meeting” and data-dependent approach.
Key ingredients for growth
Boosting productivity and achieving climate goals are critical for long-term economic health.
The IMF calls for increased investment in digital technologies, administrative reforms to reduce barriers for businesses, and greater labour market flexibility.
“Europe’s economy faces low productivity growth, which will be increasingly problematic as adverse demographic trends intensify,” the IMF warns.
Further integration of financial markets is essential for Europe to meet its goals for energy security, climate change mitigation, and digital transformation.
ADVERTISEMENTAn integrated capital market would facilitate financing for innovative projects and improve the allocation of savings within the European Union. The IMF advocates for “strengthening ESMA’s ability to coordinate across national authorities and greater harmonization of financial markets oversight.”
Enhancing the EU budget to better target public investment is another priority. The IMF suggests establishing a Climate and Energy Security Facility (CESF) to address long-term challenges effectively. This facility would support EU emissions reduction goals and facilitate investments in energy infrastructure and clean-tech sectors.
Climate policy should account for fiscal, efficiency, distributional, and cross-border impacts.
Meeting emissions reduction targets requires significant investment, reducing fossil fuel dependence, and boosting energy efficiency to enhance competitiveness. However, short-term costs could arise, the IMF warns.
According to the Washington-based institution, Member States should prioritise strengthening the single market and avoid distortive industrial and trade policies that could harm the economy and provoke retaliation.
ADVERTISEMENTLabour market and structural reforms
Labour market policies should aim to enhance skills, ease labour reallocation, and counter the effects of a shrinking workforce. Initiatives such as reskilling programmes, unemployment benefit reforms, and support for female labour force participation are essential.
The IMF highlights the need for “fostering mobility across the EU through faster recognition of professional qualifications and more portable pension and social security benefits.”