The International Monetary Fund has called on eurozone countries not to further relax fiscal rules to overcome the current energy shock, but instead to improve budget balances. The institution also clearly stated that it expects additional efforts from countries with high debt levels.
In its annual eurozone assessment published on Thursday, the IMF warned that further loosening of fiscal rules could undermine the credibility of the framework and increase debt levels. The institution stressed that especially highly indebted countries need to act more cautiously during this process.
Energy Crisis and Budgetary Pressure
Eurozone countries most affected by the energy crisis are demanding greater flexibility in the rules. The ongoing war in the Middle East is also putting pressure on European importers heavily dependent on oil and gas.
Across the region, an excessive deficit procedure with a threshold of 1.5% is already in place. While this regulation allows room for defense spending, some European Union countries are seeking further relaxation beyond this due to the energy crisis.
IMF Managing Director Kristalina Georgieva said at a press conference that consecutive shocks have pushed governments to take fiscal measures to protect consumers and businesses. Georgieva also noted that this creates an expectation for public support with every future shock.
She warned that the world is entering a period more vulnerable to shocks and emphasized the need to carefully manage limited public resources. The IMF chief stated that in a time when such support will continue to be necessary, resources must be spent very prudently.
Italy and Highly Indebted Countries
Italy’s Prime Minister Giorgia Meloni is leading the call for flexibility. In a letter to European Commission President Ursula von der Leyen at the end of May, Meloni requested more flexibility to address the energy crisis.
Last week, the European Commission announced that flexibility can only be provided within the existing framework. Accordingly, 0.3 percentage points of the 1.5% margin allocated for defense can be redirected to energy expenditures.
Georgieva said the IMF expects countries to be disciplined in how they use this flexibility, especially those with high deficit levels.
While welcoming the Commission’s recent steps, the institution also emphasized that medium-term structural fiscal adjustment is mandatory for highly indebted countries like Italy. The statement noted that eurozone governments should reduce deficits, while those with surpluses should increase them.
Call for Stricter Adjustment from 2025 to 2031
The IMF recommended that, excluding Germany, the eurozone improve its structural primary balance by about 3 percentage points of GDP between 2025 and 2031. This target implies an additional 1.3 percentage points of effort for highly indebted countries compared to the current baseline scenario.
According to the institution’s message, fiscal adjustment will not be limited to cutting expenditures. It requires reprioritizing spending, improving spending efficiency, implementing structural reforms in social benefits, and strengthening revenues through growth-supporting measures.
The IMF wants eurozone countries to make public finances more resilient in the face of the energy shock and slowing growth. According to the institution, in the current uncertain environment, credible and lasting budget discipline should take precedence over fiscal easing.
