Rising fiscal pressures facing European economies and policy options to ensure debt sustainability were at the centre of a discussion organised by the Cyprus Economic Society, at the Central Bank of Cyprus Auditorium in Nicosia.
The keynote speaker of the event, titled 'How Can Europe Pay for Things it Cannot Afford?', was Alex Pienkowski, Mission Chief for Cyprus at the International Monetary Fund (IMF), who analysed the challenges facing European countries in relation to the upward trajectory that public debt is expected to follow in the coming years.
Growing pressures and limited fiscal space
Pienkowski noted that European governments are facing an increasingly broad range of spending pressures in a context of heightened uncertainty and structural transformation. Key drivers include rising defence spending, energy security needs, investments related to the green transition, and population ageing, which is placing additional strain on healthcare and pension systems.
According to his analysis, these pressures could increase public spending by 4.5% to 5.5% of GDP by 2040, raising important questions about how it will be financed.
As he pointed out, neither increased borrowing is an easy solution, given that the era of low interest rates has come to an end nor is raising taxes straightforward, in a context where revenues are already at historically high levels.
Pienkowski warned that, if left unaddressed, these pressures could put public debt on an unsustainable trajectory. In a hypothetical scenario (which he clarified is not an IMF forecast) with unchanged policies, public debt could double, reaching around 130% of GDP by 2040.
In this context, he presented IMF analysis on the concept of a “debt anchor”, noting that “we estimate an average debt target of around 90% of GDP, with a limit of approximately 105% and a 15% safety buffer below that.”
He added that this level is significantly higher than the 60% of GDP threshold set under the EU fiscal framework, reflecting the increased debt-carrying capacity of economies in recent years.
To avoid an explosive debt path and move towards a sustainable trajectory, he outlined a policy framework based on three pillars nanely structural reforms to boost growth and contain spending, medium-term fiscal consolidation, and where necessary, a reassessment of the role of the state and the scope of public services.
Role of reforms
Pienkowski placed particular emphasis on structural reforms, noting that they can significantly reduce pressure on public finances by enhancing growth and improving spending efficiency.
Based on the scenarios presented, an ambitious reform agenda could substantially limit the rise in public debt. However, as he stressed, “reforms alone are not sufficient”, and must be complemented by fiscal adjustment.
He also noted that for countries with very high debt levels, more difficult policy choices may be required, including reconsidering the balance between public and private sector roles.
What Cyprus has to do
Although his presentation focused across all the European economies, Pienkowski made specific reference to Cyprus (noting that the IMF will publish its Article IV report on the country next Monday), describing it as a successful example of combining structural reforms with fiscal consolidation.
He noted that Cyprus’ public debt declined from 110% of GDP in 2014 to around 55% in 2025, calling it a “significant achievement” at the European level
He stressed that Cyprus demonstrates how a combination of fiscal discipline and pro-growth policies can lead to a substantial improvement in public finances, offering useful lessons for other countries.
At the same time, he pointed out that Cyprus faces similar challenges to the rest of Europe, including population ageing and energy vulnerabilities, underlining the need for continued investment in infrastructure and reforms to strengthen long-term economic resilience.
He also referred to the importance of deepening European financial integration, as well as continuing reforms in areas such as the judicial system, which could further enhance the country’s competitiveness.
(Source: CNA)
