EU budget needs 'a comprehensive overhaul' to handle shocks, says IMF
The EU needs to spend more on public goods to strengthen productivity and growth, said the International Monetary Fund on Tuesday.
Speaking at the annual EU budget conference, Alfred Kammer, the IMF's European department director, noted that 'the scale and nature of the challenges ahead require a fundamental rethink'.
Kammer suggested that the EU should raise its spending on public goods from 0.4% of GNI (gross national income) to at least 0.9%.
Without cuts to existing programs, that would increase the bloc's MFF spending to 1.7% of GNI in the period from 2028 to 2034. That's up from 1.1%, Kammer added.
The MFF is the EU's long-term budget which usually covers a seven year period, with the current plan running up to 2027.
The IMF noted that Europe is facing a raft of challenges, notably ageing populations, the climate crisis, and a productivity slump. Rising geopolitical tensions and unpredictable US policies are further clouding the region's outlook, as the EU must become more self-sufficient in terms of security.
One way to tackle these issues is by boosting growth and improving the single market, said Kammer.
While goods, services, capital and people can in theory move freely between member states, the IMF warned that barriers still exist.
'The EU single market remains far from complete,' Kammer said at the Centre for European Policy Studies (CEPS) in a separate briefing on Monday.
'For instance, it can take up to 6 months for an EU worker who relocates to another EU country to be legally employed there. Large differences across bankruptcy procedures discourage cross-border investment, while having national stock markets introduces vast inefficiencies in the allocation of capital across the continent. This fragmentation increases costs and hurts business dynamism and growth.'
The IMF said it expects growth at 0.8% and 1.2% in 2025 and 2026, a reduction of 0.2 percentage points in both years compared to the projection shared in January.
It noted that inflation is decelerating and approaching targets, driven by lower energy prices and tepid demand.
Regarding the ECB trajectory, it said the central bank should lower its policy rate to 2% this summer and leave it stable for the foreseeable future.
Consumer confidence in the European Union and the euro area staged a modest rebound in May, according to the European Commission's Directorate-General for Economic and Financial Affairs (DG ECFIN).
The flash estimate released on Tuesday showed the consumer sentiment indicator rising by 1.4 percentage points in both regions, following sharp declines in April.
Nevertheless, sentiment remains substantially below its historical average, standing at -14.5 points in the EU and -15.2 in the eurozone.
Markets now turn their attention to Thursday's release of flash Purchasing Managers' Index (PMI) figures from Hamburg Commercial Bank, alongside Germany's closely watched Ifo Business Climate survey.
These indicators will offer a broader view of momentum across Europe's largest economies and the eurozone as a whole.
Consensus forecasts point to marginal improvements across the board.
Across the euro area, the composite PMI is anticipated at 50.7, up from 50.4 in April. Manufacturing is forecast to move closer to neutral territory from 49 to 49.3, while the services index is expected to edge up by 0.2 points to 50.3, potentially reinforcing the view of a shallow recovery taking shape.
In France, the composite PMI is expected to edge up from 47.8 to 48, still signalling contraction. Manufacturing and services are also forecast to inch up to 48.9 and 47.5 respectively, suggesting continued weakness in domestic demand.
Germany's outlook appears slightly more resilient. The composite PMI is projected to increase to 50.4 from 50.1, straddling the threshold between contraction and expansion. Manufacturing is seen improving to 48.9, while services are forecast to reach 49.5, hinting at soft but gradually recovering conditions.
Further insight into German economic sentiment will come from the Ifo Institute's May business climate report. Consensus points to an uptick in the headline index to 87.4, from 86.9 last month. The current conditions sub-index is projected at 86.8, while expectations are forecast to improve to 88 from 87.4.
European equities rise on Tuesday
The euro rose to $1.1250, up 0.1% on the session, extending gains made last week.
German 10-year Bund yields held their earlier advance, trading at 2.62%, up five basis points on the day.
European equity markets posted moderate gains on Monday, buoyed by the rebound in global risk sentiment from the past week.
The Ibex 35 led the region with a 1.55% daily gain by 16:20 Central European Time, supported by strength in the banking sector.
The Euro Stoxx Banks index advanced 1.1%, outpacing broader benchmarks. Austria's BAWAG gained 2.79%, while AIB Group rose 2.77% and CaixaBank added 2.22%, fuelling the rally in financials.
France's Cac 40 added 0.66%, Germany's Dax climbed 0.51%, and Italy's FTSE Mib edged up 0.46%, suggesting broad-based, if cautious, risk appetite across continental bourses.
The Euro Stoxx 50, however, slipped 0.05%, weighed down by a mixed performance among its large-cap constituents, while the pan-European Stoxx 600 rose 0.74%.
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