IMF chief: European lifestyle is at risk if productivity isn't boosted

Euronews

2 days ago

Europe needs to boost its growth in the face of global headwinds or risk losing its way of life, said the head of the International Monetary Fund Kristalina Georgieva on Wednesday.
'I don't want Europe to become the United States of America, but I want the productivity and functionality of Europe to go up,' she told Euronews.
'In Europe we enjoy being a lifestyle superpower. Unless we become more productive we may lose this advantage,' she added.
Georgieva was speaking ahead of the publication of a new IMF statement on Thursday, which offers economic suggestions to eurozone nations.
One key message is that Europe must speed up progress on the single market, which ensures the free movement of goods, services, capital and people between single market nations.
'There are no tariffs within Europe, but it doesn't mean there are no barriers in Europe, regulatory and otherwise,' Georgieva told Euronews.
The IMF estimates that barriers to free movement in the single market are equivalent to a 44% tariff on goods and a 110% tariff on services.
Georgieva noted that in the US, what is produced in one state is split 30-70, meaning 30% is consumed in that state and 70% is sent to other states. In Europe, on the other hand, 70% of production is consumed domestically while 30% is sent abroad. This is a set-up that limits growth by keeping markets smaller and less competitive.
'If Europe completes the single market, over 10 years, it would boost GDP by 3%,' said Georgieva.
Means to advance progress on this front include lowering regulatory fragmentation, supporting labour mobility, facilitating cross-border banking mergers, integrating the energy market, and making progress on the capital markets union (CMU) — said the IMF.
The CMU aims to allow investment and savings to flow seamlessly across member states. This would make it easier for businesses in one EU state to source funding from another EU state, supporting firms to grow and create jobs.
In terms of deepening capital markets, the IMF's statement added that the EU should 'increase institutional investors' familitary with venture capital as an asset class and address remaining undue restrictions on their ability to invest in it'.
Looking ahead, the IMF expects eurozone growth at a moderate 0.8% in 2025, picking up to 1.2% in 2026.
Trade and geopolitical tensions are expected to dampen sentiment and weigh on investment and consumption.
With regards to interest rates, the IMF argued that 'a monetary policy stance close to neutral is justified' as headline inflation nears the ECB's 2% target.
When balancing spending pressures with fiscal sustainability, the IMF recommended that countries with strong public finances support countries with less room for manoeuvre.
'It is crucial that care be taken in implementing the EU fiscal rules to ensure that countries with low fiscal risks that intend to increase spending to boost potential growth and enhance resilience should not be constrained from doing so by the rules,' said Thursday's statement.
As widely anticipated, the Bank of England (BoE) decided to keep its benchmark rate at a 2-year low of 4.25% on Thursday.
This comes as fears grow that the conflict between Israel and Iran will escalate and that US tariffs will further fuel inflation.
Six out of the nine-member panel of the monetary policy committee voted to hold, while three of them saw fit to cut.
The bank lowered its rate to 4.25% in May, the fourth cut after an aggressive tightening period in 2022-2023. More cuts are still expected in the coming months by the market.
The central bank's benchmark interest rate determines how banks change their rates on savings and loans.
UK inflation, the primary figure driving the monetary policy committee's decisions, came in at 3.4% on Wednesday, far above the BoE's 2% target. Price increases, however, slowed slightly compared to the annual price change measured in April, which stood at 3.5%.
The prevailing view at the bank was that inflation would remain elevated over the coming months but start to slow towards next year.
But an uptick in oil prices, due to the current geopolitical crisis between Israel and Iran, could change this, as energy prices translate into the costs of producing and transporting all other goods.
'The risk to energy prices has clearly intensified and moved up the agenda given developments in the Middle East,' Sandra Horsfield, an economist for Investec, told AP.
Uncertainty over the level of tariffs US President Donald Trump will impose around the world is also clouding the outlook for prices across the globe.
'We are still awaiting the full impact of Donald Trump's tariffs to show up in the prices of goods. We are approaching the end of the 90-day pause on reciprocal tariffs, and what happens from there is really anyone's guess,' Lindsay James, investment strategist at Quilter said.
She added that even with the US-UK trade deal, the raft of tariffs on other nations would likely be felt in some form in the UK too. This will especially be the case if the UK's biggest trading partner Europe leaves the table with no agreement.
While setting their focus on inflationary risks, the BoE also need to consider that growth in the UK economy is slow and could benefit from lower interest rates. In April, economic output sank by 0.3%, due to falling exports to the US and higher costs for businesses, including a tax raise.
"The expectation is the UK economy will stagnate again in the second half, making the need for rate cuts more prominent," James said. "But with risks on the global stage not only uncertain but also substantial, the mantra of rates being 'higher for longer' will continue.'