00:00Now, Europe's economy is facing a dangerous combination of challenges – sluggish growth, mounting public debt and rising borrowing costs.
00:08As sovereign bond yields put pressure on government finances, Europe's ability to invest in its future is increasingly in question.
00:16Meanwhile, deep-rooted structural weaknesses, from poor productivity to a lack of competitiveness, continue to hold the continent back.
00:25What needs to change to get Europe back on track?
00:28Let's put this question to Mateusz Szurek, head of the IMF's European department, who joins me now in the studio.
00:35Good morning and great to have you here.
00:37Good morning.
00:37So, what is Europe's economic perspective and what should we be worried about?
00:44Let's start with good news.
00:45First of all, Europe is coping with the latest stress, that is the war in the Middle East and the
00:51spike in energy prices, rather well.
00:55In fact, growth has been higher than we feared it would have been, and that is good news.
01:04Inflation is higher, but it's not in a runaway path.
01:08It's well contained, given the scale of the shock to the energy.
01:13The bad news is that the potential growth, the long-term growth outlook, remains rather poor.
01:21You're talking about 1% expansion that is normal, and that normal is worrying.
01:28And Europe needs, and European countries, need to work on increasing this potential to increase prosperity of its citizens, to
01:40make it easier for the governments to provide public services, and that requires reforms.
01:46In several countries, sovereign bond yields have come under pressure.
01:52Is this a warning from the markets?
01:56Indeed, governments in Europe and across the world, they pay more to service the debt.
02:01And this increase is, to some extent, it's global.
02:05It's linked with higher prices, higher interest rates, with central banks in the world.
02:09But there is a local perspective, and countries in Europe that have higher public debt, that have more political instability,
02:19that have uncertain fiscal prospects, they pay more.
02:24And that is a powerful reminder that we cannot run very large budget deficits forever, and that public debt needs
02:30to be serviced.
02:31And the costs of servicing this debt can crowd out other public spending.
02:36This brings me to France.
02:38Could France become the next weak link in the Eurozone, potentially threatening financial stability across the monetary union?
02:48I mean, it's well within France's ability to stabilize and bring down bond yields and the costs of servicing public
02:59debt.
02:59But that requires quick adoption of the 2027 budget.
03:04It requires putting public debt at a sustainable path.
03:08And the elections next year, that brings an ability for France to set the new path in this respect and
03:17stabilize the situation.
03:18So far, it's still an orderly, yes, the yields are higher, but the markets are functioning normally.
03:26Are you worried about the growing political instability in Europe?
03:30I mean, looking at France, you mentioned the elections, looking at Spain, where we have elections, looking at Germany.
03:37In Europe, we always have elections.
03:39So there's nothing to worry about.
03:41But maybe not that consequential.
03:43There's nothing to worry about.
03:44Whatever, I mean, okay, the IMF is never commenting on the elections themselves, but we do comment on policies.
03:52And that is rather clear what needs to be done.
03:54What needs to be done is to stabilize public debt and make sure that growth accelerates.
04:04And these growth-enhancing reforms will make also the political tensions within countries much less.
04:11Because when wages grow, when prosperity grows, then the political pressures also fall.
04:21There's no shortage in Europe of economic diagnosis.
04:26You know, think about the Draghi report years ago.
04:29Why is it so painfully slow to implement the recommendations?
04:33I mean, growth-enhancing reforms, the ones that influence the way firms do business, the way we pay taxes, they,
04:42first of all, they always take time.
04:44And they are sometimes less flashy than the big announcement on new spending measures, for example.
04:51So it has to be said that a lot is being implemented across European countries and also in Brussels.
05:01So I would say, oh, give it time.
05:03The thing is that the world is not standing still.
05:07The world is changing.
05:08The economic structure of European economy needs to change more quickly.
05:13And European firms, indeed, lack flexibility and scale.
05:17And for that, there is more needs to be done.
05:21Coordination is always difficult.
05:22But I'm hopeful that the improvement will happen and Europe will be more prosperous.
05:28All right.
05:29Mateusz Szurek, thank you so much.
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