Nicosia: 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 on Monday, at the Central Bank of Cyprus Auditorium in Nicosia.
According to Cyprus News Agency, 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). Pienkowski analysed the challenges facing European countries regarding the upward trajectory that public debt is expected to follow in the coming years.
Pienkowski noted that European governments are encountering an increasingly broad range of spending pressures amid 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 straining healthcare and pension systems.
His analysis suggests that these pressures could increase public spending by 4.5% to 5.5% of GDP by 2040, raising important questions about financing methods. Pienkowski highlighted that neither increased borrowing, given the end of the low interest rates era, nor raising taxes, with revenues already at historically high levels, are straightforward solutions.
Pienkowski warned that, if these pressures are left unaddressed, public debt could become unsustainable. In a hypothetical scenario with unchanged policies, public debt might double, reaching around 130% of GDP by 2040.
He presented IMF analysis on the concept of a 'debt anchor', estimating an average debt target of around 90% of GDP, with a limit of approximately 105% and a 15% safety buffer below that. This level is significantly higher than the 60% of GDP threshold set under the EU fiscal framework, indicating the increased debt-carrying capacity of economies in recent years.
To prevent an explosive debt path, Pienkowski outlined a policy framework based on three pillars: structural reforms to boost growth and contain spending, medium-term fiscal consolidation, and, where necessary, a reassessment of the state's role and the scope of public services.
Pienkowski emphasized the role of structural reforms, noting that they can significantly alleviate pressure on public finances by enhancing growth and improving spending efficiency. An ambitious reform agenda could substantially limit the rise in public debt, but Pienkowski stressed that reforms must be complemented by fiscal adjustment.
He also noted that countries with very high debt levels might face more difficult policy choices, including reconsidering the balance between public and private sector roles.
While Pienkowski's presentation covered European economies broadly, he specifically referenced Cyprus, highlighting it as a successful example of combining structural reforms with fiscal consolidation. Cyprus' public debt declined from 110% of GDP in 2014 to around 55% in 2025, which he described as a significant achievement at the European level.
He stressed that Cyprus demonstrates how fiscal discipline and pro-growth policies can substantially improve public finances, offering useful lessons for other countries. However, he acknowledged that Cyprus faces challenges similar to the rest of Europe, such as population ageing and energy vulnerabilities, emphasizing the need for continued investment in infrastructure and reforms to strengthen long-term economic resilience.
Pienkowski also mentioned the importance of deepening European financial integration and continuing reforms in areas like the judicial system to enhance the country's competitiveness.