IMF managing director Kristalina Georgieva has warned that European Union nations face a significant fiscal challenge as public debt levels threaten to climb sharply over the coming decades.

Public debt across the European Union could surge beyond 130 per cent of gross domestic product by 2040 if current fiscal trends remain unchanged.

Without policy measures, we estimate that the simple average of public debt in EU countries would more than double to over 130 per cent of gross domestic product by 2040, the IMF head warned.

These long-term projections reflect the intense pressure already weighing on state budgets due to rising costs in pensions, healthcare for ageing populations, and the necessary energy transition.

Increased defence spending is set to compound these financial burdens, with total additional outlays across these critical sectors expected to reach 5 per cent of gross domestic product by 2040.

Countries lacking sufficient fiscal room must prioritise defence expenditure through fiscally neutral methods, which may require making difficult decisions regarding tax increases or cuts to other public spending, according to Georgieva.

Structural reforms are essential to complete the single European market and boost sluggish growth rates, which remain a primary obstacle to stabilising national debt levels.

For the average European economy, even structural reforms that boost growth to a modest degree could reduce the necessary fiscal adjustment to put debt on a downward path by about one-fifth, and the more ambitious the growth-oriented reforms, the smaller the required fiscal effort will be, she stated.

The upward trajectory of EU debt is further evidenced by the data presented in the April edition of the IMF Fiscal Monitor.

Public debt for the entire Eurozone is projected to climb from 87.1 per cent of gross domestic product in 2025 to 89.7 per cent by 2031.

It is notable that with the exception of four nations, including Cyprus, along with Greece, Spain, and Portugal, debt levels are expected to rise across the remaining member states.

Separate analysis from the IMF in April indicated that Cyprus is expected to record real gross domestic product growth of 3.8 per cent in 2025 and 3 per cent in 2026, positioning the country among the stronger performing economies despite heightened global economic risks stemming from conflicts in the Middle East.