“Public debt levels in the eurozone remain high and need to decrease,” Christine Lagarde stated in a speech in Vienna, Austria, at a time when France appears to face substantial difficulties with its 2026 budget.
Largarde explained that the primary challenge “is not that governments generally fail to comply with budgetary rules,” but rather they must “prioritize spending that supports potential growth and strategic essential priorities, while also managing public finances.”
Currently, only a few countries in the eurozone, including France and Italy, take advantage of the possibility, offered by European rules, to extend the fiscal adjustment period to up to seven years, provided they invest in structural reforms and projects that increase productivity, according to Lagarde.
The frequent prioritization of current expenditures is explained by the “pressure to preserve the European social model and support aging societies in the short term,” she emphasized.
On the other hand, the lack of investment can lead to “budgetary stagnation,” where consolidation measures weaken growth, resulting in even more fiscal austerity, a “vicious cycle,” according to the former IMF director.
To avoid this hurdle, it would be better to use the flexibility of European rules by redirecting spending towards education, research, and productive investment.
Another approach suggested by Lagarde is to pool certain strategic expenditures at the European level, particularly in research and development, encouraging innovation, and in defense, to “deter hostile actors.”
