After years of relative quiet, fiscal policy is poised to retake centre stage in the eurozone’s economic narrative.
As member states unveil their 2026 budget plans, a renewed focus is falling on deficits, debt dynamics, and the sustainability of public finances, metrics that had receded during the European post-pandemic recovery.
The International Monetary Fund’s latest Fiscal Monitor forecasts a gradual but persistent deterioration in the eurozone’s fiscal outlook.
The region’s aggregate budget deficit is projected to widen from 3.2% of GDP in 2025 to 3.4% in 2026, reaching 3.6% in 2027 and 3.7% by 2030. While deficits above the 3% Maastricht threshold have become the norm since the pandemic, the IMF’s projections confirm that fiscal rebalancing remains elusive.
Government debt is expected to rise in tandem. The eurozone’s overall debt-to-GDP ratio, which had stabilised in recent years, is now forecast to increase from 87.8% in 2025 to 92.2% by 2030. The burden is not evenly distributed across member states.
France and Belgium are set to see the sharpest increases in debt levels, with France climbing from 116.5% of GDP in 2025 to 129.4% by 2030, and Belgium rising from 107.5% to 122.6% over the same period.
Germany, traditionally seen as a model of fiscal prudence, is projected to increase its debt ratio by more than 9 percentage points, from 64.4% to 73.6%.
Italy, already among the bloc’s most indebted economies, will see a more stable path — rising marginally from 136.8% in 2025 to 137.0% by 2030, though still maintaining one of the highest debt burdens globally.
In contrast, Spain and Portugal are expected to reduce their debt ratios, reflecting stronger nominal growth and continued fiscal consolidation. Spain’s debt is forecast to decline from 100.4% to 92.6%, while Portugal’s drops from 90.9% to 77.4%.
Greece is on a steady path of debt reduction, with its ratio expected to fall from 146.7% in 2025 to 130.2% by 2030.
Ireland and the Netherlands are expected to remain the eurozone’s most fiscally resilient economies. Ireland’s debt-to-GDP ratio is projected to fall steadily from 33.0% in 2025 to just 28.2% by 2030, while the Netherlands sees a gradual increase from 44.0% to 48.5%—still among the lowest in the bloc.
'Fiscal policy will take centre stage'
Goldman Sachs economists expect a modest but clear shift in 2026.
“We expect fiscal policy to take centre stage of the euro area economic outlook,” they wrote in a recent report. This shift will be driven by “the rollout of the German fiscal package, increasing defence spending and continued budget tensions in France.”
Germany is at the heart of this expansionary pivot. According to Goldman, the deficit in Germany will increase from 2.9% to 3.7% of the GDP, reflecting the implementation of a large fiscal package approved earlier in 2025.
In France, political fragmentation continues to weigh on fiscal consolidation. Goldman forecasts the fiscal balance to improve only marginally, from 5.4% to 5.3% of GDP.
While headline debt levels are rising across much of Europe, the Kroll Bond Rating Agency (KBRA) underlines that fiscal paths are diverging significantly.
“Within Europe’s largest sovereigns, France, the UK, Germany, Spain and Italy appear under pressure, whereas Portugal, Ireland and Greece stand out as relative outperformers,” wrote Ken Egan, senior director at KBRA, in a report shared with Euronews.
Structural fiscal pressures — ranging from population ageing to climate transition costs and renewed defence spending — are intensifying.
Defence outlays, in particular, are poised to rise toward 3.5% of GDP by 2035, and KBRA estimates that even by 2030, the increase could widen fiscal balances by 0.9 percentage points, despite support from EU-wide mechanisms like the Recovery and Resilience Facility.
Meanwhile, the eurozone’s traditional periphery is showing signs of fiscal discipline. Portugal, Ireland and Greece — once at the epicentre of the euro crisis — have made substantial progress on primary balances and debt sustainability, albeit with more limited market impact due to their smaller sovereign bond footprints.
Are 'bond vigilantes' back in Europe?
Governments are spending more again, but markets may no longer be in a forgiving mood, according to experts.
“In bond markets that are now more vigilante-driven,” KBRA noted, “investors are quick to reprice stress and test fiscal credibility.”
A bond vigilante is a trader who sells bonds as a way to protest against government policy.
With 40–45% of public debt across the eurozone set to be refinanced within three years, higher borrowing costs could translate swiftly into larger interest outlays.
Rising bond yields across the eurozone could strain national budgets further, amplifying fiscal pressures.
For an average eurozone government with debt levels near 90% of GDP, KBRA estimates that a 100-basis-point increase in yields would lift annual interest outlays by up to 0.46% of GDP within three years — adding roughly €20 billion to Germany’s annual budget or €10bn to Italy’s.
"The focus should shift from invest more to invest better: stricter spending reviews, disciplined pipelines, and capex that adds to net worth," said Ken Egan.
Fiscal policy back in focus
The eurozone’s fiscal outlook is entering a new phase, one marked by diverging national strategies, elevated debt loads, and a more reactive bond market.
While the bloc as a whole benefits from deep capital markets and flexible fiscal management, the coming years will test the credibility and adaptability of member states’ budgetary policies.
As 2026 approaches, fiscal policy is no longer a silent force in the background — it is, once again, at the forefront of the eurozone’s economic story.
