Finland has already set in motion an excessive deficit procedure (EDP) by violating the 3% of GDP deficit threshold. This breach risks shattering the country’s fiscal credibility in the years to come. Without significant action to change this trajectory, their most recent projections show a worrisome picture – a projected shortfall of 4.5% in 2025 and 4.0% in 2026. This decision is a watershed moment in the coercive actions being undertaken by the European Union to impose ideological budgetary discipline on its member states.
Germany has successfully avoided entering an EDP despite a projected deficit of 3.1% of GDP in 2025 and 4.0% in 2026. The German government attributes its high deficit to increased defense spending and temporary fiscal easing measures, justified in light of ongoing geopolitical tensions. This tact seems to have full EU authorities, keeping Germany free from any wrath as it sails through endeavors payments arguments with no fear of discipline.
France is, for the time being, under an EDP since 2023, with a forecast deficit of 5.4% in 2025. The national government of France has similar fiscal woes. Even worse, it will fail to adopt a budget for 2026 before the Christmas holiday, leading to serious questions about its fiscal prudence and overall leadership. France’s deteriorating fiscal stance is the heart of EU leaders’ concern. They, too, are very interested in making sure that states do not push up against budgetary guardrails.
Bellissima, Italy, you’re on the right track! Furthermore the country is about to leave the EDP, with a planned deficit of only 2.6% in 2026. It has been only two weeks since Italy celebrated an important milestone, its first upgrade from Moody’s since 2011. This is its first upgrade in 23 years! This advance upgrade indicates the increasing investor confidence after Italy showed better fiscal discipline and stronger economic response.
The wider euro area economy has been surprisingly resilient in the face of geopolitical noise and introduction of U.S. tariffs. The region’s surprising growth path this year has been largely underpinned by strong domestic demand, which has particularly helped boost growth in Southern Europe. Notably, France’s services sector emerged from contraction for the first time in 2025, evidenced by a purchasing managers’ index (PMI) reading of 51.4. All-in-all this development is a sure sign that France’s economic landscape is turning around for the better.
Italy and Spain will have smaller budget deficits this year than Germany. That trend will continue, they say, for the next two years. This trend marks a significant reversal in fiscal health among these countries. They are turning into stable economies, at least within the euro area straightjacket.
Headline inflation in the euro area increased marginally to 2.2% y-o-y in November. This latter increase moves it closer to the European Central Bank’s target inflation rate of 2%. This uptick in inflation presents new challenges for policymakers as they balance the need for economic growth with price stability.
Looking ahead, Germany’s economy may show signs of growth, bolstered by improved PMIs in the fourth quarter compared to the third quarter. Yet Germany’s industrial base and strong consumer confidence continue to highlight the country’s underlying strengths. That prospective upturn is propping up the country’s fiscal picture, despite ever-growing deficits.