UBS Economics-European Economic Perspectives _Eurozone How much fiscal bo...-118395740

ab22 October 2025Global ResearchEuropean Economic PerspectivesEurozone: How much fiscal boost in 2026?2026 draft budgets provide updated fiscal projectionsFiscal stimulus in the form of higher defence spending across the EU and higher infrastructure spending in Germany is likely to be the key theme for the European macro outlook in the next two years. As usual in mid-October, most EU governments have submitted their 2026 draft budgets to the European Commission, providing an update to 2025 fiscal projections and plans for 2026. In this note, we review and aggregate the individual country plans, which show a large increase in the German headline budget deficit, but more mixed developments elsewhere. For the five countries that have not (yet) published their draft budgets (Belgium, Croatia, France, Lithuania and Spain), we use projections from the latest IMF Fiscal Monitor. Overall, we draw three key conclusions: (1) The draft budgets point to moderate fiscal easing in 2026 of 0.2% of GDP (in cyclically adjusted terms), less than our earlier expectation for 0.4% of GDP. Our growth multiplier assumptions would imply that the GDP growth boost would be 15-20bp in 2026 (using the draft budgets), somewhat below our forecast of 30bp. (2) Eurozone fiscal easing is more dependent on Germany implementing its large fiscal package than we expected previously. (3) Countries plan to increase defence spending by around 0.2% of GDP each year, but this does not always go along with higher budget deficits. Eurozone headline deficit set to rise in 2025 and 2026...According to the aggregated draft budgets, the Eurozone headline budget deficit is set to rise from 3.1% of GDP in 2024 to 3.3% this year and 3.7% in 2026 (see Fig. 1 and 12 and overleaf for more details on the computation). The deficit increase this year would be the first since 2020. However, the increase in the aggregated Eurozone deficit masks significant cross-country divergence: While 11 of the 20 Eurozone countries project rising deficits in 2026, nine countries expect lower deficits. The largest deficit increases in 2026 are planned in the former "frugal" countries Germany (+1.1pp), the Netherlands (+0.8pp) and Estonia (+3.2pp). Deficit declines are planned in countries that are in Excessive Deficit Procedures, including Italy (-0.2pp) and Slovakia (-0.9pp), as well as in Spain (-0.2pp). For France, which has not yet submitted a draft budget, IMF projections show a deficit increase in 2026, in contrast to government plans. Without the increase in the German deficit, the Eurozone deficit would remain unchanged in 2025 and rise only slightly in 2026. The Eurozone government debt ratio is set to rise from 87.4% of GDP in 2024 to 90.3% in 2025 and 92.3% of GDP in 2026 (Fig. 7), according to the draft budget plans. ...primarily reflecting higher expenditures...The rise in the aggregate Eurozone headline budget deficit is primarily due to higher expenditures, with expenditures/GDP projected to