Frances Fiscal Turmoil Flips the Eurozone Stability Narrative

Once regarded as anchors of financial stability within the eurozone, Germany and France are now contending with turbulence that has upended old perceptions. These two former bastions, once considered the glue holding continental finances together, are moving in opposite fiscal directions. Their challenges contrast sharply with the improved fortunes of countries that once bore the label of Europe’s economic problem cases.

Germany’s recent decision to loosen debt rules marks a significant departure from its tradition of fiscal conservatism. In March, the country’s sixteen federal states voted to relax the “Schuldenbremse,” a constitutional debt brake that had previously limited new borrowing to 0.35 percent of GDP annually. This shift allows for up to €1 trillion of debt-driven investment in infrastructure and defence over the coming decade. Economists have described this as a historic moment, signalling the end of Germany’s cautious approach to public finances.

While Germany’s transformation is significant, the situation in France presents an even graver challenge. Political instability in Paris has been compounded by mounting debt, prompting speculation about the country’s ability to maintain financial independence. Concerns have grown to the extent that some observers have acknowledged the once unprecedented possibility of France seeking external assistance such as an IMF bailout. French borrowing costs have risen, and international bond markets now demand a premium to lend to Paris, a reversal from the nation’s previous status as a safe haven.

Spain, until recently one of the eurozone’s most acute casualties of the sovereign debt crisis, now offers a striking contrast. After receiving a bailout in 2012, Spain implemented a combination of fiscal discipline, improved tax revenues, and economic growth fuelled by tourism and immigration. Spain’s budget deficit is on course to fall below Germany’s for the first time in nearly twenty years, with forecasts pointing to continued improvement. Analysts at the Bank of Spain anticipate deficits dropping to 2.5 percent of GDP in 2025 and 2.3 percent in 2026, marking the sixth consecutive annual reduction.

Germany is projected to diverge from its traditionally sound fiscal footing. The German Council of Economic Experts expects the country’s deficit to widen from 2.3 percent this year to 3.1 percent next year, as expansive spending takes priority. This trend represents the first instance since 2008 where Germany’s deficit exceeds that of Spain. Germany’s deficit could surpass 4 percent by 2027, underscoring the magnitude of the policy reversal.

Debt-to-GDP ratios across the largest eurozone economies also point to shifting trends. France’s ratio, already elevated at 116 percent, is expected to rise to 120 percent within two years, while Italy’s is forecast to edge up to 137 percent. In contrast, Spain’s sovereign debt is projected to fall to 97 percent by 2027, improving from a peak above 100 percent and marking a notable rebound from its crisis years. Germany’s debt burden, although still lower, is also on the rise, set to reach 67 percent in the same period. The changing fiscal landscape underscores an emerging order in European finance, characterised by shifting risks and altered perceptions of economic prudence.

Ongoing political pressures and evolving policy priorities will determine how the core eurozone economies navigate the years ahead. The recent divergence between former model states and their once troubled counterparts suggests that the eurozone’s financial stability now rests on very different foundations than in the past.