Every decade or so, the EU’s fiscal landscape goes through a moment of reckoning. After the global financial and economic crisis of 2008-2009, the fiscal rules tightened. After Covid, the severe economic downturn clause was invoked de facto suspending the rules. After the energy shock of 2022, the debate about the right pace of consolidation reopened. But 2025 brought something different: confronted with major geopolitical dislocations calling for a ramp-up of defence on top of other important spending pressures, established patterns started to unravel. 

A reversal of roles

In a departure from recent trends, in 2025 debt-to-GDP ratios continued to climb across most member states, but with a twist that challenges usual patterns. Countries with debt of less than 90% of GDP (in 2024) saw the strongest increase in their debt ratios, while the group of very high debt countries showed unusual restraint (see Figure 1). This result is robust across different reference periods for grouping member states by government debt as share of GDP. 

Figure 1 Gross government debt (in % of GDP by country groups) 

Source: European Commission
Notes: EU member states are grouped by their 2024 debt-to-GDP ratio in %. Low debt:  gross government debt <= 60% of GDP; high debt:  60% of GDP < gross government debt <= 90 of GDP; very high debt: gross government debt > 90% of GDP.

A deep-dive analysis of net expenditure developments (net of discretionary revenue measures), summarised in Figure 2, uncovers underlying drivers. What stands out is the distinct drop of net expenditure growth in 2025 and, prospectively in 2026, across the board. Part of that is the successful reduction of inflation following the energy price shock of early 2022, which in turn translated into less pricy government purchases and other expenditure categories. At the same time, the compression of net expenditure growth was particularly pronounced in countries with debt exceeding 90% of GDP: the rate of increase of net expenditure virtually halved, dropping well below available estimates of medium-term rates of economic expansion. Assuming that government revenues move in lockstep with economic growth, such a configuration normally signals a shift towards fiscal consolidation. 

Figure 2 Net expenditure growth and medium-term estimates of potential output growth

Source: European Commission

Do these results herald a ‘road to Damascus’ type of conversion for Europe’s most indebted governments? Probably not; reality is more prosaic. Very high debt countries are increasingly confronted with the hard constraints of their intertemporal budget. With limited fiscal space to start with, they are navigating a combination of lacklustre growth prospects and higher interest rates, and, more recently, the economic and fiscal fallout from ongoing geopolitical instability. Hence, recent caution seems rather compelled than principled. This is also why countries like Italy or France did not apply for the national escape clause, a new flexibility provision under the reformed EU fiscal rules, to accommodate higher defence spending.

The change in fiscal policy trends dovetails with a clear re-assessment of risks among key policy institutions. For instance, in documents published in the course of 2025, the IMF, the ECB and the BIS have all used unusually candid language in relation to the sustainability or vulnerability of public finances especially as regards European countries with very high debt ratios (BIS 2025, ECB 2025, IMF 2025).  Such a clear alignment in time and tone is uncommon. 

Admittedly, very high debt countries have seen a gradual recovery in underlying potential growth since the post-2008 lows (see the green bars in Figure 2 which keep the price component constant). At the same time, these rates still remain below pre-crisis levels and are projected to decelerate again going forward. This creates a structural bind: fiscal space does not widen because growth does not recover fast enough, and growth does not recover fast enough partly because fiscal policy lacks the room to be more supportive in the short term, including through tax cuts with their possible allocative effects.

The German pivot 

Perhaps the most consequential development of 2025 for the EMU dimension of fiscal policy has been the fundamental reorientation in Germany’s fiscal policy. For over a decade, Germany, together with other frugal EU countries, served a dual role: the paymaster and guarantor of EU-wide transfer programmes, and the de facto fiscal anchor of the euro area. Germany’s conservative borrowing provided the credibility buffer for the entire bloc.

In 2025, this constellation started to change. Berlin’s decision to loosen its constitutional debt brake to fund major national spending programmes, centred on defence and infrastructure, percolated through European sovereign bond markets. As Germany decided to open its fiscal gates, yields on ten-year Bunds increased spilling over to other countries: yields on Italian, French and Spanish bonds rose in tandem. Financial markets were not simply pricing in more German supply; they were beginning to re-assess the sovereign risk architecture of the entire bloc. This is also evidenced by a simultaneous increase in the yields of EU debt (see Figure 3).

Figure 3 Yields on ten-year sovereign bonds

Sources: European Commission. Yields of EU bonds generated with the help of AI. 

The logic is uncomfortable but clear. Germany’s fiscal conservatism had long acted as an implicit ‘subsidy’ for peripheral borrowing: as long as the bloc’s largest economy maintained a firm commitment to low debt, safeguarding space to back contingent EU support programmes, the risk premium of EU borrowing was compressed or, at least, lower. Once that buffer is deployed, however justified the domestic spending priorities may be, the compression mechanism weakens. Very high debt countries pay the price in their own borrowing costs, as does the EU for joint debt.

For fiscal heavyweights such as France and Italy, the calculus is different. Both are embarking on a relatively cautious course, as mentioned above, not out of sudden enthusiasm for fiscal discipline, but because financial markets have, more or less gradually, been repricing sovereign risks in a way difficult to disguise with any amount of national political narrative. Their primary challenge for the next several years is not how to stimulate growth with another fiscal expansion, but how to stabilise debt trajectories that markets are watching with an increasing degree of scrutiny.

The role of the new EU fiscal rules

The timing of these developments raises the obvious question of the role played by the EU’s reformed fiscal rules. The new framework, which replaced the old Stability and Growth Pact in 2024, puts more emphasis on medium-term expenditure paths and country-specific debt sustainability, and less on annual deficit and debt reduction targets that proved contentious in the past.

The honest assessment is that the observed fiscal restraint in very high debt countries most likely owes less to the new rules and much to market discipline and the limits of debt sustainability. This is not a condemnation of the reform: rules work best when they complement and reinforce market signals, not when they substitute for them. But it does suggest that the new framework’s effectiveness in genuinely constraining fiscal policy will only be tested in episodes where market pressure is absent, and those episodes may become rarer in a world of higher interest rates, more volatile sovereign risk premia and more frequent external shocks.

Conclusion: The fog lifts

The fiscal fog that surrounded European debt sustainability for much of the last decade is finally lifting. Very high debt countries can no longer count on a permissive borrowing environment. The traditional paymaster has turned inward. Compared to the pre-2008 period, bond markets seem to reassess sovereign risks more gradually. And the structural rates of economic growth that would make the stabilisation of very high debt less painful remain elusive for some countries.

What 2025 demonstrates is not a triumph of new rules or a sudden conversion to fiscal virtue. It is a sober confrontation with the limits of public debt in an increasingly volatile world. Countries that spent the low-rate years accumulating debt without building buffers now have nowhere to hide. Countries that preserved fiscal space now have strategic options. 

Author’s note: The views expressed in this column do not necessarily reflect those of the European Commission or the European Fiscal Board. Statistical assistance by Janis Malzubris is gratefully acknowledged.  

References

BIS (2025), Annual Economic Report, June.

ECB (2025), Financial Stability Review, November.

IMF (2025), Regional Economic Outlook Notes: Europe, November.