Euro Area—Fiscal Policy Gears Up for the Electoral Cycle

European fiscal policy, driven by Germany's fiscal expansion and the final year of the Recovery fund, has been a tailwind for growth this year and is an important factor for Euro area resilience. Next year this tailwind should fade as fiscal policy turns broadly neutral. We expect the EMU4 government deficit to increase 0.5pp to 4.0% of GDP in 2026 with a further widening to 4.2% in 2027, reflecting a notable increase in the structural primary deficit this year and a modest increase next, while interest payments rise about 0.2pp per year. Fiscal policy is meaningfully expansionary in Germany, with deficits rising from 3.0% last year to 4.0% this year and 4.6% next on higher defence spending and better investment execution. In France we remain sceptical the government meets its 5.0% deficit target and have revised up our 2027 deficit forecast to 5.4% of GDP on higher interest payments. Italy has revised up its 2027-28 deficit targets by a cumulative 1.2% of GDP, split evenly between def