For the first time in 4 years, EU fiscal rules are once again in effect. Under this new fiscal framework, several Member States are set to implement substantial fiscal tightening in 2025, collectively amounting to 0.1 percentage points of GDP in the EU.
The economic performance of EU countries has increasingly diverged, impacting their optimal fiscal approaches. Southern EU economies have recently shown stronger growth, often with positive output gaps (operating above full capacity), making fiscal tightening appropriate for next year to reduce high debt levels and create future fiscal buffers (upper-right quadrant). In contrast, northern EU economies have generally underperformed, and with their lower debt levels and greater fiscal flexibility, fiscal loosening would be more appropriate (lower-left quadrant). This broadly aligns with the fiscal plans most Member States have submitted in their fiscal-structural plans for the coming years.
However, several countries diverge towards pro-cyclical policies. For instance, Finland, Sweden, and Germany, are planning pro-cyclical fiscal tightening despite official estimates showing considerable output gaps. For France, Slovakia and Hungary, this policy course is due to the fiscal rules, as they are under the EU’s excessive deficit procedure (orange dots), which mandates fiscal tightening given their limited fiscal space. Germany presents an ambivalent case, as the country recorded subdued growth rates while possessing ample fiscal space. The 2025 German elections could signal a shift in fiscal policy, potentially softening the debt brake and supporting a more counter-cyclical fiscal approach.
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