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Investing.com - The eurozone headline budget deficit is set to rise for the first time since 2020 this year, reflecting a move by many countries in the currency area to ease fiscal restraints to pay for infrastructure improvements and defense spending, according to analysts at UBS.
In a note, researchers at the brokerage including Felix Huefner and Reinhard Cluse estimated that, based on aggregated draft budgets, the eurozone budget shortfall is tipped to grow to 3.3% of gross domestic product in 2025, up from 3.1% of GDP last year. The figure is seen edging up further to 3.7% in 2026.
"Fiscal stimulus in the form of higher defense spending across the European Union and higher infrastructure spending in Germany is likely to be the key theme for the European macro outlook in the next two years," the analysts wrote.
Spurred on by Russia’s invasion of Ukraine and calls by U.S. President Donald Trump for NATO countries to lessen their reliance on American military prowess, several European countries have outlined plans to increase their defense expenditures.
This includes Germany, the region’s largest economy, which recently scrapped longstanding constraints on borrowing to help pay for a massive 500-billion euro spending plan backed by Chancellor Friedrich Merz. A budget put forward by Berlin shows a "marked increase" in the country’s headline deficit from 3.25% of GDP this year to 4.75% in 2026, the UBS analysts said.
France, Europe’s second-biggest economy, is also seen lifting its defense budget by 3.5 billion euros next year -- leaving Paris with an overall fiscal shortfall that is on pace to climb from 5.4% of GDP this year to 5.8% of GDP, according to IMF figures. Notably, France, which has been mired in weeks of political turmoil, has yet to unveil a draft budget.
However, the UBS analysts are forecasting a decline in France’s budget deficit in 2026, as well as in Italy.
"[T]he increase in the aggregated Eurozone deficit masks significant cross-country divergence," the UBS analysts wrote. "Without the increase in the German deficit, the Eurozone deficit would remain unchanged in 2025 and rise only slightly in 2026."