Goldman Sachs: Eurozone fiscal boost to fade to zero next year as German expansion struggles to offset subsequent tightening

Why is the boost to growth fading while deficits are still widening?

Goldman Sachs expects the combined fiscal deficit of Germany, France, Italy and Spain to widen by about 0.5 percentage points to 4.0% of GDP in 2026, before rising further to 4.2% in 2027. But the fiscal boost to eurozone growth will fall from 0.1 percentage points in 2026 to zero in 2027, before becoming a drag in 2028–2029.
The difference is that the deficit includes interest spending, while the boost to growth depends on additional policy support. Goldman Sachs expects interest spending in the four countries to rise by around 0.2 percentage points of GDP each year; meanwhile, the pace of German expansion is slowing, the recovery fund is winding down, and tightening in other countries is gradually gaining the upper hand.
The composition of spending also limits the effect: fiscal support is tilted toward consumption and defence, and Goldman Sachs judges its fiscal multiplier to be below 1, so budget expansion translates into a smaller increase in economic growth.

Germany remains the main source of support. Goldman Sachs expects its deficit ratio to rise from 3.0% in 2025 to 4.0% in 2026 and 4.6% in 2027, driven by higher defence spending and increased implementation of investment from the off-budget infrastructure and climate fund; defence spending is expected to reach 3.0% of GDP in 2027.
But sustained high spending will squeeze other budgets. Funding needs for defence, interest and social spending reduce the space available under the debt brake; even though the start of debt repayment has been postponed from 2028 to 2033, the medium-term fiscal plan still contains unfunded spending equivalent to 0.4%–0.8% of GDP in 2028–2030.

The likelihood of France’s budget being passed has risen, but meeting the target remains difficult. Taking into account the government’s optimistic growth assumptions, political concessions and implementation slippage, as well as rising borrowing costs, Goldman Sachs has raised its 2027 deficit forecast by 0.1 percentage points to 5.4%, above the government’s 5.0% target.
Italy has used flexibility in EU fiscal rules to raise its deficit targets for 2027–2028 by a cumulative amount equivalent to 1.2% of GDP. The additional space is split equally between defence and energy measures, with each category accounting for 0.3% of GDP in each of the two years, making its policy stance slightly expansionary in 2027.
Spain, meanwhile, continues fiscal consolidation, partly offset in 2026 by recovery fund disbursements. Goldman Sachs believes sovereign risk could fall further if the early general election on 29 November produces a clear parliamentary majority; hung parliaments in France or Italy could push deficits above the bank’s forecasts.

Even though Goldman Sachs expects bond yields to decline somewhat in the future, interest rates on new debt remain above the average rate on outstanding debt. Refinancing maturing debt will gradually pass higher costs through to public finances; from 2028, nominal growth will also offset less of the interest-rate burden.
Under Goldman Sachs’s baseline scenario, the combined debt-to-GDP ratio of the four countries rises by about 1 percentage point a year. By country, the ratios rise in Germany and France, remain broadly stable in Italy and continue to fall in Spain; Spain’s debt reduction also helps offset interest pressures from rising rates.

Recovery fund disbursements are expected to exceed 170 billion euros in 2026, above Goldman Sachs’s forecast at the start of the year, with only residual spending left in 2027. Thereafter, EU borrowing will depend more on the deployment of the already approved SAFE defence financing and whether the 2028–2034 budget includes financing for aid to Ukraine and strategic investment.
Goldman Sachs leans toward the view that new financing instruments will be included in the final budget, but their scale may be reduced, and an agreement is not expected until late in 2027. If no agreement is reached before the French and Italian elections, the risk of fiscal integration falling short of expectations will increase; integration has been an important factor supporting the narrowing of sovereign spreads in recent years.