EU Nations' Deficits Balloon, Europe Development Banks Cut Growth Forecasts

The European Union’s second- and third-biggest economies, France and Italy, have already been handed formal reprimands alongside eight other member states.

The EU executive will publish its views Wednesday on each country’s public spending and issue warnings where necessary.

Under EU rules, the public deficit — when government revenue is not enough to cover spending — must not be above three percent of gross domestic product.

The rules were suspended during the coronavirus pandemic, and then again during the energy crisis that followed Russia’s 2022 invasion of Ukraine — both of which piled massive pressure on European nations’ finances.

A reformed set of spending rules kicked into force in 2024, and in theory, member states risk fines for violations, though the EU has never gone so far.

With energy prices soaring again because of the Middle East war, Italy now wants the EU to grant new fiscal leeway to help member states manage.

Just months after joining the eurozone single currency area, the European Commission is set to rebuke Bulgaria for violating the EU’s spending rules.

It will not come as a surprise to Sofia.

Its new prime minister, Rumen Radev, has warned about the deterioration of public finances, with a budget deficit that is expected to substantially exceed three percent of GDP.

According to the latest EU economic forecast published last month, Bulgaria’s deficit is expected to reach 4.1 percent this year after 3.5 percent in 2025.

Germany, Europe’s largest economy, has long championed maintaining fiscal discipline but is predicted to breach the EU’s three-percent deficit ceiling this year, hitting 3.7 percent of GDP and rising to 4.1 percent next year

Luckily for Germany, it will escape public rebuke because of a clause allowing for exemptions related to defence spending, which the country has ramped up in the wake of Russia’s Ukraine invasion.

France’s budget woes do not seem to end.

Paris hopes to keep its deficit at five percent of GDP this year, despite new spending measures to mitigate the impact of oil prices on certain sectors.

But the commission warned last week that France would have the bloc’s biggest budget deficit — a whopping 5.7 percent — in 2027, a crucial presidential election year, if policies remain unchanged.

That means austerity measures are likely. Prime Minister Sebastien Lecornu, currently working on the draft budget for 2027, has vowed to bring the deficit down to below three percent of GDP by 2029.

The picture looks better for Italy than for other major EU economies, with a deficit expected to fall to 2.9 percent in 2026 and 2027.

The expectation was that Rome would see its deficit below three percent in 2025, but an economic slowdown late last year dashed such hopes.

Now, Prime Minister Giorgia Meloni is demanding that, as with defence spending, governments should be allowed to exempt spending on measures that limit the impact of higher energy prices.

But the EU executive has argued that it has made hundreds of billions of euros available for energy investments.

The European Bank for Reconstruction and Development downgraded its economic forecasts Wednesday, noting that the energy price shock triggered by the Middle East war penalised Europe more than the United States.

The bank, founded to help former Soviet bloc nations adopt free-market economies, said European gas prices exceeded those in the United States by a factor of five amid a widening gap.

“Electricity prices in Europe are also much higher than in the United States,” the London-based EBRD said in its latest outlook report, which also focused on countries in the Middle East and Africa where it invests.

The bank predicted that gross domestic product would slow to 3.1 percent across its regions of operation this year from 3.4 percent in 2025, with Europe more dependent on hydrocarbon imports than the United States.

This was a downgrade of 0.5 percentage points from an EBRD forecast in February, before the US-Iran conflict began at the end of that month.

“The conflict in the Middle East has delivered a new shock to regions already navigating weakness in manufacturing industries and fragile fiscal positions,” the bank’s chief economist, Beata Javorcik, said in a statement.

“Higher energy costs are squeezing competitiveness, reigniting inflation and tightening fiscal space at a time when many economies can least afford it,” she added.

The EBRD’s biggest growth downgrades were in its Southern and eastern Mediterranean zone, which includes Egypt, Iraq, Jordan, and Lebanon.

This follows Israeli troops making their deepest incursion into Lebanon in two decades as part of the Middle East war.

Lebanon’s economy is expected to contract by two percent this year, according to the EBRD, having forecast in February that it would expand by four percent.

The institution is predicting a rebound for Lebanese growth next year, “provided peace is achieved”.

The EBRD in April announced it was unlocking five billion euros ($5.8 billion) to help shore up economies hit by the Middle East war.