SocGen Sees Eurozone Public Debt Ratio Expanding From Higher Expected Defense Spending

12:32 PM EDT, 03/24/2025 (MT Newswires) -- With the United States stepping back from Europe, the focus of European policymakers has unsurprisingly shifted to defense spending, said Societe Generale.

The bank assumes that the share of defense spending in European NATO countries will increase from 2.0% of gross domestic product to 2.5% by 2027.

The European Commission has suspended the fiscal rules for defense spending, activating the national escape clause.

Germany recently took steps to increase its room for maneuver by making unlimited fiscal resources available. Germany and a few other countries -- the Netherlands, Scandinavian countries and Ireland -- currently enjoy some fiscal headroom, indicated by a fiscal deficit below 3%.

SocGen expects these low-indebted countries to raise the public deficit by 0.5%-1%. In highly-indebted countries such as France and Italy, the bank anticipates that the domestic political situation, market pressures and rating agencies will continue to require a focus on reducing overall public deficit ratios.

In SocGen's view, political fragmentation -- where only Italy exhibits political stability within the larger eurozone countries -- will likely hinder governments' ability to make decisive fiscal choices. In that context, the overall eurozone public deficit should hover just above 3% of GDP for the coming years, meaning a broadly neutral fiscal policy.

As a result, the bank sees the eurozone public debt ratio moving slighlty above 90% of GDP.

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