Spain is on track to record a lower budget deficit than Germany for the first time in almost two decades, marking a dramatic reversal in the fiscal fortunes of two of Europe’s largest economies.
According to the Bank of Spain, the country’s budget deficit is expected to decline for the fifth consecutive year, reaching 2.5% of GDP in 2025 and 2.3% in 2026. The improvement comes after years of strong economic growth, higher tax revenues, and reduced pandemic pressures.
Germany, by contrast, is moving in the opposite direction. The German Council of Economic Experts forecasts that the country’s deficit will rise from 2.3% in 2024 to 3.1% in 2026, with analysts predicting it could climb toward 4% in subsequent years as Berlin boosts borrowing to address infrastructure shortfalls, welfare costs, and military spending.
A Reversal of the Eurozone Crisis Narrative
Seventeen years after the Eurozone debt crisis — when countries such as Spain, Italy, Portugal, Ireland, and Greece were labeled “PIIGS” — the fiscal map of Europe has changed. Many former crisis economies are now improving their public finances faster than the bloc’s core members, Germany and France.
Karsten Junius, chief economist at J. Safra Sarasin, noted that the shift highlights how “the pecking order between euro area countries has changed since the euro crisis.”
Markets Reward Spain’s Improved Outlook
Spain’s improving position has boosted investor confidence, leading to a surge in demand for its government bonds. The spread between Spanish 10-year debt and German Bunds — a key risk indicator — has narrowed to around 0.5 percentage points, the lowest since before the Eurozone crisis, when it exceeded six points.
Spain’s borrowing costs have fallen so much that they are now below those of France, long considered one of the Eurozone’s safest borrowers.
Despite mounting deficits, Germany remains the region’s benchmark safe asset due to its economic size and relatively low overall debt burden compared with other advanced economies.
Growth Divergence Between Spain and Germany
Spain has become one of the fastest-growing large developed economies, averaging 3.9% quarterly GDP growth since early 2022. The IMF expects Spain to grow 2% in 2026, nearly matching the United States.
Germany’s economy, meanwhile, has struggled. With quarterly growth averaging only 0.3%, investment has stalled and industrial output has weakened.
Analysts attribute Spain’s momentum to strong immigration, booming tourism, lower energy costs, and public investment supported by EU recovery funds.
Politics and Fiscal Discipline
Spain’s fiscal performance has been influenced by political gridlock. Unable to secure enough parliamentary support, Prime Minister Pedro Sánchez’s minority government has been forced to operate under a rollover of the 2023 budget. This has limited new spending but allowed increases in defence under existing budget rules.
Spain is expected to post its first primary surplus since 2007 this year — a measure that excludes interest payments and extraordinary spending.
Challenges Remain
Despite the progress, Spain’s overall government debt remains high at 100.4% of GDP, compared with Germany’s 64.4%, according to IMF data. Economists warn that the elevated debt level could restrict Spain’s ability to respond to future downturns.
The Bank of Spain cautioned that high indebtedness leaves the economy exposed to rising interest rates and limits room for manoeuvre in future crises.
Germany’s Debt-Financed Shift
Germany, once known for strict fiscal discipline, has loosened its constraints. Chancellor Friedrich Merz suspended parts of the constitutional debt brake to allow up to €1 trillion in borrowing for infrastructure and defence over the next decade. Critics argue that too much of the additional borrowing has been redirected toward welfare programs and tax relief rather than long-term investment.
Monika Schnitzer, chair of the German Council of Economic Experts, warned that opportunities created by new investment funds “must not be squandered.”
