Europe: Fiscal operations are becoming more flexible to bolster defense capabilities.

■ The European Commission urges Eurozone member states to ensure fiscal sustainability, boost productivity, and enhance economic security.  

■ The lengthy approval process for France's budget and ongoing cuts in recurrent spending by other countries amid slow growth could spark political unrest. 
 
   On November 25, the European Commission released the "European Term" autumn program, the first step in the 2026 budget approval process. The main focus of the autumn program is to evaluate the budgets submitted by member states for the upcoming fiscal year and to set guidelines for economic policy. According to the autumn economic forecast, the Eurozone's fiscal deficit and debt-to-GDP ratios (all figures are in nominal GDP terms) are expected to rise slightly in 2025 (3.2%, 88.8%) and 2026 (3.3%, 89.8%) compared to 2024 (3.1%, 88.1%). However, the fiscal stance for 2025 and 2026, reflecting medium-term fiscal planning, is rated as "broadly neutral." Public investment (3.7%) will grow in 2026, with about a third of the increase allocated to defense-related investments. This expenditure will be supported by EU funds focused on the Recovery and Resilience Mechanism (RRF), alongside member states' fiscal spending. In recent years, fiscal policy has shifted from expansionary spending during the pandemic to balancing growth with fiscal discipline, influenced by changes in the external environment. Countries have reduced the sharp rise in fiscal deficits by cutting non-defense recurrent spending. 

 
   In evaluating major national budgets, France and Italy, which are subject to the "Excess Fiscal Deficit Procedure (EDP)," are generally compliant with the requirements outlined in European Commission recommendations. Germany, under the National Exemption Clause (NEC) of the Stability and Growth Pact (SGP), is considered within the NEC's permissible range, despite exceeding the European Commission's recommendations for fiscal spending; specifically, defense spending can increase by no more than 1.5% of nominal GDP by 2028. Concerning economic policy guidance, the European Commission asks member states to focus on improving productivity and economic security while maintaining fiscal sustainability. Fiscal policy will remain neutral with some flexibility as long as it adheres to the medium-term fiscal plan and the NEC, allowing for adjustments in response to factors like temporary increases in defense spending. 

 
   Member states will craft their budgets based on the European Commission's fiscal assessments and economic policy guidelines. In France, an austerity budget is unlikely to pass parliament, and prolonged delays could again cast doubt on fiscal credibility and political stability. The Reserve Request for Funds (RRF) expires in August 2026, after which EU funding is expected to decline gradually. Further cuts to recurrent spending, aside from defense, will be necessary to maintain a neutral fiscal stance. Amid ongoing slow growth, austerity measures such as payment cuts could trigger public backlash, lower government approval ratings, and boost populist movements; political instability may persist in the medium term.