BRUSSELS — The European Commission on Tuesday slapped a red flag on Finland for spending too much and warned others to tighten their belts to avoid getting the same treatment.  The EU executive unveiled the full list of countries that are overspending, as part of the Commission’s biannual “European Semester” that checks whether governments are within the EU’s rules for public spending.  Red flags, known as excessive deficit procedures (EDPs), signal concerns about countries’ financial health to investors. Brussels can impose a fine if governments refuse to adopt measures to bring their finances back in line. Brussels reintroduced the EU’s rules for public spending last year after the Commission gave capitals free license during the pandemic, which plunged the EU’s economy into the worst recession since the Second World War. While the bloc’s economy has picked up this year, many governments are struggling to comply with the EU’s rules amid trade tensions with the U.S. and mounting defense budgets to deter Russian aggression. One of the countries on Russia’s doorstep, Finland, was reprimanded for exceeding the EU’s cap on budget deficits, which limits how much a country can spend beyond what it collects in taxes.  Economy Commissioner Valdis Dombrovskis. | Thierry Monasse/Getty Images The rules limit the deficit to 3 percent of a country’s economic output. Recent tweaks to the rules allow governments to spend an additional 1.5 percent of GDP on defense. But the numbers still don’t add up for Helsinki. “The deficit in excess of 3 percent of GDP is not fully explained by the increase in defense spending alone,” Economy Commissioner Valdis Dombrovskis told reporters in Strasbourg. Germany narrowly avoided the same punishment. Separately, the Commission checked whether governments’ expected spending in 2026 complies with their five or seven-year plans that were approved by Brussels. So far, Croatia, Lithuania, Slovenia, Spain, Bulgaria, Hungary, the Netherlands, and Malta aren’t doing enough. Failure to act could see Brussels reprimand the eight countries at the next European Semester in June.  POLITICO took a deeper look at some of the key countries and graded their current performances. FINLAND: E The Nordic state got a slap on the wrist from Brussels as its deficit is set to exceed the EU’s limit for the next two years. Once a paragon of fiscal stability, Finland is now in the same EDP basket as the indebted nations of France, Italy, and Belgium. As a result, Helsinki will have to reduce the deficit. That’s a tall order for a country facing overstretched social and health budgets, as well as a ballooning defense bill. ROMANIA: D+ Romania can breathe a sigh of relief after today’s announcement. Dombrovskis praised the country’s recent economic reforms and ruled out triggering the nuclear option — a suspension of the country’s payouts from the EU budget, which are worth billions.  But the country is not out of the woods. At 8.4 percent of GDP, its 2025 deficit remains by far the highest in the EU, and painful domestic reforms will be required to reduce it significantly in the years to come. GERMANY: C The country’s budget deficit is expected to reach 3.1 percent of GDP this year. That’s technically a breach of the rules. But Brussels refrained from punishing the bloc’s economic powerhouse, because the breach is “fully explained by the increase in defense spending,” the Commission said in a statement. But there is trouble ahead. Germany plans to continue its spending spree next year to juice growth, only curbing expenditure later. That won’t be easy, as China threatens the country’s export-driven economy and Chancellor Friedrich Merz’s grand coalition needs to deliver reforms to revive growth. Berlin is taking a huge gamble. Brussels too. FRANCE: C- France is in the middle of a budget crisis and is not even sure that it will manage to adopt the 2026 budget by the end of this year. That doesn’t seem to worry Brussels too much for the time being, especially considering that France received its EDP red flag in 2023. The Commission found that the French budget plans for next year are compliant with its recommendations and encouraged Paris to continue on this path.  But not even France’s prime minister knows what his budget for next year will look like. Sébastien Lecornu has pledged to bring the deficit down to 5 percent of GDP. But that goal is at risk, as contradictory amendments to the draft budget in parliament undermine the chances of a deal before Christmas. HUNGARY: F  Hungary is facing a worrying situation because it’s not making the necessary cuts in 2026 to exit the EDP. For now, the Commission has merely warned Hungary to cut spending in 2026. But if Budapest ignores such calls, Brussels might threaten to issue fines during its next budget review in Spring. Hungarian Prime Minister Viktor Orbán is unlikely to heed Brussels’ calls as the country is heading to the polls next spring and he faces the risk of losing power after almost a decade.  ITALY: B- Has Europe’s perennial fiscal bad boy turned good? That’s what it looks like, with Italy’s deficit set to fall to 2.6 percent of GDP next year, while government spending is forecast to stay below the limits imposed by the EU’s fiscal rules. That puts it on track to exit its EDP, if it can prove that debt is set to trend lower in the long term. Other good news: Rome’s tax take is trending above economic growth, helping to fill its coffers and pay down debt.  It’s not all good news. Italy remains the second-most indebted country in the EU. That isn’t changing next year, with government debt expected to increase to 137.9 percent of GDP. But any positive change is welcome, especially when it’s the class clown who is finally hitting the books.

BRUSSELS — The EU’s economy is set to expand by 1.4 percent this year, driven in large part by Poland’s and Spain’s growth. That’s according to the European Commission’s forecasts, presented on Monday. Outperforming most European countries, Warsaw and Madrid are set to grow by 3.2 percent and 2.9 percent in 2025. The EU’s economic outlook is a slight improvement from last spring’s forecast at 1.1 percent. The Commission expects the bloc’s economy to continue growing at a rate of 1.4 percent next year, despite the U.S.’ slapping 15 percent tariffs on European exports. In further good news, the unemployment rate is set to remain below 6 percent through 2027, while inflation will shrink to 2.2 percent within the same time period. Economy Commissioner Valdis Dombrovskis urged the bloc to capitalize on the momentum. “Now, given the challenging external context, the EU must take resolute action to unlock domestic growth,” such as “simplifying regulation, completing the Single Market, and boosting innovation,” Dombrovskis said in a statement. In a striking reversal, the poster boys of the eurozone crisis — Portugal, Greece, Cyprus, Ireland, and Spain — are set to outperform countries such as Germany, Finland, and Austria that were once seen as economic models. In a worrying sign for Europe, its three largest economies — Germany, France, and Italy — are set to experience weak growth over the coming years. Once the engine of European growth, Germany is set to expand by 0.2 percent in 2025 and 1.2 percent in 2026 and 2027. Italy is estimated to grow at an even more sluggish pace — 0.4 percent in 2025 and 0.8 percent in 2026 and 2027 — despite being the main beneficiary of the EU’s post-COVID recovery program. This stands in contrast to the strong economic growth in 2025 in Southern and Eastern countries such as Malta (4 percent), Bulgaria (3 percent), Lithuania (2.4 percent) and Croatia (3.2 percent).

VIENNA — Donald Trump’s trade war has been less damaging for Europe’s economy than widely feared, and there is a hope that a stable recovery is underway, European Central Bank governing council member Martin Kocher said.  “We have not seen the strong reduction in growth rates and the inflationary effects of the trade conflicts that were anticipated in March and April,” the Austrian National Bank governor told POLITICO in an interview on Wednesday. On the same day that a closely-watched business survey pointed to an unexpected and marked pickup in activity in October, Kocher suggested there were emerging signs of an economic pickup. Kocher, who served as economy minister before joining the central bank in September, nonetheless warned against complacency. “I don’t want to sugarcoat what we are seeing,” he said. “This is the highest level of tariffs since the 1930s, and there will be effects on the world economy.” The impact on the eurozone will be exceptionally difficult to predict because we have not experienced anything similar in nearly 100 years, Kocher said, adding that this was the primary reason for diverging views about the ideal monetary policy path ahead on the ECB’s governing council. Falling inflation has allowed the ECB to cut its key deposit rate eight times since the middle of last year, bringing it down from a record-high 4 percent to 2 percent currently — a level that the Bank says is no longer restricting the economy. A behavioral economist rather than a monetary one, Kocher is one of the newest faces on the governing council, having succeeded Robert Holzmann earlier this year. Most analysts expect a more moderate approach from him than from the veteran hawk Holzmann, who was often the lone dissenter on the rate-setting body. The governor’s office leaves no doubt there is a change in style underfoot — the wooden desk replaced by a modern, height-adjustable table and new, colorful paintings by Austrian artists Wolfgang Hollegha and Hans Staudacher on the wall. While policymakers unanimously agreed to keep interest rates on hold last week, ECB President Christine Lagarde revealed that “there are different positions and different views” on whether the Bank may yet have to cut them one more time. “The difficulty is to assess whether most of the effects of the trade conflicts have already materialized or whether we will see them trickle down in the economy over the next couple of months and perhaps even years,” he said. “I’m convinced that we’ll see more effects over time. But whether they will be overall inflationary, or rather disinflationary in the euro area, is difficult to tell.” RISKY OUTLOOK Kocher explained it’s reasonable to expect deflationary pressure from the rerouting of trade from China to Europe that was flowing to the U.S. before the trade conflict began, but it’s equally plausible that geopolitical conflicts may hamper supply chains and boost prices. And things can change very fast. “Last week’s APEC summit with some interim agreement between the U.S. and China might have changed the outlook again,” he noted. While policymakers unanimously agreed to keep interest rates on hold last week, ECB President Christine Lagarde revealed that “there are different positions and different views” on whether the Bank may yet have to cut them one more time. | Nikolay Doychinov/AFP via Getty Images At the summit, the U.S. and China committed to lowering the temperature in their trade and tech rivalry. The so-called “Gyeongju Declaration” called for “robust trade and investment” and committed leaders to deepen economic cooperation. In this environment, “we have to wait and see to what extent [risks] materialize” as it’s difficult to take rate decisions “primarily based on the risk outlook,” Kocher said. As things stand, he said, the ECB would need to “see some risk materializing that would reduce … the GDP projection to a significant extent, and that would lead perhaps to some disinflationary effects” before it discussed cutting again. The governing council next meets in December, when a new set of forecasts will include estimates for growth and inflation in 2028 for the first time. Kocher warned against placing too much emphasis on the 2028 numbers, which many economists and investors focus on as an indication of whether the Bank is on track to meet its medium-term inflation target. While the forecast will offer more certainty about the outlook for 2026 and 2027, that for 2028 will be little more than “indicative,” he argued. “You always have to take projections with a grain of salt. And the further away the projection horizon, the larger the grain of salt.” GREEN BATTLE CONTINUES Kocher was speaking on the day that a majority of the EU’s 27 governments decided to water down their collective target for pollution reduction, seen by many as a sign that political momentum has swung after half a decade of green victories on climate policy. But Kocher fiercely defended the ECB’s commitment to green central banking. “Whatever is decided today, there’s no significant change in the targets of the European Union to become climate neutral in the near future,” Kocher said. And so long as it does not interfere with the ECB’s inflation-targeting mandate, the ECB has the “freedom” to support those objectives. He said the governing council had reaffirmed the view, even in the last couple of months, that it is essential to take climate risks into account in its projections, citing the massive impact that extreme weather events can have on growth and inflation. In contrast to his predecessor, Kocher also backs the inclusion of a climate criterion in the Bank’s collateral framework, a step that could one day make it more expensive for polluting companies than for green ones to borrow money. Critics of green central banking have argued that it is up to elected politicians, rather than central bankers, to create incentives for green business. But Kocher, a former downhill racer who has seen Austria’s key tourism sector struggle with an ever-shorter ski season, is unconcerned. “As long as it does not create a trade-off with our inflation target, I am perfectly fine with it,” he said.

The European Central Bank left its key interest rate unchanged at 2 percent on Thursday, with the euro area economy still proving itself resilient and with inflation reasonably steady around the Bank’s target. The decision was consistent with guidance from policymakers that monetary policy is in “a good place,” giving them room to wait for year-end projections that will include the ECB’s first inflation forecast for 2028. The economy grew a faster-than-expected 0.2 percent in the third quarter of this year, while preliminary data showed inflation ticking up to 2.2 percent in October, calming fears about a possible undershoot. “The economy has continued to grow despite the challenging global environment,” the ECB said in its statement. “The robust labor market, solid private sector balance sheets and the Governing Council’s past interest rate cuts remain important sources of resilience.” At the same time, however, the ECB warned that “the outlook is still uncertain, owing particularly to ongoing global trade disputes and geopolitical tensions.” Risks remain abundant: beyond potential delayed effects from new U.S. tariffs, they include a further strengthening of the euro, as the U.S. Federal Reserve continues to lower its own rates. On Wednesday, the Fed cut rates by another quarter-point — the second consecutive reduction — citing a slowdown in job growth. Domestically, a delay to Germany’s fiscal stimulus measures and France’s ongoing budget crisis could also threaten to push the ECB out of its “good place.” Even so, a growing number of economists believe the central bank has reached the end of its easing cycle, a recent Reuters survey showed. While a slim majority of analysts last month expected one more rate cut before the end of 2026, nearly 60 percent now anticipate no further changes to borrowing costs in the current cycle.

The European Commission is considering tying pension reform to cash payouts from the EU’s next €2 trillion budget as it attempts to protect member countries’ finances from a looming demographic crisis. Three EU senior officials told POLITICO that the EU executive’s economic and finance legislative arms are looking into buttressing countries’ creaking state pension systems by recommending retirement savings policies to individual countries. If EU capitals ignore these country-specific recommendations, or CSRs, then they might not get their full share of the EU’s seven-year budget from 2028. “Our job in the Commission is to help countries do the difficult stuff,” said a senior Commission official, who, like others quoted in this story, spoke on the condition of anonymity to speak freely. “CSRs would be well suited to do it” by “linking reforms to investment.” The EU faces a toxic cocktail of high debt, an aging population and declining birthrates. Combined, they will cripple any public “pay-as-you-go” pension system that relies on taxpayers to provide retirees with a source of income. That’s a problem today as well as tomorrow. Over 80 percent of EU pensioners relied on a state pension as their only source of income in 2023. That overreliance has left one in five EU citizens above the age of 65 at risk of poverty, the equivalent of 18.5 million people. Brussels’ goal is twofold: Alleviate the pressure on the state coffers to keep pensioners afloat, and help create a U.S.-style capital market by putting people’s long-term savings to work. The idea, while well-intended, would be politically difficult and has deputy finance ministers wincing at the thought. Pension policy lies well outside of the EU executive arm’s legal reach. Even then, the risks of tying EU funds to politically toxic issues could spell disaster for governments, especially when democracy’s most loyal participants are above the age of 50. “You can’t buy pension reform,” said a deputy finance minister. “It’s going to hit the nerve of what democracy is about.” Over 80 percent of EU pensioners relied on a state pension as their only source of income in 2023. | Dumitru Doru/EPA Pension reform also has a habit of bringing protesters onto the streets. In Brussels, police clashed with trade unions on Tuesday, who were demonstrating over austerity measures that include raising the age of retirement from 65 to 67 by 2030. Belgium got off lightly when compared to France, which witnessed months of protests in 2023 when President Emmanuel Macron raised the retirement age from 62 to 64. Even then, France’s recently reinstated prime minister, Sébastien Lecornu, announced Tuesday that he’d put Macron’s pensions reforms on ice to overcome a parliamentary crisis that’s made it impossible to pass a budget. Postponing the reforms could cost Paris up to €400 million next year at a time when the government tries to tighten its belt and reduce the country’s ballooning debt burden. The Commission’s focus would stop short of setting retirement age or mandating monthly payouts to pensioners. Brussels’ reform plans instead home in on incentivizing citizens to save for retirement and encouraging companies to offer corporate pension plans to employees. CSRs are part of an annual fiscal surveillance exercise that the Commission uses to coordinate economic policies across the bloc. These recommendations are negotiated with EU capitals in a bid to fix a country’s most pressing economic problems. The Commission doesn’t consider this coercion, just sound economics. “If it’s on pensions, then so be it,” a second senior Commission official said. POST-PANDEMIC CARROTS AND STICKS EU capitals have had a habit of ignoring CSRs in the past. That could change if the Commission adds cash incentives, an idea that was born out of the EU’s €800 billion post-pandemic recovery fund. The Commission also saw an opportunity to incentivize governments to enforce costly reforms to modernize the bloc’s economy by setting targets that’d unlock EU funds in tranches. For countries like Spain, these included pension reform. The carrot and stick strategy proved such a hit within the Berlaymont that it wants to use the same system in the next EU budget, especially if it helps add teeth to CSRs. Not everyone’s a fan. The mountains of paperwork that governments had to amass to prove they’d met the Commission’s demands slowed progress, leaving hundreds of billions of euros on the table. “We don’t know why the Commission is so fond of this model,” said another deputy finance minister, who poured cold water on the idea. “[Pension reform is] hugely controversial. I highly doubt anyone’ll do it.” Giorgio Leali contributed reporting from Paris.

France’s fiscal troubles will present European Central Bank President Christine Lagarde with a particularly sensitive challenge at her regular press conference on Thursday. Aside from the Governing Council’s latest decisions, the former French finance minister will have to field awkward questions about the situation in her homeland. She faces a tricky balancing act, and will have to avoid suggesting that the ECB may “bail out an unrepentant fiscal sinner” while also taking care not to unsettle bond markets that are still giving France “the benefit of the doubt,” said Berenberg Bank chief economist Holger Schmieding. The Bank is overwhelmingly expected to keep its deposit rate at 2 percent again on the basis of new forecasts showing continued expectations of modest growth. Markets see any further rate cuts as unlikely and think rates will begin to rise again in early 2027. Lagarde will need to manage expectations carefully, HSBC economist Fabio Balboni warned, since ruling cuts out completely could drive up borrowing costs across the eurozone, including in France. “Many countries in Europe face tough fiscal challenges, especially France,” Balboni said. “They simply can’t afford” to spend more money just on interest payments. The situation Balboni describes is something economists call “fiscal dominance,” which occurs when the central bank is forced to keep interest rates low so governments can continue to borrow. Such intervention generally leads to higher inflation in short order. It was debt problems, more than anything else, that brought down France’s government on Monday, after Prime Minister François Bayrou failed to garner enough support for €44 billion in proposed budget cuts for next year. But after initially taking fright when Bayrou called his fateful vote of confidence, investors have largely held their nerve. The spread between French and German 10-year bond yields, a bellwether of market stress, is now at 0.82 percentage points, the widest it’s been all year. But it continues to resemble a slow puncture more than a blow-up. That’s partly because President Emmanuel Macron, who has appointed yet another centrist prime minister, is still trying to build consensus around a deficit reduction plan, rather than call new elections. C’EST LA VIE It has been a humbling summer for France, which has always benchmarked its economic and financial strength against Germany. But as its politics have become increasingly paralyzed and its debts have mounted, markets have come to see it more as a peer of Italy. For the first time this century, Paris’ borrowing costs surpassed those of Rome on Tuesday, albeit only briefly and due to a technical quirk. But the fear is that a growing public debt burden — which stands at over €3.35 trillion — will make the country increasingly vulnerable to a financial crisis. Under Lagarde, the ECB has given itself the power to intervene in bond markets if it feels that unjustified volatility is stopping its interest rates from working as intended, something it calls the transmission mechanism of monetary policy. It drew up the rules for using what it calls the “Transmission Protection Instrument” during the pandemic in 2022, the last time investors were seriously spooked by the size of eurozone budget deficits. Most analysts, such as Swiss Re’s Patrick Saner and UniCredit’s Marco Valli, say the current situation isn’t anywhere near serious enough to justify using the TPI. There is no certainty, however, because the criteria for intervening through the TPI are deliberately vague, giving the ECB full discretion over when and how to use it. On paper, at least, the TPI allows the ECB to buy unlimited amounts of a eurozone country’s bonds from investors, provided that market stress is “unwarranted;” that doing so would not risk stoking inflation; and that the country is not under an EU excessive deficit procedure. Hawks such as the ECB’s head of markets, Isabel Schnabel, have argued that talk of using the TPI today is “far-fetched” insofar as Paris’ problems have no “wider implications for the euro.” | Horacio Villalobos Corbis/Corbis via Getty Images The last criterion would exclude France, but policymakers were careful not to tie their hands, saying these criteria would only serve as “an input” to the decision-making process. It’s anyone’s guess where the ECB’s pain threshold might be. Hawks such as the ECB’s head of markets, Isabel Schnabel, have argued that talk of using the TPI today is “far-fetched” insofar as Paris’ problems have no “wider implications for the euro.” “It would be difficult for the ECB — at least in terms of building a majority at the Governing Council — to use its new arsenal if there is no spillover effect from the country under pressure” to others in the eurozone, AXA group chief economist Gilles Moëc agreed. Moreover, there is no sign yet that bond market conditions are really hurting growth: The Bank of France on Tuesday estimated that the French economy will grow by a respectable 0.3 percent in the current quarter. However, the fear of bond markets suddenly getting out of control runs deep. Last year, Italian central bank chief Fabio Panetta said the ECB should be “prepared to deal with the consequences” of shocks caused by “an increase in political uncertainty within countries,” much as France is currently enduring. Talk of spreads is particularly sensitive for Lagarde, whose cavalier comment during the pandemic that the ECB “is not here to close the spreads” briefly threw markets into a panic. As Raboresearch economist Bas Van Geffen said: “She will not make that mistake again.” The ECB president appeared to try to strike a balance last week in an interview with Radio Classique, saying she was watching the spreads “very closely” while urging Paris to “get organized … and put your public finances in order.”