The purse strings
Enguerrand Artaz, Strategist, La Financière de l’Échiquier (LFDE) | December 2025
We probably need to go back fifteen years to find a time when budget deficits were central to political and economic debate. Back then, Greece was the sick man of Europe, with the other ‘southern countries’ not far behind. Today, however, Portugal and Greece are running budget surpluses; Spain, despite a third year without a budget approved by Parliament, is keeping its deficit below 3% of GDP, and Italy is on the verge of moving under that threshold.
This turnaround has been rightly welcomed by rating agencies and the markets. Keeping the deficit under control is a crucial determinant of a government’s room for manoeuvre, its ability to support the economy in the event of a crisis and its capacity to implement structural investments. It is also essential to avoid a spiral of mounting deficits and ballooning debt, particularly now that the era of zero interest rates appears to be over. Public deficits increase the stock of debt and therefore mechanically raise the interest burden. This mechanism is compounded when the average interest rate on outstanding debt rises, as is the case today, with debt issued at very low interest rates gradually being replaced by debt issued at current rates. This leaves governments with two options: either offset the increase in debt service by raising taxes or cutting spending, or allow the deficit – and with it the debt and its service – to increase further, until it becomes unsustainable. This is the situation France finds itself in today.
However, keeping the deficit under control is not an end in itself. The German example shows that excessive fiscal discipline can be detrimental to an economy facing a profound challenge to its economic model and sluggish growth. Although Berlin has at last abandoned its dogma and is preparing to increase public spending, its sacrosanct orthodoxy has cost it several years.
The fiscal question extends beyond Europe’s borders. The spectacular turnaround in Argentina’s public finances has inspired those who advocate shock therapy to put an end to the fiscal profligacy of certain developed economies. But we need to turn our attention above all towards the major powers. In the United States, the fiscal trajectory has been deteriorating since the mid-2010s, with the deficit reaching unprecedented levels outside the last two recessions. The Trump administration’s fiscal reform, dubbed One Big Beautiful Bill, will not help matters, especially since the new windfall in tariff revenue could be partially wiped out if the Supreme Court rules that the tariffs imposed under the IEEPA[1] are illegal. To date, bond markets have tended to shrug off the risk, but the question is very likely to come back to haunt investors in the coming months.
And then there is China – the elephant in the room. Despite an official deficit of 4% of GDP – but close to 8% according to the IMF – and an increasingly accommodative monetary policy, the country has been unable to pull itself out of the property crisis that began in 2020, which has weighed heavily on consumption and fuelled a deflationary trend. This raises the risk of a Japanese-style scenario of a liquidity trap and a lost decade.
After nearly two decades of monetary-policy dominance, fiscal policy is back in the spotlight – and likely to stay there. Faced with progressive deglobalisation, this is no longer just an economic issue but a matter of sovereignty.
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[1] International Emergency Economic Powers Act, a federal emergency law dating from 1977