Morgan Stanley || Jens Eisenschmidt (Macro Europe) has revised upwards its deficit estimate for the Eurozone to 3.3% in 2026 and 3.5% in 2027, +10bps in both cases. As a result, debt ratios will continue to increase by more than 1 percentage point of GDP per year, rising from 88% in 2024 to 92% in 2027. However, it sees the upward risk limited to around 30 bps per year. Germany remains the main driver of the larger aggregate deficit in 2026, contributing around 40 bps to the total Eurozone deficit, while Eisenschmidt expects that fiscal consolidation in France, Italy, and Spain will stagnate. Aside from the response of economic policy, higher energy prices should widen deficits with some delay only from 2027. An effective closure of the Strait of Hormuz could push Eurozone fiscal deficits to 5% of GDP in 2027. In this tail scenario, the European Commission could introduce greater flexibility in its fiscal rules and ease financing tensions through a higher volume of loans at the European Union level.
