EU recovery spending should continue after 2026

Southern European economies face the threat of a steep fiscal cliff in 2027. The EU Commission plans to end payments from the EU recovery fund by the end of 2026. Unspent funds are worth 6% of GDP, so a full absorption looks impossible in this timeframe. But we think spending will continue after 2026 and the periphery’s recent growth outperformance won’t abruptly end.

What you will learn:

• We had been sceptical since the inception of the Next Generation EU stimulus package that countries would manage to absorb the massive fiscal transfers in the planned timeframe. News reports and official statements support our view that a combination of funds reallocation and financial engineering will safeguard the funds. However, this is subject to the remaining projects being approved over the coming month and completing agreed targets by August 2026.
• The large residual funds and the tepid implementation so far add downside risks to our outlook. GDP growth across the four main Southern EU countries could be 0.5ppts below our baseline in 2027 if progress remains lacklustre and only 30% of the spending in the baseline is implemented from 2027.