Public debt in the euro zone and the EU as a whole grew in 2025 for the second consecutive year, albeit slightly. In the euro zone, it rose from 86.5% of GDP to 87.4%, while across the EU, the evolution was from 80.5% to 81.7%. The deficit and debt data released this Wednesday by Eurostat show that the first years of applying the new fiscal rules approved at the beginning of 2024 are not achieving their objective: to reduce the large liabilities that member states accumulated during the three major crises suffered between 2008 and 2023 (the financial and euro crisis, the pandemic, and the energy crisis unleashed by Russia’s invasion of Ukraine). The public deficit, however, did end last year below the totemic 3% of GDP enshrined in EU treaties.
The explanation for why European countries are not reducing their debt is manifold. However, one reason has become more prominent recently: the increase in defense spending. Geopolitical changes in recent years have placed the increase in this budget item in a preferential position, as became clear at the beginning of 2025. Just over a year ago, when the multiannual fiscal adjustment plans that member states had agreed with the European Commission had only been in operation for a few months, it was the President of the EU Executive herself, Ursula Von der Leyen, who proposed the suspension of the rules concerning armament spending.
Ultimately, the proposal went ahead and 17 Member States opted for this option. The measure facilitated the commitment that EU countries that are part of NATO, except Spain, assumed months later at the Atlantic Alliance summit to raise this item to a figure equivalent to 5% of GDP by 2035. This represents a significant increase in 10 years. There are no official figures yet for defense spending in 2025, but there are some estimates, such as that from the European Defence Agency, which expected an increase to an aggregate figure of 2.1%. The numbers, however, hide very substantial increases in recent years in countries closest to Russia: Poland far exceeds 4%, and the three Baltic republics are approaching that number. At the other extreme is Spain, which reached 2% in 2025 but has made a significant leap in recent years.
But alongside defense spending, there are other elements that help explain why Member States are having problems reducing public debt, such as the increase in interest rates with which this liability is financed and refinanced. The high inflation brought by the war in Ukraine provoked a reaction from the ECB, which raised the official price of money. And although it has already reduced it considerably, it has not returned to previous levels. This was highlighted in a recent report on debt by the OECD, the club of the world’s richest countries, which noted that investors were demanding higher returns on long-term bonds.
The anemic situation of the European economy in recent years also plays a role, and even the fact that prices were controlled. Debt is usually measured in relation to a country’s or economic area’s gross domestic product in nominal terms – that is, without discounting inflation. If this GDP grows a lot, the total volume of debt weighs less, and even less if prices grow significantly.
This is clearly seen when analyzing the case of Spain. The Spanish economy has been the fastest-growing in the EU in recent years, even with the rampant inflation in 2022 and 2023. This has been key for it to have gone from 109.3% of GDP to 100.7% in just four years. In the same period, Germany, one of the guardians of fiscal orthodoxy, has barely been able to reduce its liabilities by a few tenths, to 63.5%. Throughout this period, the Union’s largest economy has been stagnant.
But when strictly analyzing the evolution of EU public accounts by country, others stand out, such as France, Italy, or Greece, for having the largest debt. In the first of these, its political deadlock has made it impossible to adopt measures to reduce the public deficit, which has been above 5% of GDP in the last three years, and has pushed its debt up to 115.6% of GDP (six points more than at the end of 2023). Italy, for its part, also fails to rein in its deficit and maintains liabilities that dangerously exceed 137% of GDP. Greece, on the other hand, continues to recover from its deep fiscal crisis at the beginning of this century, and although it still has the largest debt in the EU (146.1% of GDP at the end of last year), it is reducing it at cruising speed: 33 points of GDP in the last four years.
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