June Fiscal Monitor: Slight Defence Acceleration Into Summer, Still Below Target

Research evidence excerpt

June Fiscal Monitor: Slight Defence Acceleration Into Summer, Still Below Target

Update

July 21, 2026 02:40 PM GMT

Morgan Stanley Europe S.E.MGermany Economics | Europe Claire A Thuerwaechter

Economist

June Fiscal Monitor: Slight Claire.Thuerwaechter@morganstanley.comJens Eisenschmidt +49 69-21662842

Chief Europe Economist

Jens.Eisenschmidt@morganstanley.com +49 69-21662817

Defence Acceleration Into Jean-Francois Ouvrard

Deputy Chief European Economist

Jean-Francois.Ouvrard@morganstanley.com +49 69-21662813

Summer, Still Below Target

Prior trends have continued. The central government deficit is

tracking wider than 2025 but spending in defence and

infrastructure is running below target, despite a slight

acceleration in defence. The print is in line with our view. Our

forecasts for fiscal balance and growth are unchanged. The 2027

budget draft signals downside risk to spending and borrowing, in

our view.

Key Takeaways

The cash deficit tightened to €36bn in June (MSe €35bn) from €42bn in May, in

line with seasonality. It still remains notably above 2025 (€23bn in Jun-25).

Extrapolated to 2026, defence is trending below 2025 and 32% below target

(17% below MSe), but execution has accelerated and seasonality suggests a 4Q

uptick.

Infrastructure is trending above 2025 but remains 21% below target (8% below

MSe). Regional draws could accelerate borrowing but likely add limited spend on

budget shifts.

The 2027 budget draft includes a large borrowing rise to €204bn (4.3%-GDP) in

2027 up from €182bn (3.9%-GDP) in 2026 for the central government. We see

downside risks to that from slower-than-planned defence ramp up and infra

draws from regions.

We forecast a 120bp wider total public deficit in 2026 and +20bp in 2027, close

to consensus and below Bundesbank and Government.