The Euro Area Stability Watch 2026 report by the European Stability Mechanism reveals significant divergences in fiscal performance among eurozone member states. About half of the countries, including Cyprus, Greece, Ireland, Portugal, and Spain—those which received financial support—have made substantial progress in public finances by reducing debt and narrowing deficits thanks to robust economic recovery and higher tax revenues. This improvement is evidenced by credit rating upgrades and tighter yield spreads on government bonds relative to German counterparts.

Conversely, several core economies in the eurozone have struggled to improve fiscal positions due to increased defense spending, infrastructure investments, and rising interest costs. Despite the eurozone showing resilience with high employment and stable financial conditions, fiscal space is gradually shrinking, and risks remain from energy price shocks tied to geopolitical tensions and close financial ties with the US.

Under a potential adverse scenario, the eurozone could slip into recession with inflation nearing 5%, severely impacting investment, exports, and economic activity. Prolonged geopolitical tensions and US asset repricing could exacerbate uncertainty and energy costs, leading to long-term output losses and weakened competitiveness.