Fiscal Space and Sovereign Bond Market Developments in Selected European Economies

by Alexandros Kontonikas and John Tsoukalas

This research note examines fiscal space and sovereign bond market developments in Greece and selected European economies. While Greece has made significant progress in fiscal consolidation, maintaining primary surpluses and reducing its debt-to-GDP ratio, the broader European landscape is shifting: increased defense spending needs, tariffs and hightened geopolitical uncertainty. The need for stronger defense capabilities across Europe introduces a major fiscal challenge for all EU member states, including Greece, which, compared to its EU peers, has historically allocated a higher share of GDP to defense. While Greece benefits from a favorable investor composition and debt servicing conditions, future debt issuance at market rates and rising European borrowing costs may add pressure to its fiscal position. Given these developments, adhering to fiscal prudence, exploring EU-wide financing mechanisms, maintaining debt reduction efforts and accelerating growth enhancing reforms will be critical.