European Sovereigns’ Capacity to Absorb a New Energy Shock Varies in World Economy News 08/05/2026 Western European sovereigns’ fiscal capacity to respond to a new energy crisis caused by the Iran conflict varies considerably with Belgium, France and the UK having the least headroom, Fitch Ratings says. Many western European sovereigns were already in a vulnerable fiscal position with the war in Iran adding to those pressures through higher energy costs, rising inflation, weaker growth and tighter financing conditions. Within the EU, those that have maintained a strong record of fiscal prudence in recent crises – Cyprus, Greece, Ireland, the Netherlands, Portugal, and most Scandinavian sovereigns – have, in theory, the most fiscal space to respond, although with some moderation to prevent a sharp deterioration in debt and deficits. Countries that have posted deficits of close to 3% in recent years, such as Germany and Spain, have scope to raise spending without significantly affecting the debt ratio trajectory to support households and businesses. Spain has been at the forefront of such efforts, announcing measures totalling 0.3% of GDP. Germany’s additional outlays on defence and investment will continue. Further fiscal measures in response to the Iran war would add pressure to the deficit but are likely to be offset by savings elsewhere, as such spending would probably fall under EU fiscal rules and the domestic debt brake. We view challenges for Germany as more related to growth and how the latest energy shock would affect the economy. Italy’s deficits have been moderating and are close to 3% of GDP but, unlike Germany or Spain, its high debt and financing costs is likely to limit its ability to provide support – the strong commitment to fiscal prudence by the Meloni government also supports this view. As in Germany, the main challenge from the war will be negative effects on the economy, particularly given industrial reliance on gas and the higher expected impac