European governments face mounting pressure to fund defence, pensions and healthcare while meeting higher debt-servicing costs, with weak growth limiting their options, according to a Morgan Stanley analysis published on July 20, 2026. Without policy changes, those competing demands could raise public spending by at least three percentage points of gross domestic product (GDP) in most eurozone countries by 2040. Morgan Stanley expects governments to face difficult budget choices over the coming decade as they try to sustain growth without adding to debt. For decades, falling defence expenditure and debt-servicing costs helped European countries expand welfare programmes.
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