China and the Eurozone in a Slower World: Rebalancing Growth Models and Rethinking Fiscal Strategy

China and the Eurozone in a Slower World: Rebalancing Growth Models and Rethinking Fiscal Strategy

A slower global economy tends to expose whatever each region has been postponing. When world trade cools, borrowing costs stop falling, and geopolitics keeps adding small frictions to every supply chain, “growth” becomes less of a tide that lifts all boats and more of a test of domestic engines. That’s the backdrop to two stories that matter together: China’s long, uneven attempt to rebalance away from property-and-export dependence toward consumption-led “high-quality” growth, and Europe’s effort to respond to weak potential growth with a fiscal strategy that can spend more on security and the transition without losing credibility on debt.

Start with the shared constraint: forecasts are not recessionary, but they are modest. In Europe, the European Commission’s Autumn 2025 forecast had euro area growth easing to around 1.2% in 2026 (after roughly 1.3% in 2025), a profile that looks steady but also stubbornly low for a region facing aging populations and productivity challenges. The OECD’s late-2025 outlook sits in the same neighborhood, describing an aggregate euro area fiscal stance that tightened a bit in 2025 and is broadly neutral thereafter, with EU-level investment support from NextGenerationEU still doing some of the lifting. Even within the ECB’s own macro projections, the sense is that the external environment is doing fewer favors—foreign demand growth is expected to slow in 2026 as global trade weakens.

China’s headline numbers look stronger, but the direction of travel is similar: decelerating trend growth and a bigger premium on composition. The IMF’s 2025 Article IV mission statement projected China at about 5.0% growth in 2025, slowing to 4.5% in 2026, helped near-term by policy support and still-resilient exports, but with the underlying challenge of weak confidence and structural imbalances still front and center. The point isn’t whether 4.5% is “high” in the abstract; it’s that the model producing it matters much more than it used to.

For China, rebalancing has been a slogan for years, but the urgency has sharpened because the old growth flywheels are either politically constrained or economically exhausted. Property, once a near-universal collateral base and a dependable source of local-government revenue, has been in a prolonged adjustment. Local-government financing vehicles and off-balance-sheet debts have turned from a hidden accelerant into a visible risk channel. Meanwhile, the external environment is less reliable: trade policy uncertainty remains elevated in global forecasts, and China’s export engine faces more scrutiny, more tariffs, and more strategic “de-risking” than it did in the pre-pandemic era.

So what does “rebalancing” concretely mean in the China context right now? At its core, it’s a shift in the source of demand—from building and selling ever more apartments (and the upstream steel/cement credit cycle that comes with it) toward household consumption and service-sector dynamism. International institutions keep returning to the same practical levers because they map to the same behavioral obstacle: households save a lot because they feel they need to. The IMF has repeatedly emphasized strengthening the social safety net and liberalizing services as central to making consumption a more dependable driver. The World Bank’s December 2025 China Economic Update adds texture to that argument with specifics: unemployment insurance coverage is still limited (especially for migrant and informal workers), and rural migrant/informal pensions are small relative to incomes—exactly the kind of gaps that make precautionary saving rational. If you want consumption to rise, you don’t just ask people to spend; you reduce the tail risks that make saving feel like self-defense.

This is why the policy mix matters as much as the stimulus headline. China can support growth with fiscal measures and credit easing, and the IMF notes that recent stimulus helped near-term activity and incomes. But rebalancing is not simply “more stimulus.” If support mainly props up construction or funnels through state-linked investment without repairing household balance sheets and expectations, it can buy time without changing trajectory. The harder version—expanding portable benefits, improving health coverage, boosting unemployment insurance reach, making the tax-and-transfer system more progressive, and reducing barriers in services—tends to be slower and politically more complex, but it’s the version that raises the consumption share of GDP in a durable way.

There’s also a second layer to China’s rebalancing that is often misunderstood outside the country. It isn’t only about “consumption versus investment”; it’s also about what kind of investment. China has been leaning heavily into advanced manufacturing, clean energy supply chains, and strategic technologies. That can raise productivity and export competitiveness, but it also risks intensifying trade tensions and generating overcapacity concerns abroad if domestic absorption remains weak. In a slower global economy, an export-heavy outlet for industrial expansion is simply less guaranteed than it once was—so the domestic-demand leg of the stool becomes even more important.

Europe, for its part, faces a different problem that rhymes: weak growth potential colliding with new spending imperatives. After years when the big fiscal story was pandemic support followed by inflation-era consolidation, the new constraint is security. The EU has been explicitly creating room for higher defence spending through the fiscal framework itself. In April 2025, the Council endorsed coordinated activation of a “national escape clause” mechanism that gives member states additional budgetary flexibility for defence outlays while still keeping the debt-sustainability architecture in place. The Commission has framed this as allowing substantial fiscal space over several years if defence budgets rise materially. In other words, Europe’s fiscal response to modest growth is not a single pan-EU stimulus button; it’s a set of rule changes and exemptions designed to reconcile higher strategic spending with the promise of discipline.

At the same time, the baseline macro stance is cautious rather than exuberant. The OECD expects the euro area fiscal stance to be broadly neutral in 2026 and 2027, with investment spending under NextGenerationEU continuing to support demand, even as many national budgets remain under consolidation pressure. This neutrality is not an accident; it’s the political equilibrium of a currency union where some countries want more room to invest and others want stronger safeguards. The reformed fiscal framework tries to square that circle by focusing on medium-term expenditure paths and country-specific debt trajectories, rather than one-size-fits-all annual targets—an approach that is still in the early stages of real-world implementation.

Where Europe’s “response” becomes more visible is in the composition and geography of spending. Germany is the obvious case because it is large enough that its fiscal choices spill across borders. Recent reporting and analyst estimates have highlighted a meaningful German fiscal impulse in 2026 tied to defence and infrastructure, albeit with slow rollout that may delay growth impact. In a euro area that has been repeatedly constrained by demand shortfalls, a Germany that spends more—especially on investment rather than pure transfers—can lift regional activity through imports, supply-chain orders, and improved confidence. But the caveat matters: if implementation is slow, the macro effect arrives late; if the spending mix skews toward items with low multipliers, the boost is smaller than the headline number suggests.

Put China and Europe side by side, and a useful contrast emerges. China’s rebalancing is fundamentally about changing household behavior—making the consumer confident enough to be the stable core of demand—while managing the unwind of a property-credit era without a financial accident. Europe’s challenge is less about household willingness to spend (though confidence still matters) and more about collective capacity to invest inside a rules-based fiscal union—finding a way to finance defence, the energy transition, and productivity upgrades while not re-triggering old debt crises or political backlash against “austerity.”

Yet the strategies also complement each other in the global picture. If China succeeds in raising the share of consumption and services, it becomes a steadier importer of consumer goods, services, and high-value inputs—good for global demand when trade is fragile. If Europe succeeds in making fiscal policy more investment-friendly without losing discipline, it raises its own potential growth and reduces its dependence on external demand at exactly the moment the external environment is less supportive. In both cases, the shift is away from growth models that rely on the world being generous—endless appetite for exports, endless tolerance for leverage—and toward models that can generate momentum at home.

The risk, of course, is that both rebalancing efforts can slip into half-measures. China can stimulate without reforming the safety net at scale, leaving consumption cautious and forcing industry to look outward again. Europe can create fiscal flexibility for defence but underdeliver on the productivity side—slow permitting, fragmented capital markets, underinvestment in innovation—so that higher spending raises costs more than it raises capacity. And because the global economy is slower, those mistakes get exposed faster: there’s less “easy growth” available to cover them up.

What a pragmatic rebalancing playbook looks like in this environment is therefore less dramatic than people expect. For China, it means prioritizing policies that directly reduce precautionary saving—wider unemployment insurance coverage, better portability for migrants, stronger basic health and pension support—while continuing to clean up local-government and property-sector balance sheets so credit flows to productive uses rather than to plugging old holes. For Europe, it means using the new fiscal space not merely to spend more, but to spend in ways that expand capacity: defence procurement that builds an industrial base, infrastructure that removes bottlenecks, transition investment that lowers energy vulnerability, and EU-level programmes that crowd in private capital rather than replacing it.

In a faster world, you can sometimes grow your way out of structural problems. In a slower one, you have to redesign the engine while you’re still driving. China’s rebalancing and Europe’s fiscal response are both attempts to do exactly that—under different constraints, with different politics, but facing the same reality: the next few points of growth will be earned, not assumed.