As inflation slows and interest rates begin to fall, Europe is entering a new phase. The emergency measures of the post-pandemic period appear to be over, but uncertainty remains–both in terms of monetary policy and national security. Rising geopolitical tensions are putting pressure on European institutions, challenging their ability to respond quickly, stay credible, and work together over the longer term.

Within this context, this month’s issue of Spanish and International Economic & Financial Outlook (SEFO) opens with an assessment of the European Central Bank’s strategic pivot, following its recent rate cut and what looks to be the end of its disinflation effort. On 5 June 2025, the Governing Council of the European Central Bank lowered its main policy rates by 25 basis points, bringing the deposit facility rate down to 2%. While this move does not yet return rates to their estimated long-term neutral level—and may not be the final adjustment—it marks an important shift. Specifically, it brings to a close the ECB’s three-phase response to the inflation shock triggered by the COVID-19 pandemic and Russia’s full-scale invasion of Ukraine. Looking ahead, the Governing Council will place less emphasis on whether interest rates are exactly at the “right level” for long-term price stability. Instead, the focus will shift toward how and when to respond to new external developments. In this new phase, the ECB aims to remain flexible and responsive while continuing to uphold its credibility with markets and the public. This forward-looking approach was outlined in a strategy assessment published by the ECB on 30 June, drawing on lessons from recent years. Concern for the neutrality of monetary policy will have to wait for a more predictable economic and political climate.

From there, we shift to another high-stakes policy domain—Europe’s defense industry, exploring the structural inefficiencies holding back Europe’s military-industrial base and present a compelling case for deeper integration. The European Union is the second-largest global spender on defence, but its effective military capacity has lagged. The current industrial model, marked by overlapping capabilities, limited economies of scale, and modest levels of collaborative innovation spending, has contributed to high production costs and missed opportunities for technological spillovers. Drawing on a simple modelling exercise, estimates show that full integration of the EU defence market could have raised industrial output by 22 percentage points in 2022 above observed growth, equivalent to roughly €46 billion or 14% of total EU defence spending. Most of the potential gain is tied to scale effects, with a smaller but important share linked to increased knowledge transfers. While countries with larger industrial bases would benefit most in absolute terms, smaller member states would experience stronger relative growth, supporting more balanced development. Unlocking these gains would require addressing long-standing institutional and financial barriers and ensuring that benefits are distributed equitably across the bloc. At a time of heightened geopolitical pressure, improving industrial coordination offers a credible path to stronger strategic autonomy and more effective defence capacity.

Zooming in on Spain, we examine a different kind of vulnerability: the gap between headline growth and public sentiment. Despite leading GDP growth in the eurozone since 2021, Spain’s strong economic performance has not translated into equally strong public sentiment. A new national survey reveals that while some households report financial improvement driven by wage gains and job stability, more believe their situation has worsened, citing inflation and taxes as the main causes. The disconnect between macroeconomic indicators and household sentiment is further demonstrated by continued concern over low wages, housing affordability, and inequality. Perceptions vary significantly by age, income, household composition, and political orientation, with younger, right-wing, and lower-income groups expressing greater dissatisfaction. The widespread sense of lost purchasing power, combined with sharp increases in VAT and income tax burdens since 2019, reinforces a sense of financial strain for many.

That mixed sentiment is mirrored in the underlying data. Against the backdrop of impressive GDP growth in Spain in 2024, household incomes grew strongly for a second consecutive year, supported by wage gains, rising property income, and easing inflation. This trend led to a significant increase in savings and a record high net lending position. Despite higher interest payments, households remained financially sound, with debt ratios continuing to fall relative to income and GDP thanks to a growth in savings. In contrast, non-financial corporations saw a decline in gross operating surplus and weak investment dynamics, with real capital formation still lagging pre-pandemic levels. While corporate dividend payouts reached record highs, retained earnings fell, suggesting limited reinvestment capacity. Overall, 2024 revealed a growing divergence between household financial resilience and corporate underperformance, pointing to a structural shift in Spain’s post-pandemic economic landscape.

We then take a longer view of this corporate trajectory, tracing how Spanish non-financial firms have transitioned from debt-fueled expansion to equity-backed consolidation since the start of the euro era. The financial evolution of Spain’s non-financial corporations (NFCs) over the first quarter-century of euro membership reveals a marked transition from aggressive debt-financed expansion to cautious, equity support consolidation. Using original estimates based on Eurostat and national accounts data, this paper constructs a consolidated balance sheet for Spain’s NFC sector from 2000 to 2024, tracking changes in the composition of assets (operating vs. financial) and liabilities (debt vs. equity). While total assets tripled in current euros and doubled in real terms over the period, the growth was uneven, concentrated largely before the 2008 financial crisis and slowing afterwards. Financial assets increased rapidly in the early years but have remained steady at around 40% of total assets since 2010. On the liabilities side, a dramatic pre-crisis surges in bank debt reversed post-2009, with the leverage ratio falling from a peak of 65.3% to 35% by 2024 and bank credit declining to just 16% of total liabilities. The shift reflects a deeper structural change: since the crisis, retained earnings have persistently exceeded gross capital formation, enabling deleveraging and a net lending position. A simple regression confirms that while asset growth drives demand for external funds, strong internal financing capacity reduces reliance on debt, especially bank credit. The recent stagnation in asset accumulation cannot be attributed to credit constraints but rather suggests waning investment appetite, despite a financially healthier corporate sector.

The next two articles turn to households and financial inclusion. First, we assess the rise of revolving credit in Spain—a product that offers flexibility and access, but also risk. Revolving credit has emerged as both a tool for financial inclusion and a source of concern in Spain, especially as its usage grows amid legal scrutiny and regulatory debate. Recent Supreme Court rulings demonstrate a need for clearer consumer information and greater transparency in contract terms, while European examples offer potential regulatory models. Although revolving credit remains a small share of household borrowing, close to 2%, its flexible features make it appealing to vulnerable borrowers. However, without robust consumer protection and financial education, the risk of long-term debt accumulation and exclusion from formal financial systems remains high. The implementation of Directive (EU) 2023/2225 provides an opportunity for Spain to enhance legal certainty, implement international best practices, and strike a better balance between access and safeguards.

We then present new insights into the roots of low financial literacy among adolescents. Despite widespread recognition of the importance of financial literacy, proficiency among adolescents remains uneven across varying socioeconomic and educational contexts. A typological framework helps clarify these disparities by distinguishing between cognitive disadvantages, structural disadvantages, and situational disadvantages that shape financial literacy outcomes among 15-year-olds. Drawing on international PISA data and a novel classification of risk factors, allows for the quantification of the independent and cumulative impact of each type of disadvantage on student performance. Cognitive deficits in math and reading are the strongest predictors of poor financial outcomes, followed by socioeconomic background and lack of exposure to financial concepts in school or at home. Importantly, research highlights the high modifiability of situational disadvantage through targeted educational interventions, while also drawing attention to the necessity of strong foundational skills in math and reading to combat cognitive disadvantages. Schools can play a pivotal role in leveling the playing field by integrating financial education into the core curriculum and improving instruction in the basic academic skills necessary for financial literacy, combining educational reform with broader social equity goals to prepare all adolescents for the financial demands of adult life.