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“Political uncertainty and policy shifts in some countries (France, Belgium, Germany) could affect fiscal strategies and increase volatility in financial planning. The successful absorption of EU funds and national fiscal consolidation will be important for mitigating risks, as regional debt levels continue rising,” says Alvise Lennkh-Yunus, head of sovereign and public sector ratings at Scope.

The outlook for German Länder remains stable, supported by strong institutional frameworks, a robust revenue equalisation system, and substantial federal government backing. AAA-rated Länder such as Baden-Württemberg, Bavaria, Berlin, Hesse, North Rhine-Westphalia, and Saxony-Anhalt continue to benefit from financial stability, good market access, and flexible funding options as benchmark sub-sovereign debt issuers in Europe.

“Still, German Länder face several important risks and challenges. High debt levels pose long-term fiscal risks, while budget constraints limit revenue growth and expenditure flexibility, requiring careful financial management. Some Länder face contingent liabilities from municipal short-term debt burdens (Kassenkredite). Additionally, economic uncertainty, driven by a weak federal performance, may further curb investment capacity,” says Julian Zimmermann, analyst at Scope.

Political risks, particularly the February 2025 elections and potential fiscal policy shifts, could influence borrowing costs and market sentiment, potentially widening bond spreads. Despite the debt brake (Schuldenbremse) limiting borrowing, Länder issued over EUR 60bn in bonds in 2024, demonstrating continued market activity. Similar issuance is likely this year, driven by refinancing needs, economic pressures, and fiscal policy adjustments, including potential reforms to the debt brake. Maintaining fiscal discipline while adapting to economic and political shifts will be crucial for preserving stable ratings in 2025.

In Spain (A/Stable), regional finances are improving overall but progress is uneven, with persistent budget deficits in certain regions and rising borrowing costs posing important fiscal risks.

“Despite strong revenue growth, driven by Spain’s resilient economy, regional budget deficits persist, with the overall deficit expected to decline only gradually. Fiscal consolidation will be crucial, but rising public investment commitments could lead to a higher number of regions ending 2025 in deficit,” says Jakob Suwalski, analyst at Scope.

Effective fiscal coordination between regional and central governments will be essential to ensure effective absorption of substantial EU funds in 2025 and 2026 across Spain’s Autonomous Communities.

France’s regions rely on strong central government support, but current political uncertainty and cuts to central transfers pose fiscal-planning challenges. Operating surpluses and sound debt affordability provide stability, but debt is set to rise further due to ambitious investment programmes.

Belgium’s federated entities benefit from predictable transfers and policy influence, but credit risks are likely to grow given the sovereign's negative Outlook (AA-/Neg). Fiscal performance is likely to improve as inflation recedes and revenue recovers, yet debt will continue to rise on the need to fund investment.

Italian regions and municipalities face balanced risks, with stable tax revenues and EU funds supporting budgetary performance but rigid fiscal structures limit flexibility. Economic disparities across regions create extra fiscal pressures, while reliance on sovereign on-lending ties sub-sovereign credit risk to national debt sustainability.

Among non-EU European sub-sovereigns, Swiss cantons maintain strong credit profiles, despite high debt and social spending pressures, due to revenue equalisation and national backing. SNB profit distribution and Switzerland’s economic resilience should ease fiscal strains in 2025. Norwegian sub-sovereigns are financially stable due to state alignment and equalisation, but limited revenue flexibility and growing investment needs pose long-term challenges.