Investments on hold
Growth in Europe set to remain moderate in 2025 and 2026
▪ Euro area on moderate growth path despite intensified global competition: Foreign trade is under great pressure despite the tariff compromise reached with the United States. The appreciation of the euro and diversion effects in global trade are increasing the strain on European companies. We expect the euro area to grow by around 1.2 percent in 2025 and 1.1 percent in 2026, mainly on the back of domestic consumption.
▪ Fiscal impetus concentrated with limited impact overall: Germany is the biggest generator of impetus in the euro area with extensive infrastructure and defence spending. Many other member states are curbing their spending due to pressure to consolidate their finances resulting in a largely neutral fiscal stance overall.
▪ Investment agenda remains central challenge: Defence spending is clearly on the increase and there have been some positive announcements recently regarding investments in the digital sector. Overall, investment ratios in the EU nonetheless continue to be slightly downward. The implementation of Mario Draghi’s proposed investment agenda is still highly doubtful with first indicators showing that the expansion of private and public investment is falling well short of the mark.
▪ Strengthening drivers of growth: Recovery in the euro area remains subdued with growth potential too low to secure competitiveness in the long term. Europe must improve its investment environment, strategically align the EU budget towards forward-looking projects, deepen the internal market and resolutely implement structural reform. Progress in innovation, digitalisation and industrial resilience as outlined in the Draghi report and the EU Competitiveness Compass is needed now. Declarations of intent are no longer enough; concrete action is overdue
▪
Introduction
The European economy is still facing considerable challenges in an increasingly fragmented global environment. Foreign trade remains under great pressure despite the tariff compromise agreed with the United States in the summer. Effective tariffs are still at around 13 percent and a degree of uncertainty about the future structure of trade policy measures remains Furthermore, the euro has appreciated considerably since the start of the year, additionally squeezing the price competitiveness of European industry. Another downward factor is the intensified diversion effects of global trade, particularly from Asian producers.
Some indicators are nonetheless pointing towards a slight easing of the situation. The monetary loosening of the European Central Bank (ECB) has somewhat improved financing conditions, and labour markets remain robust. However, investment momentum is still moderate overall. Fiscal impetus is emanating largely from Germany and its impact is slow, while several other member states are facing considerable pressure to consolidate their finances. The central question in the coming years will be whether investment levels in the euro area, above and beyond defence spending, are raised tangibly and whether or not the investment agenda proposed by Mario Draghi is implemented. First indicators show that investments other than in defence are not increasing sufficiently. Tangible effects on growth potential are therefore only to be expected in the medium term, provided investments are expanded considerably and structural reforms are implemented resolutely. As things stand, the EU is simply not doing enough.
With this backdrop, economic recovery in the euro area remains moderate overall and is heavily dependent on the resilience of the domestic economy. Private consumption is being buoyed by increasing real wages, while public spending is propping up growth in several countries. On the downside, net exports and structural locational weaknesses are curbing growth. Growth is currently on the level of the moderate growth potential that has declined in the last few years. This is too low to secure competitiveness and prosperity in the long term. The risks for our forecast development are mainly downward, particularly in the form of a possible escalation of trade disputes, geopolitical tensions and weaker global demand as well as increased risks on the financial markets. The China shock, intensified by the US tariff shock, will continue to weigh down production and employment levels in European industry with little restraint, not just through an increase of imports to the European internal market but also through the rising global market shares of Chinese companies in many different industries. These have benefited from many years of subsidies, a hefty depreciation of the renminbi, surplus capacities with export pressure and a long period of weak producer prices.
Our growth outlook presents a compact overview of the key macroeconomic developments in the euro area, examines the main economic drivers and risks, puts the role of fiscal and trade policy impetus into a European context and investigates whether the investment agenda is actually being implemented or not with the objective of providing decision-makers in politics, business and society with a solid basis for strategic assessments and economic policy decisions.
Growth in the Euro Area
Growth in the euro area losing steam with first quarter momentum diminishing
In the third quarter 2025, the euro area economy grew by 1.4 percent year on year following growth of 1.5 percent in the second quarter and 1.6 percent in the first quarter. Especially in the first quarter, the
European economy was boosted temporarily by activity pulled forward on account of the tariff dispute with the United States. This momentum died down quickly, however. At the same time, the introduced tariffs will only unfold their full economic impact in the next few quarters. This is particularly evident in the quarter-on-quarter comparison. While euro area GDP increased by a robust 0.6 percent in the first quarter, growth in the second and third quarter was much lower at 0.1 and 0.2 percent respectively.
As the following figure shows, growth in the first six months of 2025 was generated mainly by private consumption and public spending. Gross fixed capital formation also made a positive contribution while net exports pulled down growth, particularly in the second quarter, bringing GDP down by almost one percentage point.
Private Consumption
Public Consumption
Changes in inventories
Gross Fixed Capital Formation
*change over previous year, calendar and sesonally adjusted
Sources: Macrobond, Eurostat
Net exports
Total
Industrial production had been downward in the less volatile two-month average throughout May 2023 to January 2025, weighed down, among other factors, by the persistently high energy prices on an international comparison. It then recorded a turnaround in February 2025 with growth rates of more than two percent in spring especially, which could well be due to pulled forward trade activity with the United States. Growth then slowed down slightly and, at last count in September, was down to around one percent.
Industrial production* in the Euro area, in percent
*Volume index, 2-month-average, seasonally adjusted
Sources: Macrobond, Eurostat
In this context, capacity utilisation rates increased slightly most recently, reaching 78.2 percent at the start of the fourth quarter 2025. Capacity utilisation is still lower than the long-term average since 1985 of 80.7 percent, indicating that industrial activity has dampened overall.
Capacity utilisation* in the Euro area, in percent
*seasonally adjusted
Sources: Macrobond, DG ECFIN, European Commission
Alongside industrial production, a look at retail sales is also interesting as it is an important indicator for consumer demand which is, in turn, a test of strength for the domestic economy. Particularly when
industry is only growing at a moderate pace, private consumption can play a crucial role in overall economic momentum.
As shown in the following figure, retail sales in the euro area have been upward for around one and a half years now, since March 2024, much ahead of industry. As detailed above, industrial production only turned onto a gradual upward path in February 2025 and remains moderate overall. Retail sales were particularly brisk between August 2024 and July 2025 with an average growth rate of 2.5 percent. Growth has subsided slightly since August 2025, when it only reached 1.5 percent, before dropping to 0.9 percent in September 2025.
Euro area retail trade* (excluding motor vehicles)
*change over previous year, calendar and seasonally adjusted
Sources: Macrobond, Eurostat
Growth outlook largely defined by US trade dispute and changed fiscal stance
The European growth outlook for 2025 is largely defined by two key factors. First, the most recent developments in the trade dispute with the United States and the consequent impact on the export prospects of European companies and, second, the realignment of fiscal policy within the euro area and its effects, in varying degrees, on the domestic economy.
The agreement reached between the EU and the United States in July 2025 has only marginally reduced the burden of the previously introduced US tariffs. The average effective tariff rate has been around 13.9 percent since August (German Council of Economic Experts, 2025), which is slightly lower than our assumptions in our spring forecast in a no-deal scenario. The German Council of Economic Experts further points out that if products that have so far been exempted from the tariffs such as semiconductors, pharmaceutical products and critical minerals are also subjected to a tariff of 15 percent, this would bring the overall average effective tariff rate up by another 4.6 percentage points. This would almost lift the overall rate up to our spring assumptions. The degree of uncertainty has also only subsided marginally. The final structure of tariffs in areas covered by pending investigations (Section 232) is still open and sectoral tariffs, particularly in metals and their derivative products, are still much higher, at up to 50 percent. In addition, a large part of the economic damage has already
been incurred in the current year, through tariff measures and the impact of uncertainty. More details are set out in the chapter “Macroeconomic Parameters”.
On the other hand, the fiscal course of several member states has become looser. Germany is injecting the biggest momentum here with extensive investments in infrastructure and climate protection and higher defence spending. Most other member states are also increasing their defence expenditure considerably, while some countries, including Italy and France, are under pressure to consolidate their finances which is diminishing the overall impact on the euro area. Further details on fiscal policy and the expansion of investments in line with the investment agenda proposed by Mario Draghi are included in the chapter “Macroeconomic Parameters”.
PMIs show a mixed picture, with political uncertainties remaining high
The current forward indicators for economic development in the euro area show a mixed picture. The Flash HCOB Purchasing Managers’ Index for the euro area compiled by S&P Global reached 52.4 points in November 2025. This was only marginally below the previous month's figure, when the composite PMI had reached a 29-month high. The general improvement continues to be concentrated in the service sector, where the PMI reached an 18-month high. However, at 49.7 points, the PMI for industry fell below the expansion threshold of 50 points once again. According to Dr Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, companies continue to face weak demand, which is reflected in a slight decline in new orders.
In comparison to the indications coming from the PMIs, the sentiment indicators measured by the European Commission for the business sector remained largely unchanged or rose slightly, with the exception of industry Confidence in the industry has been declining slightly again since August 2025, as shown in the figure below.
Business confidence indicators* in the Euro area
*Balances, seasonally adjusted
Sources: Macrobond, DG ECFIN, European Commission
The economic policy uncertainty in Europe, and particularly in Germany, has subsided slightly from its extremely high level in spring 2025 but is still far above its long-term average. The Economic Policy Uncertainty Indicator (see following figure) still shows pronounced fluctuations, pointing to a persistently volatile economic policy environment. This uncertainty is undoubtedly encumbering shortterm investment decisions and corporate planning. The high level of volatility is also a reflection of geopolitical uncertainties and the ongoing debates on fiscal and structural policy measures and currently make it more difficult to interpret forward indicators
Economic policy uncertainty index*
indicies
Sources: Macrobond, Economic Policy Uncertainty
In view of the continuingly challenging environment with persistent pressures on foreign trade, the appreciation of the euro and structural challenges for Europe as a business and production location on the one hand, but also positive factors such as robust labour markets, monetary easing by the ECB, supported by gradually unfolding fiscal impetus in some European countries on the other, we forecast growth for the euro area of around 1.2 percent in 2025. This is higher than our spring forecast of 0.8 percent, but lower than the average growth over the last ten years of 1.5 percent (Eurostat 2025).
It should be noted that unusually high growth of 10.7 percent is expected for Ireland on account of the exceedingly high volume of pharmaceutical exports to the United States in the first six months of 2025. Excluding Ireland, growth in the euro area in 2025 would only be around 0.9 percent.
The euro area economy is being propped up largely by the domestic economy. Private consumption is benefiting from rising real wages, with public spending also playing a minor supporting role. Downward factors for growth are net exports, with US tariffs and the appreciation of the euro causing a deterioration in price competitiveness. Corporate investment activity also remains subdued.
In 2026 overall, we expect to see growth of 1.1 percent. This growth will be driven by domestic consumption, a gradual pick-up in investment and continued fiscal impetus, while net exports are likely to carry on pulling down growth for the time being.
Germany
The Germany economy, which delivered a poor performance in 2024 with real GDP only reaching its pre-pandemic level of 2019 and very little recovery, again failed to gather pace in 2025. According to the Federal Statistical Office (Destatis 2025a), Germany’s gross domestic product stagnated in the third quarter compared to the previous quarter, after nudging down 0.2 percent in the second quarter and rising a mere 0.3 percent in the first quarter. GDP is also lacking in momentum year on year. After stagnating in the first quarter and contracting slightly in the second quarter, gross domestic product rose slightly by 0.3 per cent in the third quarter.
Growth is weak across several areas. Private consumption remains subdued overall despite following a gentle upward curve since the end of 2024 and a tangible increase in real wages. German foreign trade has also failed to recover from its weak phase in the last two years in which price-adjusted exports dropped by 1.4 and 2.1 percent respectively (European Commission 2025). Incoming orders in the manufacturing sector are still not gathering any steam and the weak level of investment seen since the end of 2022 is persisting stubbornly.
In view of these developments, all the main forecasting institutions expect very low growth in 2025 overall. The German Council of Economic Experts (2025), the autumn forecasts of the federal government (German Federal Ministry of Economic Affairs and Energy 2025a), the Joint Economic Forecast (2025), the European Commission (2025) and the IMF (2025a) all forecast growth in real GDP of only 0.2 percent. Based on the most recent early indicators, which indicate a slight drop in GDP in the fourth quarter 2025, we expect minimal growth for the year overall of only 0.1 percent. Net exports and investment activity are expected to continue their downward path, with domestic consumption only barely bringing the overall result back into positive territory.
In 2026, the German economy should start to gather momentum, boosted by the most recent fiscal policy decisions. The coalition government has adopted an extensive package of measures to stabilise the economy, the effect of which will unfold successively from the second half of this year onwards. According to preliminary estimates, the fiscal impetus will amount to just under one percent of economic output in 2026. In conjunction with the high number of working days, which could contribute around 0.3 percentage points alone (see German Council of Economic Experts 2025), we also expect overall growth of one percent. Growth will be driven by a pick-up in investment and moderate impetus from public and private consumption. Foreign trade is likely to remain well in the negative Our growth forecast is therefore within the range of the forecasts from the key forecasting institutions. These range from 0.9 percent (IMF and German Council of Economic Experts) up to 1.3 percent (federal government and Joint Economic Forecast), while the European Commission forecasts 1.2 percent.1
France
After growing 1.1 percent in 2024, the French economy recorded a subdued start to the year in 2025 although it has gathered pace since then. In the first quarter 2025, French gross domestic product was 0.1 percent higher than in the previous quarter, due above all to changes in inventories. These were probably caused by reserves of domestic production for exports. Private consumption, on the other
1 In its latest forecast, the Deutsche Bundesbank expects economic growth of zero percent for 2025 and 0 7 percent for 2026. However, this forecast is from June and already outdated in part due to the swiftly changing economic environment
hand, contracted 0.3 percent. In the second quarter, growth picked up a little to 0.3 percent before gearing up to 0.5 percent in the third quarter. While private consumption only recovered gradually, investment activity picked up tangibly (particularly in capital goods and transport equipment). Foreign trade made a substantial contribution to growth of 0.6 percentage points in the third quarter, with imports decreasing slightly and exports picking up pace markedly following a weak first six months of the year. This trend was particularly pronounced in transport equipment (above all in aviation), that had been stored previously, and chemicals and pharmaceutical products (Insee 2025, European Commission 2025).
The Banque de France (2025) expects growth of 0.7 percent in 2025 overall, which is a slight upward adjustment compared to its June forecast. This adjustment was triggered by the higher carryover from the first six months of the year and the positive impetus already apparent in the third quarter. A moderate recovery of the economy is expected for 2026, with 0.9 percent growth. This forecast assumes less favourable international parameters (higher euro exchange rate, higher oil prices, weaker external demand) and continuing fiscal uncertainty. The forecasts for 2026 have been slightly downwardly adjusted compared to the forecasts made in June. The risks for growth after 2025 are largely downside, above all due to the political uncertainty in France regarding its fiscal course going forward. This could further exacerbate the wait-and-see attitude of companies and consumers. The forecasts are based on the fiscal stance remaining constant compared to June which would imply a deficit of around 5.4 percent of GDP in 2025. From 2026 onwards, the forecasts assume a structural adjustment of 0.6 percent of GDP.
The IMF (2025a) expects France to grow by 0.7 percent overall in 2025 and 0.9 percent in 2026. The IMF has adjusted its forecasts slightly since June (up 0.1 percentage point for 2025 and down 0.1 percentage point for 2026). The European Commission forecasts are in line with those of the IMF. In 2026, the Commission expects net exports to contribute 0.4 percentage points to growth and for private consumption to increase 0.6 percent, thus contributing 0.3 percentage points to growth. Private investment levels are also expected to increase following two downward years, buoyed by low interest rates although still curbed in general by domestic uncertainty. The forecasts factor in a gradual budget consolidation. Based on the information submitted by the French national parliament in its draft budget of early October, the European Commission (2025) expects the overall budget deficit in 2026 to drop down to 4.9 percent of GDP, after 5.5 percent in 2025 and 5.8 percent in 2024. The debt-to-GDP ratio is expected to increase from 113.2 percent to 118.1 percent during this period.
According to the Banque de France (2025), inflation will decrease considerably in 2025, averaging one percent which is one of the lowest levels of inflation in the euro area. The main factors driving inflation down are lower energy prices and a drop in inflation among services. Core inflation (excluding energy and food) is also on a downward trend, down from 2.3 percent in 2024 to 1.7 percent in 2025. Overall inflation is expected to rise slightly up to 1.3 percent in 2026 overall with core inflation remaining steady at around 1.6 percent. The IMF (2025a) is expecting slightly higher inflation rates of 1.1 percent in 2025 and 1.5 percent in 2026 but also indicates a very moderate rise in prices overall.
We also expect France to grow by 0.7 percent in 2025, mainly due to the strong third quarter results. In line with the forecasts referred to above, we expect growth to step up a little in 2026, up to 0.9 percent. Upward momentum will be curbed overall by external pressures, such as the latest US tariffs on French exports, as well as the country’s persistent fiscal uncertainty and need for budget consolidation.
Italy
The Italian economy picked up slightly at the start of 2025 before losing steam in the further course of the year. GDP increased by 0.3 percent in the first quarter 2025, before slipping down 0.1 percent in the second quarter. In the third quarter, GDP grew by 0.1 per cent quarter-on-quarter and 0.6 per cent year-on-year. Domestic demand contributed 0.2 percentage points to GDP growth in the third quarter: 0.1 points each from consumption and investment. Public spending had no impact. The external contribution was positive (+0.5 points), while inventory changes and valuables reduced growth by 0.6 points. On the production side, value added increased in agriculture and the service sector, while industry declined slightly. According to Istat (2025), the statistical overhang for the year as a whole is 0.5 per cent.
The Italian economy continues to face structural challenges which are partly similar to those of Germany particularly regarding the internationally comparatively high energy costs. These difficulties are also reflected in the downward trend of industrial production in Italy for the last two and a half years. Production levels have declined more than eight percent since 2021. Francesco Giavazzi, a former economic advisor to the former prime ministers Mario Monti and Mario Draghi, even believes that the Italian economy would already be contracting tangibly if it were not for the extensive support provided by the European recovery programme NextGenerationEU, of which Italy is the biggest recipient, receiving almost 200 billion euros (Börsen-Zeitung 2025). Italy’s GDP only grew by 1.5 percent between the third quarter 2022 and the third quarter 2025.
The Banca d’Italia (2025) expects the Italian economy to grow 0.6 percent in 2025 and 2026 and 0.7 percent in 2027. The main upward factors are forecast to be private consumption, buoyed by an increase in real disposable incomes. Investments will also gather pace, carried by the measures of the national recovery and resilience plan (NRRP) and lower financing costs. Demand from abroad, on the other hand, is likely to suffer tangibly from a more restrictive trade policy. The forecast for 2026 has been downwardly adjusted by a slim 0.2 percentage points since June, mainly on account of increased pressure on the export side through the appreciation of the euro and higher US tariffs (Banca d’Italia 2025).
The IMF (2025a) expects Italy to grow by 0.5 percent in 2025 and 0.8 percent in 2026, which is slightly lower than the Italian central bank’s forecast this year and slightly higher next year. The European Commission (2025) even forecasts growth of only 0.4 percent in 2025, expecting net exports to shave 0.7 percentage points off growth, and domestic consumption to contribute one percentage point and changes in inventories 0.1 percentage point to growth. In 2026, the European Commission expects growth of 0.8 percent, the same as the IMF. This growth will be driven by domestic consumption and a lower strain on foreign trade compared to the previous year.
Our assessment: We expect low growth of around 0.5 percent in 2025, driven by moderate consumption and growing investment activity. Investments picked up solidly in the second quarter but are still stifled by uncertainties. In 2026, we expect growth to accelerate slightly to around 0.8 percent, propped up by the deployment of the remaining NRRP funds and a moderate pick-up in investment. The risks remain high nonetheless with the appreciation of the euro and US tariffs burdening exports while the continuingly high savings rate could dampen consumption.
Spain
The Spanish economy has proven surprisingly resilient in the face of the current challenging international environment. Economic growth in Spain is moving well above the euro area average, with growth at 3.1 percent in the first quarter and three percent in the second. According to the Banco de España (2025), economic growth was supported largely by the strong momentum in domestic demand, particularly in private consumption and gross fixed capital formation. Together, these two components contributed 0.9 percentage points to growth in the second quarter. In contrast, net exports reduced GDP growth by somewhat more than 0.1 percentage points. This is due to a lower growth in exports, particularly in non-tourism services, and a small increase in imports. Preliminary data from Eurostat indicates that the Spanish economy grew by 2.8 percent in the third quarter 2025. Quarter on quarter, growth was at 0.6 percent, 0.8 percent and 0.6 percent in the first three quarters of the year.
The Banco de España (2025) expects Spain to grow by 2.6 percent in 2025 overall, which is 0.2 percentage points higher than its June forecast. The forecast was adjusted to factor in two counteracting forces. On the positive side, the solid development of economic activity over the last few months and the strength of the latest economic indicators are set to add 0.3 percentage points to GDP growth in 2025. On the negative side, revised assumptions, particularly regarding energy prices and exchange rates, have made the scenario slightly less favourable than in June, subtracting 0.1 percentage points off growth this year. The forecast for 2026 is unchanged at 1.8 percent. Economic expectations therefore remain robust, although tangibly lower than in the previous year. The Banco de España also points out that the unchanged forecast for 2026 masks the small upward effect from the carryover of higher growth expected for 2025. This effect is cancelled out by a downward adjustment due to the deterioration of the global economic environment, particularly in relation to energy prices, exchange rates and the global markets.
In its World Economic Outlook of October 2025, the IMF (2025a) is somewhat more optimistic than Spain’s central bank and forecasts economic growth of 2.9 percent for Spain in 2025 and as much as two percent in 2026. This is an upward adjustment of 0.2 and 0.4 percentage points respectively compared to the IMF’s forecasts from July and April. The European Commission (2025) also expects to see growth of 2.9 percent in 2025 and 2.3 percent in 2026.
Our conclusion: In 2025, we expect the Spanish economy to grow by 2.9 percent. This figure reflects the robust state of domestic demand and investment activity and also factors in slightly negative net exports. In 2026, we expect growth to slow down to around 2.1 percent as the positive effects of tourism and services are set to subside and foreign trade is likely to pull down growth, while consumption and investment will prop up the national economy but not reach the unusually high momentum seen in the last few years.
Source: Eurostat
Our forecast for the euro area and the four largest EU countries is summarised in the following overview
Sources: Eurostat. Projections: BDI and European Commission (*).
Macroeconomic Parameters
In this chapter, we provide an overview of the macroeconomic parameters relevant to our forecast. The analysis takes account of both current trends and future developments which could impact economic development in the euro area
Global economy – temporary supports mask burdens on trade
In 2025, the global economy has developed slightly better than expected. According to the IMF (2025a), several factors led to higher economic output. These include activity brought forward following the introduction of higher US tariffs, a depreciation of the US dollar and the consequent more favourable financing conditions, and continuingly high risk propensity on the markets. Furthermore, several large economies loosened their fiscal policy, particularly the United States, and investments in artificial intelligence boomed, largely in the United States and China. These upward factors are temporarily masking the negative impact of higher tariffs and persistent global uncertainty and causing the global economy to exceed expectations slightly. Without this impetus, global growth momentum would have been even weaker.
Despite these temporary supports, the outlook remains subdued. The IMF (2025a) forecasts global growth of 3.2 percent in 2025, following growth of 3.3 percent the previous year. In 2026, it expects growth to slow further, down to 3.1 percent, well below the pre-crisis average of 3.7 percent. The advanced economies are only expected to grow by a very moderate 1.6 percent while emerging and developing countries are on track to grow at a slightly higher rate of over four percent, driven particularly by Asia.
Global trade is increasingly becoming a factor curbing growth. After a temporary boost from pulled forward activity in the first six months of 2025, the IMF (2025a) expects the trade volume to grow by 3.6 percent this year before decreasing substantially in 2026, down to 2.3 percent. Persistent fragmentation, high uncertainty and new trade policy barriers are pressing down on momentum and set to further constrict the efficiency of global value chains. According to the IMF, the risks are still largely downside even if inflation in most countries is gradually approaching target levels.
Strain on growth in the euro area remains high despite trade deal with the United States
The burden on European companies caused by the US tariffs remains high despite the agreement reached between the EU and the United States in July 2025. Based on the trade deal, EU exports to the United States have been subject to a general tariff ceiling of 15 percent since 7 August 2025 Products with a higher MFN tariff rate, such as certain textiles, are subject to this higher tariff. Much higher tariffs apply to steel, aluminium and copper and products made of these materials and there are currently no quota regulations in place, although negotiations are underway to introduce them. For numerous products which are only partly made of these metals (derivatives), the tariff applies to the respective share of these metals.
Tariffs on semiconductors, pharmaceutical products and lumber, which are some of the products that are being investigated under Section 232 of the US Trade Expansion Act of 1962 and may be subject to additional tariffs, remain capped at 15 percent for the time being Tariffs on cars and car parts from the EU have retroactively been reduced to 15 percent from 1 August, down from 27.5 percent previously (this rate was the sum of the Section 232 tariff of 25 percent and the MFN tariff of
2.5 percent). A Section 232 investigation into trucks and truck parts has resulted in tariffs of 25 percent on trucks and truck parts and ten percent on buses, effective as of 1 November, also for exports from the EU Several investigations under Section 232 are still underway in the United States to review whether additional tariffs are necessary for reasons of national security, including for products such as critical minerals, drones, solar inputs, wind turbines, robotics and industrial machinery as well as personal protective equipment, medical disposables and devices. Uncertainty therefore remains high regarding the final tariff rates in these areas.
For some “strategic products” such as natural resources not available in the US (including cork), aircraft and aircraft parts, chemical precursors, generic pharmaceuticals and their ingredients, the US has committed retroactively as of 1 September 2025 to only apply the MFN tariff, which is zero or close to zero in these categories
The tariff deal includes a pledge by the European Commission that the EU will invest 600 billion US dollars in the US until 2028 and import US fuels worth around 750 billion US dollars. These announcements should be regarded as strategic declarations of intent and need to be specified in more detail, structured and possible reviewed, particularly regarding the infrastructural and capacityrelated prerequisites in the field of energy. The European Commission has explained that these are investments that are already planned by EU companies. The EU has further pledged to invest at least 40 billion US dollars in US AI chips. Additionally, the EU intends to eliminate its import tariffs on US industrial goods and prepare the reduction of further trade barriers.
The average effective tariff rate for EU exports to the United States has increased to around 12.9 percent since the coming into effect of the trade deal on 7 August 2025 (German Council of Economic Experts, 2025). On an international comparison, some US tariffs for other trade partners are lower (such as for Canada and the United Kingdom) and some higher (including for China). This means that the relative competitive position of European exporters to the US market is different depending on the comparison group, which further modulates the growth impact of the tariffs. Overall, the tariffs make European exports substantially more expensive and curb US demand, which, on a macroeconomic level, also reduces growth in the euro area. Furthermore, the continuing uncertainties are putting a strain on private investments. At the same time, tariffs can trigger disruptions and delays in global supply chains which additionally encumbers the production and sales planning of European companies.
The international competitive environment has also intensified, not least due to increasing competition from China. After the United States, China is the second most important trade partner of the EU (Destatis, 2025b), but trade relations with China are becoming increasingly asymmetric. Goods exports from the EU to China amounted to around 214 billion euros in 2024. The proportion of total non-EU exports going to China has dropped from around ten percent in 2020 and 2021 to around eight percent in 2024, which reflects the declining relative significance of the Chinese market for European exports. Although exports to China increased by a slim 11 billion euros between 2020 and 2024, the increase was much less than in non-EU exports overall, thereby reducing the relative share of exports to China.2
2 In detail, German exports to China dropped from 96 billion euros in 2020 and 105 billion euros in 2021 down to 90 billion euros in 2024. This reduction was partially compensated for by increasing exports from other EU countries. In France, exports to China increased from 18 billion euros to 24 billion euros, in Italy from 12 billion euros to 15 billion euros (with fluctuations in 2021) and in the Netherlands from 16 billion euros to 24 billion euros
In contrast, imports from China amounted to 523 billion euros in 2024 which is more than twice as high as exports. In addition, imports have increased by 138 billion euros since 2020 (Eurostat, 2025).
This imbalance is further aggravated by the structural problems of the Chinese economy in the form of a weak domestic economy, publicly subsidised production and massive industrial surplus capacities in key industries including steel, chemicals, solar and electric mobility. These surplus capacities do not just distort competitive conditions on the Chinese market but also produce an aggressive pressure on prices in third country markets on which Chinese providers are increasingly driving out European companies. China therefore represents a growing challenge for the European economy, reflected both by a reduction in demand and a global dissemination of its surplus capacities.
Furthermore, the US tariffs are triggering diversion effects, especially in the case of Chinese exports which are increasingly migrating to Asian markets and also, in part, to Europe. A study by the German Economic Institute (IW, 2025) concluded that US imports from China, for example, decreased by almost 16 percent in the first six months of 2025 compared to the same period last year, while German imports from China increased by around eleven percent in the same period. At the same time, the prices for these goods decreased by almost four percent. Imports from China rose particularly in the case of plug-in hybrids, automotive components and chemical products. The IW interprets this trend as a reflection of Chinese providers crowding onto the German market with low prices. Consequently, the global competitive pressure on German and European companies is increasing and causing additional pressure on prices in the euro area particularly in price-sensitive industries.
In addition, exchange rate developments are having an impact in the same direction. A weaker US dollar and a weaker renminbi are additionally reducing the price competitiveness of European companies. The euro appreciated almost 13 percent against the US dollar between January and the beginning of February 2025 and nine percent against the renminbi At the same time, the nominal effective exchange rate of the euro against a basket of 41 trade partners increased by more than six percent.
Despite the tariff compromise, our assessment of the negative impact of the US tariffs on growth in the euro area still holds true. We already expected a clear negative impetus in our spring outlook, at the time under a no-deal scenario. Now, with the agreed conditions, we still expect the negative impact on GDP to be at around 0.3 percent of GDP. In 2026, this downward effect is set to intensify accumulatively to around one percent compared to the baseline scenario.
Fiscal policy measures not expected to provide much support to growth overall
For the euro area, the total public budget deficit is expected to rise slightly in the next two years. In 2025, the deficit is forecast to increase 0.1 percentage points up to 3.2 percent of GDP (European Commission 2025). According to the European Commission, the increase in the deficit for the EU overall will be slightly higher. The main factors for this development are less revenues, higher interest payments and higher defence spending, which will partly balance out the ongoing fiscal adjustments. In 2026, the deficit is expected to continue rising slightly, up to 3.3 percent of GDP.
The European Commission (2025) has classified the fiscal course in the euro area for 2025 and 2026 as neutral overall. Following a contractionary fiscal impulse of 0.4 percent of GDP in 2024, this is set to drop to 0.1 percent of GDP in 2025 and prospectively to almost zero in 2026. National net spending will be slightly expansionary in both years (0.2 percentage points of GDP in 2025 and 0.1 percentage
point in 2026) while the EU contribution will be slightly contractionary in both years at minus 0.1 percentage points of GDP. In ten EU countries, nationally financed current expenditure will restrain the fiscal course, particularly pronounced in France, Malta, Austria, Finland and Poland as well as in Slovakia and Romania, with restraint amounting to 0.5 percent of GDP or more. Most countries are keeping nationally financed investments steady, or expanding them, most notably in Estonia and Lithuania, also due to expanded defence spending. At the same time, higher absorption from RRF funds and other EU funds will be providing substantial expansionary contributions to the fiscal stance in Bulgaria, Portugal, Poland and Greece.
In Germany, fiscal policy reforms were adopted in March 2025 exempting all defence expenditure above one percent of GDP from the national fiscal rules. Further, the creation of a special fund for infrastructure and climate investment was enabled with a volume of 500 billion euros over a period of twelve years and the spending rules for the federal states were also loosened. Public spending will therefore increase considerably in 2025 and 2026. The European Commission (2025) expects Germany’s fiscal stance in 2026 to be significantly expansionary (0.9 percent of GDP). The general government deficit is projected to increase from 2.7 percent of GDP in 2024 to 3.1 percent in 2025 and four percent in 2026. The deficit will be driven up by higher investment and defence-oriented spending and additionally lifted by new tax relief measures for companies and various alleviations for households and companies, also in energy policy (European Commission 2025).
The debt ratio in the euro area is expected to increase further in the period under review, from around 88 percent of GDP in 2025 to 89 8 percent in 2026 (European Commission 2025). This is mainly on account of continuing primary deficits. The deficit of eleven EU member states is likely to exceed three percent of GDP in 2025. The EU has initiated excessive debt procedures against nine countries
The aggregate public investment ratio of the whole EU is expected to be four percent in 2026, up from 3.2 percent in 2019 (European Commission, 2025). Despite lower support from the Recovery and Resilience Fund, public investment should remain stable in 2027 as nationally financed investment, including in defence, is set to rise. In our box on investment activity, we investigate whether investment in the EU is increasing tangibly, above and beyond defence spending, and whether the investment agenda proposed by Mario Draghi is actually being implemented or not
Is EU investment on the upswing? Perspectives in light of the Draghi recommendations
Estimated investment needed
Despite high private savings, the level of productive investment in the EU is still well below the necessary. In his report of September 2024, Mario Draghi highlighted that additional investment of at least 750 to 800 billion euros per year would be needed to reach the strategic objectives of the EU, particularly in climate protection, decarbonisation, digitalisation and defence and security. This corresponds to around 4.4 to 4.7 percent of EU GDP in 2023. To close this gap, Draghi calculated that the investment ratio needs to be lifted from the current level of around 22 percent of GDP to around 27 percent, which would represent a turnaround in the decade long downturn in investment levels in the major economies of the EU. For comparison, the investments under the Marschall Plan between 1948 and 1951 only amounted to between one and two percent of EU GDP at that time. This shows the massive scale of investment efforts required to secure the competitiveness and scope for strategic action of Europe.
The situation is even more serious according to Mario Draghi’s latest assessment. At a high-level conference in September 2025 to evaluate the progress made in the implementation of his recommendations, he estimated that the annual investment required per year between 2025 and 2031 had meanwhile increased to almost 1.2 trillion euros. This corresponds to an increase of around 50 percent compared to the 800 billion euros estimated one year previously. According to an analysis by the ECB (2025e) referred to by Draghi, the investment volume needed has surged mainly due to considerably increased requirements for defence and security following the NATO summit in June.
The following figure of the ECB shows the breakdown of the additional annual investment needed according to the individual areas: around 4.2 percent of GDP for the green transition, 2.1 percent for defence and 1.4 percent for the digital sector (rough estimates). Based on the total investment needed of 1.2 trillion euros this corresponds to around 650 billion euros per year for green investments, 330 billion euros for defence investments and 220 billion euros for digital investments.
The ECB sets out that historically public funds accounted for around 24 percent of green investment, around 15 percent of digital investment and almost all defence expenditure. Applying these publicly funded shares to the current annual investment requirements of around 1.2 trillion euros, the public funds required (yellow and red bars in the following figure) would amount to around 43 percent. That is about double the amount estimated in the previous year in the Draghi Report, mainly because defence spending is largely financed by public funds.
The resulting additional annual costs for national budgets and the EU budget is thus around 510 billion euros. The ECB calculates that with a margin to account for uncertainty of plus/minus 20 percent for the three transition areas the extra public contribution required corresponds to between 2.7 and 4.0 percent of EU GDP per year.
The remaining sum of around 690 billion euros would need to be covered by private funds. Applying an equal margin to account for uncertainty this would, according to our calculations, correspond to a private contribution of between 3.7 and 5.4 percent of EU GDP per year. For the total annual funds required of 1.2 trillion euros with a margin around this estimate this corresponds to between 6.4 and 9.4 percent of EU GDP.
It should be noted that defence spending is, colloquially, classified as “investment” but the actual proportion of investment in the macroeconomic sense is usually low. Only expenditure that contributes to the expansion or qualitative improvement of the overall economic capital stock, such as durable military equipment or infrastructure is included in gross fixed capital formation. A large share of defence expenditure is, however, spent on running costs such as personnel, operation and maintenance. Calculations of the European Defence Agency (2024) show that between 2005 and 2023 only around 17 to 26 percent of defence expenditure was spent on defence-related investments. For 2024, this proportion, based on preliminary data, is expected to reach a new record level of around 31 percent.
Even if the investment share of defence spending is set to keep rising on account of the latest NATO resolution, we have assumed a conservative proportion of around 30 percent in our calculations. Based on the annual volume of defence spending proposed by Draghi of 300 billion euros, this would correspond to an investment volume of just under 100 billion euros per year. Based on the calculated sum of additional annual expenditure required of 1.2 trillion euros this would amount to around 970 billion euros in investment in the narrower sense of capital stock formation. Including the above specified margin to account for uncertainty, this corresponds to around 5.2 to 7.6 percent of GDP and a public investment contribution of between 1.5 and 2.2 percent of GDP.
The ECB analysis arrives at similar figures overall as corresponding estimates on a national level, even though the different studies focus on different areas. A joint study by BCG, IW and BDI (“Transformation Paths of Germany as an Industrial Nation”, 2024) estimate the additional investment requirements for climate protection, digital transition and geopolitical challenges in Germany until 2030 at around 1.4 trillion euros. Based on the German proportion of EU added value of around 24 percent, this volume is on a comparable scale to that calculated in the Draghi investment agenda. It should be noted that the specified country-specific study does not explicitly include defence expenditure.
The key indicators for investment needs in the conventional meaning of the term are summarised in the following table.
Estimated additional investment needed in the EU (annual, ± 20 %)
Sources: European Central Bank, own calculations
Development of key investment indicators to implement Draghi agenda
Comparing the calculated volume of additional investment needs with the latest quarterly changes in gross fixed capital formation shows that the EU has not made any progress towards the Draghi investment agenda. To the contrary, gross fixed capital formation as a percentage of GDP between Q1 2024 and Q2 2025 dropped 0.5 percentage point down to 21.1 percent.
In a comparison of selected EU countries, only Spain has recorded a slight increase in investments. Germany, Italy and France are still seeing investments stagnate, as is Sweden, although the investment proportion of Sweden is historically high (just under 25 percent) and has increased considerably since about 2013. Greece has not yet recovered from the euro crisis. The proportion of investment here is around 15 percent and, although it has trended upwards since the Covid pandemic, the upward momentum has subsided recently.
*in percent of GDP, calendar and seasonally adjusted
A look at investments according to institutional sector shows that only public investment has risen slightly in the last few years. Public investment has increased from just under three percent of GDP in 2017 up to around 3.7 percent in 2024. The lion’s share of investment is made by the private sector, and this has been slightly downward in the last few years. In 2024, corporate investments amounted to 12.5 percent of GDP, household investments 5.5 percent, bringing the total private investment contribution to around 18 percent of GDP.
Investment share* by institutional sector in the EU
Source: Macrobond *in percent of GDP
Source: Macrobond
Finally, a look at gross fixed capital formation according to assets shows that levels have stagnated or been downward recently in almost all areas. Investment in plant and equipment has been slightly downward or largely flat, despite increased defence spending, which may reflect both the delayed impact and data collection of these investments and that reductions in the industrial sector are difficult to compensate. Investment in commercial property and infrastructure is also following a flat trajectory, while residential property remains on a downward path, although less steep than in late 2024. Investments in intellectual property is the only area to have recorded strong growth this year with 9.9 percent growth in the first quarter 2025 and 13.3 percent in the second quarter, evidently due to the boom in artificial intelligence.
Quarterly change* in gross fixed capital formation by type of asset in the EU, year-on-year
property Machinery, equipment, weapon systems
*calendar and seasonally adjusted, in percent
Source: Macrobond
Outlook for future development
property and infrastructure
Investment is nonetheless set to rise considerably in two areas in the near term
Firstly, the NATO member states have resolved to increase their defence spending, including arms and personnel costs, to 3.5 percent of GDP. In addition, they have pledged to spend 1.5 percent of GDP on defence and security-relevant areas such as infrastructure, industrial capacities and resilience.
It should be noted that the NATO targets are scheduled to be reached by 2035. They are therefore not completely congruent with the ECB projections up to 2031. Furthermore, as specified above, only slightly under one third of defence expenditure is likely to constitute investments. Regarding the additional security-relevant expenditure, it is unclear what proportion will represent real additional investment and how much will primarily flow towards the renewal of existing infrastructure, which is generally not categorised as gross fixed capital formation in national accounts. Furthermore, some EU member states,
including Austria, Ireland, Cyprus and Malta, are not NATO members, although their share in EU economic output is low (just under six percent of GDP).3
According to calculations of the European Parliamentary Research Service (2025), the defence expenditure of the 23 EU member states that are also NATO members was at 1.9 percent of GDP in 2024 and is set to increase to 2.04 percent in 2025, while the defence spending of the four non-NATO members is, in part, much lower. A phased increase in the defence expenditure of these 23 countries from the current level of just under two percent up to 3.5 percent in the next ten years would require additional spending, using a simplified estimate, of around 0.15 percent of GDP per year, the investment proportion of which would be under 0.05 percent. Even including all security-relevant expenditure, the additional expenditure would amount to about 0.3 percent of GDP per year to reach around 1.8 percent of GDP until 2031 of additional expenditure compared to current levels. This roughly corresponds to the target of 2.1 percent estimated by the ECB, assuming a slightly elevated percentage for 2025 already. At the same time, it clearly shows that the target will only be reached by the end of the period under review and that defence expenditure needs to be stepped up much faster. Some member states, including Germany, have planned a swifter rise in expenditure. Germany plans to reach the 3.5 percent mark by 2029 already according to current budget plans.
Secondly, investments in the digital sector are expected to rise. Looking back, the OECD (2025a) initially shows that investments have remained weak overall in most OECD countries since the global financial crisis while digital and knowledge-based assets have grown much more. Software investments among OECD countries have tripled since 2008, ICT hardware investments have doubled, and R&D investments have risen around 45 percent, while investment in machinery has only increased around twelve percent and investment in buildings have declined by seven percent. This trend has been particularly pronounced in the United States and France, while Germany has only recorded moderate growth. The latest OECD December 2025 Economic Outlook also shows that private ICT investment, for example in data centres, grew strongly in the first half of 2025, particularly in the United States, but is also gaining momentum in some smaller European countries, indicating a trend reversal towards stronger digital investment.
There have been further positive signs in Europe recently The Berlin Declaration – Friends of Industry 2025 (German Federal Ministry of Economic Affairs and Energy, 2025b), a joint statement of 18 EU member states, explicitly calls for a promotion of investment in AI, quantum technologies and cloud infrastructure. It also names three IPCEIs, Next Generation Cloud Infrastructure & Services (IPCEI-CIS), Artificial Intelligence (IPCEI-AI) and Edge Cloud Infrastructure (IPCEI-CIC), that support this promotion of investments. The European Commission is also planning to build five giga factories. Global corporations have recently announced substantial investments in Germany. Deutsche Telekom and Nvidia are building an AI data centre in Munich with an investment volume of around one billion euros which is scheduled to be ready for operation in early 2026. The Schwarz Group is investing eleven billion euros in a new data centre in Spreewald The first construction phase is scheduled for completion by the end of 2027. At the Summit on European Digital Sovereignty co-chaired by Germany and France in November 2025, Federal Chancellor Merz referred to Germany’s High-Tech Agenda according to which a total of 18 billion euros is earmarked for technological sovereignty and competitiveness until the end of the present legislative term.
It is currently difficult to judge to what extent these announcements will suffice to reach the additional investment needs in the digital sector outlined in the Draghi agenda of just under 1.4 percent of EU GDP. Most evidence shows that the measures and projects announced so far will not be enough to cover these needs. Furthermore, it can be assumed that in the estimates used by the ECB it is difficult to accurately estimate the steeply increasing need for AI-relevant infrastructure, particularly data centres, cloud capacities and the energy and grid infrastructure these require. In view of the fast pace of technological
3 In its analysis, the ECB has assumed for these four countries that their defence expenditure will rise to the current NATO average of two percent of GDP by 2035.
progress, the exponentially growing computing power requirements and the high volumes of upfront investment this entails, the actual investment needs are likely to be higher than estimated so far.
Conclusion
One year after the Draghi recommendations it is evident that instead of a pronounced upward surge in investment, the overall investment ratio is slightly downward and still far below the required level, even if public investment has risen somewhat. This gap is in danger of widening in the next few years without a drastic change in course. Even though investment in intellectual property has risen, the expected impetus from defence expenditure has not taken place so far and cannot compensate for the downward trends in the industrial sector. In contrast, the erosion of the industrial base is clearly discernible. To stop this trend and secure the competitiveness of Europe overall, the parameters for investment, innovation and growth need to be improved extensively.
Labour market still robust despite slight weakening
The labour market in the euro area remains stable despite the more subdued overall economic environment. In October 2025, the seasonally adjusted unemployment rate was at 6.4 percent, almost unchanged compared to the previous year. Unemployment is close to an all-time low and the European Commission (2025) is expecting a further drop down to an average of 6.2 percent in 2026. The employment level is also on a positive trend, although upward momentum here has subsided. Quarter on quarter, the number of employed persons increased by 0.2 percent in the first quarter 2025 and then by only 0.1 percent in the next two quarters. In 2025 and 2026, the European Commission is expecting a moderate upward trend in employment of 0.6 and 0.5 percent respectively.
There are nonetheless indications of a slight weakening on the labour market. The number of vacant positions has decreased tangibly. According to Eurostat, the job vacancy rate dropped from 2.6 percent in the second quarter 2024 down to 2.2 percent at last count. Corporate surveys confirm this trend. The proportion of companies that specified a shortage of skilled staff as an obstacle for production has continued to fall, in the service sector from 25 percent in the first quarter down to 23.9 percent in the third quarter, and in industry from 18.6 percent down to 16.4 percent. The reported shortage of skilled staff has therefore declined considerably from its record level in 2022 but is still above average and approaching its 2019 level (European Commission 2025).
Large differences between the individual member states remain. Unemployment rates in October 2025 ranged from slightly above three percent in the Czech Republic and Malta to 10.5 percent in Spain. Germany was at 3.8 percent compared to 3.4 percent in the same month last year, Italy at six percent and France at 7.7 percent. Alongside these differences at the national level, there are also indications of a weakening in the industrial sector. The number of employees in manufacturing (companies with more than 50 employees) in Germany was almost 23,000 lower in August 2025 than at the start of the year Compared to August 2019, there are around 233,000 less jobs in manufacturing.
ECB monetary policy less restrictive but financing conditions still slightly less favourable
Development of inflation
Overall inflation in the euro area has largely been moving sideways since August 2024. In November 2025, it was at 2.2 percent, only slightly above the two percent target level of the ECB. Core inflation, which excludes the highly volatile energy and food prices, was 2.4 percent at last count and is therefore still slightly elevated
The main driver of inflation is the persistent increase in prices in services, annual inflation here in November 2025 was at 3 5 percent As shown in the following figure, the service sector is still contributing substantially to overall inflation. Going the other way, energy prices have curbed inflation repeatedly in the last two and a half years and contributed negatively to price increases at last count. Price increases among industrial goods excluding energy, which were a principal driver of inflation during the supply chain problems and energy crisis between 2021 and early 2023, have become almost negligible. The price development of foods remains moderately elevated at between 2.5 and three percent.
Non-energy industrial goods (contributions)
Energy (contributions)
Food, alcoholic beverages and tobacco (contributions)
Services (contributions)
Inflation
Core inflation (excluding energy and food)
*Change compared to previous year
Sources: Macrobond, European Central Bank
Development of interest rates
After eight interest rate cuts since June 2024, the ECB terminated its easing cycle in summer 2025. Since June, the deposit facility has been at two percent, the main refinancing rate at 2.15 percent and the marginal lending facility at 2.40 percent.
At its most recent meeting on 30 October 2025, the ECB Governing Council signalised a wait-and-see stance in its monetary policy, in which it will carefully observe the further economic and inflationary development. ECB President Christine Lagarde described the current monetary course as “still in a good place” and emphasised that the Governing Council will follow a data-dependent and meeting-bymeeting approach (ECB 2025a, ECB 2025b). The ECB thus underlined its willingness to adjust its stance if necessary and react promptly to new data and economic and inflationary developments.
Lagarde noted that some of the downside risks for economic growth have subsided most recently, for example on account of the trade deal between the EU and the US, the ceasefire in the Middle East and progress in trade talks between the US and China At the same time, the global trade environment remains volatile, still harbouring uncertainties for growth and inflation. The ECB underlined that there are both upside and downside risks for growth and inflation. Downside risks include possible higher US tariffs and potentially increased export activity from countries with surplus capacities into the euro area which could lower inflation. Furthermore, a stronger appreciation of the euro could curb inflation more than expected so far. On the other hand, disruptions to global supply chains, shortages in commodities and higher expenditure for defence and infrastructure could cause inflation to rise more than anticipated.
Market analysts are expecting rates to be left on hold for some time now. According to DB Research (2025), the financial markets are only factoring in an easing of around 12 basis points in the next twelve months. This corresponds to an implied probability of just under 50 percent of a further cut in rates. The background here is the subsiding pressure on prices, due to the moderate increase in wages and the recent curb in energy price increases, among other factors. In the medium term, fiscal policy impetus and structural shortages on the labour market could cause renewed upward pressure on prices. The ECB (2025b) also notes that the start of the European Emission Trading Scheme 2 (ETS 2), which has meanwhile been postponed to 2028 according to the Council Decision of November 2025, could have a one-time impact on inflation of around 0.3 percentage points. In its Staff Macroeconomic Projections of September 2025c, the ECB is expecting inflation to be at 2.1 percent in 2025, 1.7 percent in 2026 and 1.9 percent in 2027. As these projections do not yet factor in the postponement of ETS 2, there is a slight downward risk for the inflation forecast for 2027
Financing conditions
Since our last forecast in May, the financing conditions have continued to improve slightly. As mentioned above, the deposit rate has remained unchanged since the last ECB rate cut of 0.25 percentage points down to two percent in June. Despite this slight monetary easing, the ECB Bank Lending Survey for the third quarter 2025 showed a moderate tightening of credit standards for companies (up four percent in net terms), largely triggered by increased risk perception on account of geopolitical tensions and trade risks. The demand for corporate loans only increased marginally (up two percent) and remains subdued overall, while the demand for residential construction loans increased solidly (up 28 percent). In the case of consumer loans, banks also reported a slight tightening of lending standards (up five percent in net terms) with demand remaining largely stable (up one percent; ECB 2025d).
While the rates of European and global stock markets have continued to rise, yields of ten-year government bonds have been largely stable on the capital markets since May, although with differences between the individual countries. In Germany, bonds are at around 2.7 percent, on the level of our last growth forecast in May, and, in Italy, at around 3.4 percent, slightly higher than in spring. French bonds have moved on a similar scale, though slightly higher in part. Yields here have increased by between ten and twenty basis points since May, above all on account of the persistent uncertainty regarding the budget situation and medium-term consolidation plans. In Spain and Greece, yields have remained largely stable at around 3.2 percent and 3.3 percent respectively.
Sources: Macrobond
Risk Analysis
Notwithstanding individual positive developments, such as first trade policy agreements in the global tariff dispute and the expansionary fiscal policy of Germany, the economic environment in the euro area remains marked by high uncertainty. The following risks and opportunities could lead to deviations in the forecast economic development.
Downside risks:
▪ Geopolitical tensions and security situation: The ongoing war in Ukraine and the fragile situation in the Middle East continue to harbour substantial risks. New provocations from Russia against EU and NATO countries or an escalation of current conflicts could fray the confidence of companies and households, increase energy prices and impact global trade flows.
▪ Renewed escalation of trade dispute: Despite individual trade policy agreements, such as the agreement between the EU and the US, uncertainty remains high. The repeated turnarounds in relations between large trade blocs, particularly the US and China, continue to cause planning uncertainty and erode the confidence of companies. For the EU, possible risks are disrupted supply chains, reticence to make investments and a stronger than expected weakening of exports. A scenario outlined by the IMF (2025a) of permanently increased US tariffs, with an increase of up to 30 percentage points against China and ten percentage points against the euro area, would lower global GDP by 0.3 percent in 2026, without factoring in possible retaliatory measures, and lead to a long-term loss of GDP of 0.5 percent. For the euro area, the danger is higher import prices, disrupted supply chains and an increase in inflation of up to 20 basis points. According to the chart analysis of the IMF scenario, the impact on
euro area GDP is likely to be on a similar scale to the global average, possibly slightly lower but not significantly different.
▪ Financial market risks and systematic vulnerabilities: The most recent development of asset prices, particularly in the United States, has triggered concerns of possible overvaluations. An abrupt downturn in asset prices could also impact confidence and assets in the euro area and lead to more stringent financing conditions here. The shadow banking sector harbours particularly high systematic risks with its high indebtedness, liquidity risks and limited transparency. The high level of interconnectedness with the bank sector and the incomplete data make it more difficult to reliably assess the risks here and increases the uncertainty of potential domino effects. Additionally, stablecoins and other crypto-based payment systems have created new risks for financial stability. According to the IMF (2025b), runs on stablecoins could trigger sales of reserve assets such as bank deposits and government bonds, thereby burdening the money and bond market and the repo market.
▪ Consumption and investment risks: Private households still have high savings which curbs consumption. A persistently high or increasing degree of uncertainty and weak confidence could exacerbate this situation and lead to lower than forecast levels of private consumption. Investment activity also remains vulnerable to geopolitical tensions, divergent policy courses and limited planning certainty.
Growth opportunities:
▪ Positive fiscal surprises: Public investment in infrastructure and in defence are already factored into the baseline. If the impact of these measures is stronger or swifter than expected, for example on account of accelerated implementation, this could additionally support demand in the short term.
▪ Technological impetus: Advances in digitalisation and in AI could strengthen future potential growth Especially if new applications are introduced rapidly and swiftly increase productivity, growth could be lifted above the medium-term trend
▪ Structural reforms: An accelerated implementation of structural reforms could substantially strengthen the competitiveness of the economy both on the European and the national level. At the EU level, a deepened Capital Market Union and a closer integration of the internal market could boost investment, facilitate the access of companies and start-ups to financing and reduce trade barriers. At the national level, targeted reforms in administration, the labour market and innovation support could sustainably increase productivity and thus substantially strengthen the potential growth of the economy.
▪ International cooperation: The most recent progress achieved in trade talks and the deescalation of individual disputes have reduced direct risks. If this trend continues, it could strengthen confidence and encourage investments, particularly if global supply chains continue to stabilise.
Even if individual opportunities materialise, such as stronger fiscal impetus, technological advances or international agreements, in our opinion, the downside risks currently still far outweigh the upside risks. The persistently high geopolitical uncertainty, possible upheavals on the financial markets and present
structural challenges in the euro area indicate an elevated risk of negative deviations to the expected course of economic development going forward.
Outlook and Policy Recommendations
Economic development in the euro area is set to remain subdued throughout the forecast horizon. Factors weighing down growth, such as the transatlantic trade dispute, the appreciation of the euro and structural weaknesses of the euro area diminishing its appeal as a production location are not going to be resolved anytime soon. Although robust labour markets and a less restrictive monetary policy will be supporting the domestic economy, investment momentum will remain weak. Fiscal impetus will only have a limited impact as it will unfold mainly in countries such as Germany, while other countries are pursuing budget consolidation. Growth will therefore remain around potential, which is too low to secure competitiveness and prosperity in the long term. The risks for the forecast development going forward are largely downside, with the possibility of a renewed escalation of the trade dispute, geopolitical tensions and weaker global demand as well as increased financial market risks looming large.
Strengthening economic growth in the euro area for the long term will require a row of targeted measures that increase competitiveness, promote investment and bolster economic resilience. The most recent developments, including the readjustment of transatlantic trade relations, the structural weakness of individual member states and the geopolitical challenges, underline the need for an economic policy agenda that is strategic and implemented resolutely. The reports of Mario Draghi and Enrico Letta, the new EU Compass for Competitiveness and the Clean Industrial Deal provide central analyses and numerous recommendations for this agenda. However, implementation to date is lagging far behind requirements. Europe is in danger of falling further behind in terms of regional competitiveness. Concrete progress is now needed, rather than more declarations of intent. The following points set out what we believe are currently the most urgent and important areas of action in economic policy.
▪ Improve parameters for investment to mobilise private and public funds: Europe is facing an annual gap in investment of more than 1.2 trillion euros, particularly in the areas of energy, digitalisation, industrial resilience and defence. The EU and its member states therefore need to tangibly improve the framework conditions for private investment. This includes tax incentives, targeted grants, greater use of risk-sharing instruments and a better coordination between development banks. The InvestEU and Important Projects of Common European Interest (IPCEI) programmes need to be expanded strategically and simplified administratively. It is crucial that investments throughout Europe and in the member states are triggered more swiftly, with more precision and more effectively. To make this happen, it will need reliable planning certainty and appealing locational conditions that encourage rather than encumber investments.
▪ Strategically align EU budget towards competitiveness and investment: The Multiannual Financial Framework (MFF) for the period 2028 to 2034 must be geared towards closing the investment gap and strengthening competitiveness. The structural reallocation proposed by the European Commission towards forward-looking areas such as research, infrastructure and defence goes in the right direction but is still not enough. Pooling central programmes in the European Competitiveness Fund (ECF) can facilitate implementation if the funding is deployed
▪ strategically and procedures are tangibly simplified Investment certainty must be improved, particularly in the field of energy and infrastructure. A good balance needs to be achieved between flexibility and reliability to smooth the way for long-term investments.
▪ Deepen internal market, particularly in services, energy and digitalisation: A fully integrated internal market is a crucial step towards increasing the productivity and economic resilience of Europe. A top priority is the rapid expansion of cross-border energy and digital infrastructure and the reduction of remaining national barriers, particularly in the service sector. An analysis by the International Monetary Fund (2024) concluded that the trade costs within Europe in 2020 corresponded to a tariff equivalent of 44 percent in manufacturing compared to 15 percent between US federal states. In services, this figure was up to 110 percent. These costs have a direct impact on companies and consumers alike in the form of less competition, higher prices and lower productivity. Reducing these costs is a key task of economic policy in order to facilitate investment, increase value added and strengthen Europe’s position in global competition
▪ Drive structural reform forward on EU and national level: Europe needs to step up its pace of reform in order to unfold its growth potential. At the EU level, this means reducing regulatory complexity, simplifying procedures and rapidly expanding the Capital Market Union to facilitate cross-border investment and innovation. At the national level, this means resolutely implementing reforms on labour, product and capital markets, modernising administrative structures and reducing barriers to investment. Europe can only become a dynamic economic region again with resolute reforms on both levels.
▪ Use fiscal policy scope to promote growth but also safeguard budgetary discipline: Policymakers need to make targeted use of the available fiscal policy scope to encourage investment in infrastructure, digitalisation and the transformation of industry. The national escape clause for defence expenditure has meanwhile been activated by numerous countries and creates temporary leeway in the EU’s fiscal rules. This makes it all the more important to set clear priorities, use funds efficiently and lay down a credible perspective for budget consolidation. Depending on the debt ratio, a return to a sustainable expenditure path needs to be achieved much earlier. A stable fiscal policy framework remains the foundation of sustainable growth and economic resilience.
▪ Secure open markets and further develop strategic trade relations: The EU should swiftly conclude further trade agreements and resolutely implement existing agreements. Diversified supply chains, improved market access and stable framework conditions for trade and investment are crucial components of economic resilience. The EU must strengthen its strategic partnerships in global trade and ensure a coordinated response to international trade diversion effects.
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German Economic Institute (IW) (2025). US-Zölle: Chinesische Waren fluten deutschen Markt November. Cologne
Insee (2025). In Q3 2025, GDP accelerated (+0.5%) and the household savings rate declined (18.4% after 18.7%) November. Montrouge.
International Monetary Fund (2025a). Global Economy in Flux, Prospects Remain Dim. October. Washington DC.
---(2025b). Global Financial Stability Report. Shifting Ground beneath the Calm. October. Washington DC.
---(2024). Regional Economic Outlook. Europe. October. Washington DC.
Istat (2025). III quarter 2025 Quarterly National Accounts November. Rome
OECD (2025a). Economic Outlook Tackling Uncertainty, Reviving Growth June. Paris.
---(2025b). Economic Outlook. Resilient Growth but with Increasing Fragilities. December. Paris
Project Group Community Diagnosis (2025). Expansive Finanzpolitik kaschiert Wachstumsschwäche. Gemeinschaftsdiagnose Herbst 2025. October.
S&P Global (2025). HCOB Einkaufsmanagerindex. November. New York City.
European Parliamentary Research Service (EPRS) (2025). EU Member States' defence budgets. At a glanze. May Brussels
Imprint
Federation of German Industries e.V. (BDI)
Breite Straße 29 10178 Berlin
T: +49 30 2028-0 www.bdi.eu
German Lobbyregister Number R000534
Author
Frederik Lange
T: +49 30 2028 1734 f.lange@bdi.eu
Editorial / Graphics
Dr. Klaus Günter Deutsch T: +49 30 2028 1591 k.deutsch@bdi.eu
Marta Gancarek
T: +49 30 2028 1588 m.gancarek@bdi.eu
This report is a translation based on „Wachstumsausblick Europa – Dezember 2025, Investitionen in der Warteschleife | Europas Wachstum 2025/26 bleibt moderat“, as of 5 December 2025.