The euro area economy remains resilient, despite multiple shocks in recent years. Based on the Commission Spring forecast, euro area GDP growth, expected to be moderate this year, should accelerate in 2026 on the back of solid gains in households’ real disposable income, notwithstanding the current trade tensions. While risks to the growth outlook remain tilted to the downside, amid exceptional uncertainty in a volatile and unpredictable environment, the labour market remains robust with record low unemployment. Investment is set to increase in most member states, supported by the Recovery and Resilience Facility and other EU funds. Following a steady disinflation process, headline inflation is now around the ECB’s 2% target, earlier than previously anticipated. It is largely expected to stabilize around this level with risks to the inflation outlook appearing balanced.
Public debt in the euro area stabilized at around 90% of GDP in 2024, with a slight increase projected in 2025 and 2026, after a significant decline between 2020 and 2023. The euro area public deficit is expected to slightly increase and remain above but close to 3% of GDP over the forecast horizon.
The euro area fiscal stance was contractionary in 2024 and is expected to turn broadly neutral in 2025, based on the Commission forecast. This appears appropriate in light of the more negative macroeconomic outlook and the reduced inflationary pressures. This is consistent with the need for fiscal prudence in member states particularly those with high debt.
Strengthening Europe’s defence capabilities is amongst our top priorities, and we will reinforce our overall defence, security and readiness while continuing to preserve debt sustainability. We welcome the request for the activation of the national escape clause (NEC) for defence spending during the period 2025-2028 by eleven euro area member states at this stage. The NEC should be implemented in a prudent manner to facilitate the transition to a higher level of defence spending in the medium term. While the necessary increases in defence spending are expected to have an expansionary effect compared to the path outlined in the submitted medium-term plans, the magnitude for the euro area as a whole will depend on the concrete implementation and will only become clearer over time. Focusing defence spending on productive investment and innovation can support economic activity in Europe, improve the ability of our economies to absorb higher defence spending and thereby ensure best value for public money. Over the medium term we will also work on the gradual reprioritisation of national budgets to accommodate higher defence spending, while remaining focused on addressing other structural and social challenges.
Excluding increased defence spending, fiscal restraint remains appropriate, and we are committed to implementing our medium-term plans in line with the revised governance framework. We expect a broadly neutral fiscal stance in the euro area in 2026, which seems overall appropriate in the current economic environment. This is before considering the impact of Germany’s medium-term plan, which Germany intends to submit by end-July. The implementation of the net expenditure paths recommended by the Council, through the 2026 budgets, would ensure the differentiation of fiscal policies across euro area member states, further reflecting country-specific fiscal and economic challenges. We will strengthen our efforts to improve the effectiveness, quality and composition of public spending.
The Eurogroup will continue to closely monitor economic and fiscal developments and reinforce its policy coordination. We will review euro area budgetary policies in December, informed by the Commission opinions on the draft budgetary plans for 2026.
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