The European economy will emerge better than expected from the trade war with the United States and the increase in tariffs. The euro zone will grow by 1.3% this year and 1.2% next year, four and three tenths better than expected last spring, according to the European Commission’s own forecasts. The forecasts for the European Union as a whole also improve, which stand at 1.4% for 2025 and 2026. The first quarter of this year was good, motivated by the advance of exports to avoid the tariff war that began in the spring; The resistance of the labor market which supports consumption and investments promoted by the recovery fund explain the numbers presented on Monday by the European Executive.
There is no country or countries that explain or capitalize on the improvement in the economic forecasts presented by the Commission. The vast majority of Member States emerge well from the autumn review. Only Estonia, Luxembourg and Austria see their forecasts lower. The increase also reaches Germany, Europe’s largest economy, immersed in a structural crisis that has practically blocked it since the first Russian soldier officially invaded Ukraine in February 2022. It is not a large increase, just two tenths this year (from 0% to 0.2%) and one next year (from 1.1% to 1.2%), but it does its part in the overall improvement.
This also affects Spain, which once again confirms itself as the largest and fastest growing economy in the EU. Brussels expects a rate of 2.9% for this year, the same given by the Spanish government in the macroeconomic framework it will present this week, as announced on Monday by EL PAÍS. Activity will cool a bit next year: growth will be 2.3%. Six tenths less, but it will still be practically double what is expected for the entire monetary area.
The resilience of the labor market, both in Europe and in Spain, has been key to boosting the economy. Much more, without a doubt, in the Spanish case, where the arrival of migrants has become a determining factor in explaining employment growth, despite the fact that unemployment this year will continue to be above 10%, as will domestic consumption. And this is why the Commission, explaining the risks that Spain could face in the future, underlines that “a more pronounced slowdown in migratory flows than expected could reduce the dynamism of the labor market, which would give rise to less favorable prospects for private consumption and investments”.
For the Union as a whole, the Commission underlines that the agreement reached in the summer between Washington and Brussels offers more certainty on trade than six months ago, when the spring forecasts were drawn up (the European Executive prepares for two years). The general tariff of 15% for exports leaving Europe to the other side of the Atlantic is “the highest level in almost a century”, explains the document from the Directorate General of Economy and Finance. But this text also cautiously points out that these tariffs are lower than those of other US trading partners, “giving a relative advantage to the European economy”. “However, this advantage takes place in a context of moderate export growth and a strong euro,” he explains to contextualize and reduce this advantage.
What has helped to keep the anemic performance of the European economy in recent years from worsening has been the resilience of the labor markets. Unemployment rates – in the EU and the eurozone – will continue to hover around 6%. This is an average percentage, which includes rates such as that of Spain, where the unemployment rate will fall below 10% in 2026 for the first time in about 15 years, and those of Germany, where with a rate of 3.5% we can speak of full employment despite economic stagnation.
If nothing goes wrong, skyrocketing inflation is already behind us. Prices are already moving around 2% and in this perspective they will be until 2027. This is good news for the European Central Bank, since they fall within the objective set by the authority and, therefore, stability in monetary policy can be deduced. This benefits the granting of credit on favorable terms and benefits business investments.
On the public sector side, the Recovery Fund and other EU financial instruments stand out, which “are attenuating the effect of fiscal consolidation in several Member States”. “This support supports domestic demand, which is expected to be the main driver of growth over the forecast horizon,” explains Brussels.
But fiscal consolidation happens by neighborhoods… or by countries. In the EU there are those who are reducing their debt, such as Portugal, which will reduce it by around 90% in the three-year period 2025-2027 or Spain, which will reach 97% within two years. These are still very high volumes, but they represent great progress compared to the values of just five years ago, around 120%.
The two Iberian countries – much more Portugal than Spain – will improve the -3% deficit target included in the Stability and Growth Pact. And they will end their years in a better position than the entire EU or the eurozone, where that totemic percentage in the Union since the signing of the Maastricht Treaty in 1992 will be easily surpassed. The increase in defense budgets will play an important role in this, which according to the numbers managed by the Commission will go from 1.5% of GDP in 2024 to 2% in 2027.
