Trade and tight fiscal policy raise euro-area risks

Significance There is a consensus view that GDP growth will accelerate in 2025 as inflation recedes and investment improves. However, the risk of trade conflict is rising and sizeable post-pandemic recovery funds remain unspent. Political realities in Germany and France further reduce the prospect of expansionary fiscal policy. Impacts Political paralysis raises the risk of recession in the euro-area’s two largest members, Germany and France, in early to mid-2025. The impact of higher US import tariffs will only be fully apparent by 2026-27. Almost all euro-area members in NATO will be pressured to spend more on defence, a challenge amid weak growth and EU fiscal rule limits.