Geopolitical and trade tensions continue to be a challenge for the EU economy. Deepening structural reforms and reprioritising public spending are needed to boost growth, according to a new OECD report.
The latest OECD Economic Survey of the European Union and Euro Area projects that GDP growth in the euro area will strengthen to 1.0% in 2025 and 1.2% in 2026, up from 0.8% in 2024. Inflation in the euro area is easing, projected at 2.2% in 2025 and 2.0% in 2026, down from 2.4% in 2024, though monetary policy must remain vigilant.
The labour market will remain tight, with high labour demand supporting wage growth and real incomes. Easing financial conditions will support private investment, while public investment will be boosted by spending from the Next Generation EU.
Fiscal policy tightening needs to continue in most EU countries to ensure long-term public debt sustainability. At the same time, a greater share of public investment could be co-ordinated and financed at the EU level, including defence procurement and cross-border infrastructure. To meet additional spending needs, EU countries will have to allocate new resources to priorities best provided at EU level and reprioritise existing budget items, by better targeting cohesion spending to less developed regions and rationalising Common Agricultural Policy spending.
Reducing regulatory burdens and removing internal market barriers is key to enhance innovation, business dynamism and productivity. Deepening capital markets will also be important, allowing financing to be channelled to where it is most productive. A strong state aid framework is central to maintain a level playing field for productive firms to grow and drive structural change.
Raising the effectiveness of support for innovation would help address the European Union's limited public spending on research and development. This calls for rigorous evaluations of research and development programmes based on clear performance indicators, shifting funding to well-performing programmes and closing under-performing programmes.
High energy costs reduce the European Union's competitiveness. Reducing electricity costs requires reforms to lower electricity taxation, extend cross-border interconnections and strengthen competition. A more integrated electricity grid would allow countries to export their surplus energy, helping to ensure security of supply and lower energy costs elsewhere. It would also allow for a smoother integration of renewables, helping to achieve climate targets more efficiently.
See an Overview of the Economic Survey of the European Union and Euro Area
