IMF Executive Board Concludes 2025 Consultation with Euro Area
IMF News, July 11, 2025
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- Published: July 11, 2025
Consultation overview
- The Executive Board concluded the 2025 discussions on common euro area policies with member countries and included a discussion of the findings of the Financial Sector Assessment Program (FSAP) exercise for the euro area.
- Press Release No. 25/248.
Growth and inflation outlook (2025–27)
- Growth in the euro area is likely to stay moderate over 2025-27.
- Trade tensions and elevated uncertainty are expected to weigh on activity, despite some boost from higher defense and infrastructure spending.
- Geopolitical situation in Europe is expected to dampen sentiment and weigh on investment and consumption, despite looser monetary policy and projected gains in real income.
- Headline inflation is projected to remain broadly at target from the second half of 2025.
- Core inflation will return to 2 percent in 2026.
Risks and scenarios
- Risks to growth are on the downside; risks to inflation are two-sided.
- Downside growth risks:
- Trade policy uncertainty and potential tariff escalations.
- Ongoing geopolitical tensions.
- These may negatively impact demand and growth more than previously anticipated and could outweigh positive effects of unanticipated fiscal easing.
- Two-sided inflation risks:
- Downside channels: lower-than-expected non-energy goods prices because of trade diversion, weaker-than-expected activity and wages, recent euro appreciation.
- Upside channels: larger or more inflationary fiscal spending than in the baseline; geopolitical tensions, supply chain disruptions, tariff escalation raising import prices; wage growth may not moderate.
Policy recommendations and priorities
- Need for a comprehensive policy strategy and decisive EU-level actions to boost growth potential and financial resilience.
- Key EU-level reforms and actions recommended:
- Strengthen the EU single market.
- Enhance energy security.
- Orient the EU budget to invest in common public goods.
- Ensure debt sustainability and secure financial and price stability as prerequisites for reform implementation.
- Fiscal policy guidance:
- For countries with high debt and limited fiscal space, significant fiscal adjustments are needed to mitigate fiscal risks.
- Implement credible medium-term fiscal plans to address urgent and rising spending needs while ensuring fiscal sustainability.
- Activation of the national escape clause of the EU fiscal rules should be limited to the initial phase of scaling up defense investment expenditures and not to finance recurring spending over an extended period.
- Non-defense net current expenditures should remain consistent with adopted medium-term fiscal plans.
- Assess the impact of overall defense spending on debt sustainability on an ongoing basis.
- Monetary policy guidance:
- A monetary policy stance close to neutral is justified by close-to-target inflation and a mildly negative output gap.
- Communicate with greater emphasis on the forecast together with well-designed illustrative scenarios and sensitivity analysis around a baseline to help guide rate expectations.
- Financial sector and FSAP-related recommendations:
- Enhance data sharing and strengthen systemic risk monitoring.
- Conduct system-wide stress tests and analyze systemically important banks’ counterparty credit risk.
- Strengthen resources and prudential powers of European authorities overseeing nonbank financial institutions.
- Fully implement the international capital standard for banks (Basel III).
- Introduce a common deposit insurance system.
- Make bail-in requirements more flexible.
- Strengthen arrangements for liquidity in resolution.
- Facilitate better data sharing among EU and national authorities and continue efforts to close existing data gaps.
- Complete the banking union, including introducing a common deposit insurance system and arrangements for the Single Resolution Fund to offer guarantees—ideally supported by an EU fiscal backstop.
FSAP findings
- The euro area FSAP found the banking system to be adequately capitalized and liquid overall, while some banks would dip into their buffers under stress.
- Identified financial stability risks from interlinkages with non-bank financial institutions and recommended enhancing monitoring and data sharing.
- Progress welcomed on strengthening banking supervision and introduction of the new Anti-Money Laundering Authority.
- Fragmentation continues to hinder development of more resilient, deeper, and integrated euro area-wide financial markets.
Executive Board assessment — key director views
- Directors welcomed the resilience of the euro area’s economy: record-low unemployment, declining inflation, and a stable financial system.
- Directors recognized higher US tariffs, trade and geopolitical tensions, and elevated uncertainty as weighing on the outlook and creating downside growth risks; risks to inflation remain two-sided.
- Emphasized the necessity of deepening the single market to stimulate investment and innovation; welcomed the proposal for the adoption of a 28th corporate regime to establish a uniform set of regulations and legal standards.
- Agreed advancing the capital markets union is vital for channeling savings to innovative projects.
- Supported lowering barriers to cross-border bank mergers to allow more efficient banking services across the single market.
- Noted the potential of a digital euro to help deepen integration of financial services.
- Encouraged coordinated EU-level efforts to address shared challenges and help member states manage fiscal tradeoffs; stressed the significant role the EU budget can play and called for a more streamlined, responsive budget with strengthened financing through regular borrowing paired with resources to support debt service.
- Urged continued advocacy for a stable, rules-based global trading system and diversification of global partnerships while removing internal trade barriers to strengthen supply chain resilience.
Key statistics (selected table entries preserved exactly as presented)
- Real GDP: 6.3; 3.5; 0.4; 0.9; 0.8; 1.2; 1.3; 1.1
- Private consumption: 4.7; 5.0; 0.5; 1.0; 1.4
- Public consumption: 4.4; 2.8; 1.7
- Gross fixed investment: 3.8; 2.0; -1.9; 1.6; 1.8; 1.5
- Final domestic demand: 3.4
- Stockbuilding (contribution to growth): 0.7; -0.9; -0.3; 0.1; 0.0
- Domestic demand: 5.1
- Foreign balance (contribution to growth): -0.2; 0.3; -0.4; -0.1
- Exports (includes intra-euro area trade): 11.4; 7.3; -0.8; 2.2; 2.6; 2.5
- Imports (includes intra-euro area trade): 9.0; 8.3; -1.4; 0.2; 2.4; 2.7
- Potential GDP: 2.3
- Output gap: -1.6; 0.6
- Unemployment rate: 7.8; 6.7; 6.6; 6.4; 6.2
- GDP deflator: 2.1; 5.9; 2.9
- Consumer prices: 8.4; 5.4; 1.9
- Overall fiscal balance (percent of GDP): -5.1; -3.5; -3.6; -3.1; -3.2; -3.4; -3.7
- Primary balance: -3.8; -2.1; -1.5; -1.3
- Structural balance (percent of potential GDP): -4.0; -3.0; -3.3
- Structural primary balance: -2.7; -2.2
- Gross public debt: 93.9; 89.5; 87.4; 87.7; 88.7; 89.7; 90.4; 91.1; 91.9; 92.9
- Current account balance (percent of GDP): (row listed but no numeric entries provided in source)
- Euro short-term rate (€STR): -0.6; 3.9; …
- 10-year government benchmark bond yield: 3.0; 3.1
- Nominal effective rate (2005=100): 96.5; 96.2; 97.7; 96.4; 99.6
- Real effective rate (2005=100, ULC based): 87.1; 85.0; 89.0; 88.8; 85.4
Source: IMF Executive Board conclusion of the 2025 consultation with the euro area (Press Release No. 25/248).