Regional Economic Outlook for Europe, October 2025

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Overcoming Europe’s Policy Drift: From Recognition to Action

Regional Economic Outlook for Europe, October 2025

Europe has managed major shocks, but growth is slowing, export gains are reversing due to tariffs, and bond markets reflect rising risks. Interest rate cuts and increased fiscal spending, including defense, have not spurred private demand. The productivity gap with the US remains wide, and structural reforms are lagging. National priorities and slow EU decision-making hinder deeper integration of capital, labor, and product markets. Without stronger growth and fiscal consolidation, average European debt could reach 130 percent of GDP by 2040, requiring significant fiscal adjustment. Near-term policies should maintain price stability, start fiscal consolidation, and keep trade open. Long-term growth depends on urgent structural reforms. Solutions lie firmly within Europe’s grasp. An intensive debate to dismantle market fragmentation, simplify regulation, and boost investment is underway. Appropriate bundling, sequencing, and timing of reforms can garner broad support by spreading gains across society and nimbler decision-making in the European Union would help move faster from recognition to forceful action.

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Regional Economic Outlook Notes

Note 1: How Can Europe Pay for Things That It Can't Afford?

Europe is facing daunting fiscal pressures both from new policy priorities (e.g., defense, energy security), the escalating costs of population aging (pension, healthcare), and a rising interest bill on already high debt. Without prompt policy action, public debt levels could more than double for the average European country in the next 15 years. This could drive up interest rates, slow down already sluggish economic growth, and undermine market confidence. Both structural reforms and fiscal consolidation will be necessary to deliver the difficult policy adjustment, with one third achieved through a set of moderate reforms and two thirds coming from consolidation. For high-debt countries, however, this policy package would likely be insufficient to meet the fiscal challenge, leaving no option other than a deeper rethink of the scope of public services and the social contract to fill the gap. Delaying policy action could be costly, as the fiscal position would deteriorate further, and make the task for policymakers even more challenging.

Remarks by Alfred Kammer

Note 2: Making European Reforms a Success on the Ground

Europe’s medium-term growth prospects remain subdued. While many of Europe’s structural deficiencies are well documented, such as fragmented markets and red tape, analyses of how they play out “on the ground”—at the regional level—are still lacking. This Note shows how growth barriers interact powerfully to suppress the benefits Europe should be reaping from its production hubs where firms cluster. Coordinating EU-level policy initiatives to integrate markets for products, talent, and capital with domestic structural reforms would generate significant gains for aggregate productivity in most regions while amplifying the gains of some reforms. These efforts should be paired with carefully designed policies to maximize gains at production hubs (e.g., ensuring affordable housing and through policies targeting spillovers) while providing support to lagging regions without hindering the benefits from agglomeration.