Despite the uncertainty linked to the war in the Middle East, economic growth is expected to continue in 2026 in the European Union, but at a slower pace than envisaged last autumn, according to the Spring Economic Forecast presented by the European Commission, on Thursday 21 May.
“Regarding growth within the EU, we expect continued expansion, albeit at a slower pace. The EU economy ended 2025 on a slightly stronger footing than previously expected. The positive momentum ended in March, when the conflict in the Middle East materially changed the outlook”, said European Commissioner for Economy Valdis Dombrovskis.
While in November, it was forecasting GDP growth of 1.2% for the euro area and 1.4% for the EU (see EUROPE 13753/12), the EU institution now estimates that wealth creation in 2026 will reach 0.9% of GDP for the euro area and 1.1% of GDP at EU level.
Inflationary shock. The main reason for this slowdown lies in the inflationary shock caused by the surge in energy prices linked to the blocking of the Strait of Hormuz.
Although this rise in energy prices is expected to be “more contained” than when Russia’s military aggression against Ukraine began in February 2022, its impact on other parts of the economy are already being felt, meaning that inflation will increase “sharply”, Mr Dombrovskis noted.
In the euro area, inflation is expected to reach 3.0% this year, an upward revision of 1.0% compared with the autumn forecast, before easing back to 2.3% next year. For the euro area, it expected to stand at 3.1% in 2026 and 2.4% in 2027.
The Commission supplemented this baseline forecast with an adverse scenario based on more prolonged disruption. Under this more pessimistic scenario, energy commodity prices are expected to rise well beyond the levels envisaged in the baseline scenario, peaking at the end of 2026 before gradually declining in 2027. Inflation shows no sign of easing, prompting households and businesses to cut their consumption and investments more sharply.
In short, economic growth, falling back to 0.6% of GDP in the EU in 2026, is not expected to rebound in 2027, contrary to what the baseline scenario forecasts.
Mr Dombrovskis nevertheless pointed out that the action the EU has initiated, and then stepped up since February 2022, to diversify supplies, reduce energy consumption and drive decarbonisation of the economy means that the European economy is “better equipped to absorb the inflationary shock”.
Deterioration of public finances. The war in the Middle East is having negative repercussions on Member States’ public finances, as not all EU countries have been able to complete their fiscal consolidation since the Covid-19 pandemic.
On average, at euro area level, the deficit-to-GDP ratio is therefore expected to rise from 2.9% in 2025 to 3.3% in 2026 and, at EU level, from 3.1% to 3.5% over the same period.
This year, while Ireland (1.4% of GDP), Denmark (0.9%) and Greece (0.8%) will still post a budget surplus, 13 Member States are expected to report a public deficit above the regulatory threshold of 3% of GDP: Poland (-6.5%), Hungary and Romania (-6.2%), Belgium (-5.2%), France (-5.1%), Slovakia (-4.6%), Estonia and Finland (-4.5%), Bulgaria and Austria (-4.1%), Germany (-3.7%), Latvia and Slovenia (-3.3%).
As the trend for 2027 does not point to any improvement in fiscal consolidation, it cannot be ruled out that the Commission will recommend, on Wednesday 3 June, opening an excessive deficit procedure (EDP) against five new countries: Germany, Bulgaria, Estonia, Latvia and Slovenia.
By contrast, the EDP opened against Malta is expected to be closed, the island having reduced its deficit to -2.2% of national GDP in 2025. And as regards Italy, the deficit of which reached -3.1% of national GDP last year, a decision cannot be taken before 2027, since the Commission is forecasting an Italian deficit of -2.9% for next year.
As with the deficit, average public debt is expected to increase because of the economic situation. At euro area level, it is therefore expected to rise from 88.7% to 90.2% of GDP between 2025 and 2026, while at EU level debt is expected to increase from 82.8% to 85.3% of GDP.
The Member States with the heaviest debt burden relative to output remain Greece (140.7%), Italy (138.5%), France (118.1%) and Belgium (110.5%). Benefiting from sustained growth, Spain is expected to see its debt fall below the 100% of national GDP mark, to 99.6%.
Replying to a question from Agence Europe, Mr Dombrovskis listed several factors explaining the deterioration in national public finances: - “the need to rapidly increase military spending” with the activation of the flexibility clauses of the Stability and Growth Pact; - “automatic stabilisers”, through which, faced with the macroeconomic situation, States do not offset the fall in tax revenues, the rise in interest rates, which weighs on debt servicing, or the social spending resulting from the economic slowdown; - emergency fiscal measures intended to support households and businesses affected by the inflationary shock.
Untargeted emergency measures. Calling for fiscal vigilance, the European Commissioner stressed the importance of adopting emergency measures that are “temporary, targeted” at the economic operators most affected and which, instead of increasing demand for fossil fuels, are aligned with the objectives of decarbonising the economy.
“Since we are facing a supply shock, providing a broad stimulus to sustain fossil fuel demand would just help to sustain high energy prices in international markets. In this way, governments can spend lots of money for little benefit”, Mr Dombrovskis argued.
According to the Commissioner, “for the time being, the situation remains relatively under control, and that is precisely what we are recommending” to Member States in this area.
According to the Commission, which based itself on national governments’ announcements up to 4 May, the emergency measures taken would amount to a total of €14.5 billion, or 0.07% of EU GDP (0.2% of GDP if they are maintained until the end of 2026), whereas in 2022 they were close to 1.2% of GDP.
Nevertheless, the EU institution notes that, as during Russia’s military aggression against Ukraine, this aid is not sufficiently targeted and is aimed mainly at lowering fossil fuel prices, and therefore at not slowing consumption.
See the Commission’s Spring Economic Forecast: https://aeur.eu/f/lzs (Original version in French by Mathieu Bion)