Europe’s Macro Outlook 2025: prolonged volatility amid shifting global risks
The European economy in 2025 faces an extraordinary set of intertwined economic, social, and geopolitical challenges which will fuel prolonged volatility and uncertainty. At the heart of Europe, political instability in France and Germany leaves little optimism for a near-term growth revival, while Donald Trump’s return to the White House casts a shadow over the outlook European trade and economic stability. The prospect of US tariffs targeting European goods threatens trade-dependent industries and exacerbates existing economic pressures and strains sovereign strategic alliances.
The outlook for Europe’s economy remains constrained by sluggish activity, as structural weaknesses and adverse demographics expose the bloc’s declining global competitiveness amid a turbulent environment shaped by:
- Renewed global protectionism, which risks re-igniting inflation.
- Fiscal consolidation aimed at curbing deficits, compounded by policy paralysis in coalition-led governments.
- Rising social unrest fuelled by immigration concerns, declining living standards, inadequate infrastructure, and fears of automation and artificial intelligence (AI) displacing labour.
- Ongoing geopolitical conflicts and escalating strategic rivalries straining international alliances.
At the turn of the new year, credit investors are seeking to navigate these complexities in order to understand both the immediate and long-term implications for sector-specific opportunities and risks across Europe’s secondary debt markets. In this year’s macro-outlook series, we aim first share our insights on the macro themes which inform our expectations for secondary debt sales across our preferred markets, Germany, Italy, Greece and Spain. Subsequent articles will cover the dynamics in these four markets.
The ECB’s dovish trajectory offers meagre growth boost
Against the volatile and uncertain backdrop, the European Central Bank’s (ECB) has positioned monetary policy as a stabilising influence. Since June 2024, the ECB has cut rates four times, at 25 basis points each, reducing the deposit facility rate down to 3.0%. Annual headline euro area inflation is estimated at 2.4% in 2024, and trending lower to 2.1% and 1.9% in 2025 and 2026, respectively. By comparison, the IMF and OECD forecast 2.0% and 2.1% for the same years. The three institutions forecast annual GDP growth in 2025 of 1.1%, 1.2% and 1.3%, respectively. Elsewhere, Capital Economics and Goldman Sachs expect below-consensus for annual GDP forecast of 0.8%, alongside 1.8% and 2% by year end, respectively. Despite the ECB’s efforts to stimulate demand, the euro area faces deeper structural issues that limit the impact of monetary easing.
Overview of macroeconomic forecasts, euro area, 2024 and 2025
With inflation under control, the focus has shifted to structural challenges: weak productivity, declining competitiveness, and subdued consumption and investment. Euro area productivity has lagged behind the US since the early 2000s, hindered by low private R&D investment, fragmented public R&D efforts, and a focus on mid-tech industries over high-tech innovation. Labour shortages, uneven digital adoption, and demographic pressures exacerbate this gap. Low productivity growth may make it increasingly difficult for firms to sustain wage growth, leading them to either reduce labour or pass rising costs to consumers.
Competitiveness remains constrained by high energy costs, particularly for energy-intensive industries, and declining export demand, causing investment to fall by more than 2.5% in the first half of 2024, according to the Commission. While transitioning to sustainable energy offers long-term benefits, it demands significant upfront investment in infrastructure, limiting immediate gains. Eurozone households are saving, rather than spending, their income holding back growth. This behaviour is influenced by the legacy of high interest rates, economic uncertainty, and caution in the aftermath of the economic impacts from the pandemic and ongoing geopolitical tensions.
The ECB aims to stimulate demand amid constrained fiscal policies in member states. Markets are currently pricing in five rate cuts over eight ECB meetings in 2025, notably more aggressive and faster than in the US and the UK. The ECB’s bloc-wide monetary policy will impact member states unevenly, with faster-growing economies like Spain and Greece benefiting from rate cuts, as structurally weaker nations like Germany and Italy facing deeper challenges.
Given the unpredictable nature of global economic drivers, investors likely wait to see how events unfold. However, these euro-wide projections mask significant divergence among member states. Spain and Greece are expected to lead growth, while Germany struggles under the weight of a manufacturing slowdown, overreliance on a weakening China, and demographic challenges. France’s political stalemate risks delaying budget deficit resolution, and Italy’s public finances remain a concern.
Trade tensions and fiscal consolidation
US tariffs represent an additional drag on European growth, particularly in the struggling manufacturing sector. Goldman Sachs estimates a base-case GDP hit of 0.5%, rising to 1% if broad-based 10% tariffs are imposed. An outsized 20% tariff on European goods would reduce US-EU exports by 50%, according to Bloomberg Economics. Auto-related exports are the likely primary target, affecting Germany most while Spain and Italy see smaller impacts. Trade policy uncertainty, rather than the tariffs themselves, is expected to drive most of the drag on growth. Nomura predicts that broad-based tariffs would have a modest inflationary effect, adding 0.1 percentage points to overall inflation. Many businesses will be forced to absorb higher costs, resulting in lower profits, firm closures, and rising unemployment.
Higher trade policy uncertainty to weigh on growth
More fundamentally, these tariffs expose structural vulnerabilities in Europe’s export-driven growth model, which relies on low wages and external demand. Trade with China has stagnated, and the US, under Trump, is prioritising reduced trade imbalances. Europe’s reliance on external demand underscores the need for a shift toward domestic demand and productivity-enhancing reforms. As Mario Draghi, former Italian prime minister and ECB president, highlighted, structural reforms to integrate capital markets and coordinate public investment are critical. Draghi contends that joint EU-issued debt could unlock significant fiscal space to fund digitalisation, green energy, and infrastructure projects, creating a unified response to Europe’s economic challenges. However, joint EU-issued debt comes risks a deterioration of bloc’s finances, inefficient use of funds, moral hazards, disproportionate burden sharing and widening political frictions between member states. Without decisive action, Draghi argues, Europe risks long-term stagnation and challenges in sustaining its social model.
Geopolitical risks
Unresolved geopolitical tensions continue to threaten European energy security, with risks to oil supplies from the Middle East posing inflationary pressures and undermining growth in oil-dependent economies. While conflicts in Ukraine and the Middle East dominate the agenda, escalating tensions over China-Taiwan sovereignty remain an ever-present risk. Chinese President Xi Jinping’s New Year’s speech reinforced this with his declaration that no one can stop China’s “reunification” with Taiwan. The impact on global trade, particularly Taiwan’s semiconductor industry, risk severe disruption in global semiconductor supply chains, undermining critical industries across Europe and exacerbating existing vulnerabilities in manufacturing and technology sectors vital to the bloc’s competitiveness.
Escalating geopolitical tensions also risk disrupting the anticipated disinflation trend, potentially causing financial market and capital flow disruptions, straining Europe’s already fragile growth outlook. In highly leveraged sectors like commercial real estate (CRE) and construction, vulnerabilities are heightened by interconnected non-bank financial institutions, increasing the risk of rapid spill overs across markets and threatening broader economic stability.
Credit investors perspective
For credit investors, heightened geopolitical risks translate into market volatility and wider credit spreads, as higher perceived risks drive up required returns. This environment increases the likelihood of defaults, creating opportunities to acquire debt in distressed sectors like CRE, manufacturing, and construction. Investors with a long-term perspective may find attractive entry points for high-quality debt at discounted prices. However, liquidity crunches could complicate exit strategies.
The European economy in 2025 is navigating a challenging landscape of geopolitical risks, structural weaknesses, and shifting global dynamics. While the ECB’s monetary policy provides some stabilization, trade tensions, fiscal constraints, and divergent national outlooks present ongoing risks. For credit investors, these challenges create opportunities and risks that demand a nuanced and strategic approach to navigating Europe’s evolving secondary debt markets.
In subsequent articles, we will delve into the NPL outlook for Germany, Italy Greece and Spain.
Timur Peters is the founder of Debitos GmbH. He holds a diploma in finance and law. He has more than 10 years’ experience in the range of finance.
Before Founding Debitos Timur Peters was responsible in the distribution of Software for Banks and Financial Institutions for Comarch for the D/A/CH Region. Next to this he has worked for several years as a self employed Project Consultant in the area of Financing of Litigation cases, Peer2-Peer Credit Marketplaces and other online projects for financial institutions.
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https://www.debitos.com
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