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The Council Recommendation on the Economic Policy of the euro area is an integral part of the annual cycle of macroeconomic coordination. It offers guidance to euro area Member States, tailored to the specific challenges facing the Economic and Monetary Union.

(2)

The Recommendation serves as a tool to help define the Eurogroup policy agenda and promote policy discussions on issues of common interest, helping to foster coherence and convergence of the Union's and national policies. By providing a shared understanding on the main policy priorities, it contributes to more effective policy coordination, strengthens resilience and enhances the euro area's capacity to respond to external shocks while seizing opportunities for sustainable and inclusive growth, safeguarding stability and helping the transition towards a decarbonised and digital economy.

(3)

The euro area is facing a more uncertain global environment than at any time in the past decade. Geopolitical tensions, in particular Russia's ongoing war of aggression against Ukraine, affecting the EU's Eastern border regions, and the emergence of a more fragmented, multipolar world order are reshaping trade and financial patterns. Unilateral approaches by major partners, particularly in trade, have unsettled markets and raised questions about the reliability of long-standing international frameworks. On the one hand, these developments constitute external shocks which disrupt global supply chains, and create volatility in trade, capital flows and energy markets. On the other hand, they underscore the importance of economic security and open strategic autonomy as key components of economic resilience and highlight the urgency to invest in critical capacities and circularity. Against this backdrop, the Competitiveness Compass (3) – a strategic initiative by the European Commission – provides a valuable framework to assess both challenges and opportunities. By identifying three priority areas – closing the innovation gap, decarbonising the economy, and reducing strategic dependencies – it indicates where the Union and the euro area must concentrate efforts to secure prosperity in a rapidly changing world. To seize emerging opportunities, forward-looking policies, closer coordination among Member States and a renewed focus on innovation are essential. By addressing structural vulnerabilities, and deepening the Single Market, while simultaneously strengthening European security and open strategic autonomy, the Union and the euro area can turn external pressures into drivers of long-term resilience and global influence. Further, mobilising private and public investment is critical to boost productivity growth and achieve the EU goals.

(4)

The euro area economy continues to prove resilient. Economic growth exceeded expectations in 2025. This better-than-expected performance was initially due to a surge in exports ahead of anticipated tariff increases, but investment in equipment and intangible assets also performed more strongly than expected. As one of the world's most open large economies, the euro area is set to feel the strain of the increased global trade restrictions and tensions. As a result, domestic demand is, and is expected to remain, the primary driver of growth, underpinned by a robust labour market, improving real incomes, and broadly favourable financing conditions. In 2026, economic activity is likely to remain constrained by slower external demand from trade restrictions and lingering global uncertainty. Overall, according to the Commission Autumn forecast, real GDP in the euro area is expected to grow by 1,2 % in 2026. The growth outlook remains subject to high uncertainty, with downside risks prevailing.

(5)

Inflation in the euro area continues to moderate. Since spring 2025, inflation has fluctuated around levels broadly consistent with price stability. Headline (HICP) inflation was at 1,9 % in December 2025, while core inflation (excl. food and energy) remains higher at 2,3 %. Underlying price pressures are expected to remain contained by the recent appreciation of the euro, intensifying import competition and moderating wage growth. While for some Member States inflation remains high, euro area inflation and its outlook have recently been close to the European Central Bank (ECB) definition of price stability. In this context, the ECB halted the easing cycle it started in June 2024. Between June 2024 and 2025, the deposit facility rate has been lowered by a total of 200 basis points, bringing it down to 2 %. As a result, policy rates in the euro area are currently close to most estimates of the natural rate. Looking ahead, headline inflation is projected by the Commission at 2,1 % in 2025 and 1,9 % in 2026. Risks to the inflation outlook are broadly balanced, with most measures of longer-term inflation expectations continuing to stand at around 2 %, thus supporting the stabilisation of inflation around the target. This indicates that the ECB's policy has been credible, anchoring expectations and guiding inflation back towards price stability.

(6)

In the past years, there have been relevant improvements in the fiscal position of the euro area as a whole: from 2020 to 2024, the average deficit fell from 7,0 % of GDP to 3,1 % of GDP, while the debt-to-GDP ratio decreased by 10,1 ppt. reaching 88,1 % of GDP in 2024. Looking ahead, the fiscal outlook points to a modest deterioration, with the deficit expected to rise to 3,2 % of GDP in 2025 and 3,3 % of GDP in 2026, driven by rising defence spending as well as continued growth in interest expenditure and some revenue shortfalls. The debt ratio is projected to increase to 88,8 % of GDP in 2025 and 89,8 % of GDP in 2026, reflecting a less favourable interest–growth differential, and persistent primary deficits. The fiscal stance is projected to remain broadly neutral over the forecast horizon in both the EU and euro area, although with considerable variation among Member States. The fiscal stance is shaped by the fiscal paths that were recommended by the Council in line with the Union's economic governance framework, the impact of Recovery and Resilience Facility (RRF) and other EU Funds and, where applicable, the temporary flexibility allowed under the national escape clause to facilitate the move to higher defence spending.

(7)

The reshaping of Europe's security environment is prompting a transition towards substantially increased defence and security spending across the Union. The Council has supported this effort by activating the national escape clauses for 2025 to 2028, under the EU fiscal framework, for the so far 13 euro area Member States which have applied by December 2025. The Commission and the High Representative published a White Paper for European Defence Readiness 2030 (4), alongside the ReArm Europe plan, which provides financial levers for Member States to strengthen defence capabilities and infrastructure, including the Security Action for Europe (SAFE) (5), through which the EU will provide up to EUR 150 billion in loans to Member States to support defence investments. This new instrument has met with strong demand from Member States, who have expressed their interest to participate. Defence expenditure remains uneven across countries and sometimes heavily concentrated in personnel costs, while the European defence industry is fragmented. On the demand side, the dependence on non-European supplied systems and long development cycles limit efficiency and the ability to scale up production rapidly. Ramping up European production, increasing cooperation among Member States and increasing the share of military goods that are designed and manufactured in Europe will require addressing existing constraints and further integrating the defence equipment market. It can deliver a short- to medium-term macroeconomic stimulus, provided that procurement leverages European industrial capacities, while its great potential for innovation creates an opportunity for long-term productivity spillovers, in particular if it is organised jointly.

(8)

The overall fiscal position in the euro area remains under pressure, with government deficits and debt levels still above pre-pandemic ratios in several Member States and not projected to decline in the immediate years ahead. Respecting the fiscal paths recommended by the Council to preserve debt sustainability will need to go hand in hand with making room for spending pressures arising from the need to improve defence capabilities, strengthening competitiveness, including by supporting innovation, and enhancing investment on strategic priorities, including in critical capacities and infrastructure, as well as for the budgetary costs associated with increasingly frequent events related to climate change- and environmental degradation, losses of which are privately insured only to a limited extent in many countries. These significant and competing spending needs will require a gradual reprioritisation of public expenditure, taking measures to contain the rise in ageing costs, improving the quality of spending programmes and exploring the scope for mobilising additional revenue. Reducing tax gaps by improving tax compliance, including through digitalisation, tackling avoidance and evasion and combatting aggressive tax planning remain important to ensure fair and efficient tax systems. Broadening the tax base and shifting towards taxes less detrimental to growth, while increasing incentives to work and align tax strategies with broader policy objectives, would support sound public finances and sustainable growth. Spending could become much more efficient and targeted at policy priorities by a thorough use of spending reviews, cost benefit analysis and performance budgeting tools. In particular, greater use of private insurance of climate related losses could provide additional fiscal space. In 2025, the rules on the mid-term review of EU Cohesion Policy also highlighted a number of areas (defence and security, competitiveness and decarbonisation, energy transition, affordable housing, measures related to water and challenges facing Eastern border regions) as EU strategic priorities. Reprogramming operational programmes and mobilising available resources would allow for additional investments in these areas. Finally, improving the efficiency of public investment through sound medium- and long-term planning, effective coordination across policy areas and levels of government, rigorous project appraisal and synergies with private financing could contribute significantly to productivity and fiscal sustainability.

(9)

The euro area labour market remains robust despite labour shortages, which are easing but remain sizeable. Unemployment is around historically low levels, standing at 6,4 % in mid-2025. Employment growth has slowed down, but it continues to be supported by rising labour market participation and migration from outside the EU. In several Member States, net migration has been the major contributor to employment growth since 2021. Managed legal migration has helped ease labour shortages in specific industries and offset demographic headwinds. At the same time sizeable differences remain among population groups. The outlook for 2026 points to continued moderation in employment growth and continued low unemployment, but with persistent disparities across Member States and regions. Heightened trade restrictions and lingering uncertainty could weigh on growth and, hence, employment through both higher tariffs on exports and heightened global uncertainty. Nominal wage growth is moderating after a period of rapid growth. Annual growth in compensation per employee in the euro area stood at 3,9 % in the first half of 2025, down from 4,5 % on average in 2024. Given falling inflation, real wages increased by 1,7 % in the first half of 2025 and, by mid-2025, the purchasing power of wages had recovered to 2019 levels in the euro area as a whole. Looking ahead, negotiated wage growth is expected to further moderate gradually.

(10)

Labour and skills shortages combined with demographic pressures continue to pose important challenges to many European sectors and the economy as a whole. Labour market dynamics are also shaped by the ongoing transition towards a digital (in line with the Digital Decade Policy Programme (6)) and decarbonised economy, which are creating new opportunities, changing labour market needs in relation to certain types of skills and jobs. Equipping workers for this shift requires sustained efforts in upskilling and reskilling, supported by closer alignment between labour market policies, education and training provision, and the skills in demand. Also, enhancing the acquisition of basic skills from an early age helps laying the foundations for skill development. Addressing large regional disparities in skills and human capital endowments will benefit workers and bolster the single market. Stronger focus on STEM (science, technology, engineering and mathematics) education and training – fields where shortages exist, while addressing gender stereotypes – is also essential to sustain competitiveness, preparedness and technological leadership. Strengthening incentives to work by shifting the tax burden away from labour, including through targeted reforms of tax and benefit systems, as well as improving working conditions in certain sectors, would support labour market participation and employment. Facilitating the labour market integration of underrepresented groups (including women, younger and older workers, the low-skilled, migrants, Roma and persons with disabilities) which depend on the country-specific context, would further strengthen labour supply and inclusiveness. Young people's participation and thriving in the workforce is instrumental for the Union's sustained prosperity. At the same time, reducing poverty, also among children, and supporting vulnerable households through adequate and sustainable social protection and inclusion systems, including improving access to care services and improving affordable and accessible housing, as well as supporting labour market transitions, are key to social cohesion. Quality job creation and transitions, as well as ensuring the effective involvement of social partners in policy making and strengthening social dialogue, remain essential to sustain euro area competitiveness and resilience to structural change. Initiatives under the Union of Skills (7) and the Quality Jobs Roadmap will help drive these efforts. (8)

(11)

Addressing structural weaknesses is crucial to unlocking stronger, more sustainable economic growth in the Union and the euro area, and enhancing overall competitiveness and resilience. EU's growth potential is hindered by productivity gains largely limited to mid-tech manufacturing and low-skilled services, whereas the US has seen more significant development in high-skilled, innovative sectors like IT services. Strengthening the European capacity to innovate and compete globally requires mobilising resources available in all EU regions and translating its strong research base into marketable technologies and products. This calls for higher investment in Research and Development (R&D) and knowledge, stronger links between research and industry, deeper innovation ecosystems, a forward-looking EU strategy to attract talent and ensuring the growth of a well-developed circular economy industry. To this end, the unitary patent system provides a key instrument to strengthen innovation. In parallel, InvestEU (9) mobilises large volumes of public and private investment, including in the development and deployment of innovations, and the Strategic Technologies for Europe Platform (STEP) (10) provides an important vehicle to channel resources towards strategic technologies. Despite recent improvements, EU's venture capital ecosystem remains fragmented and undercapitalised, especially as regards investments in scale-ups. Expanding private long-term risk capital, including through progress towards a Savings and Investment Union and sustained support through public policies, is also important to scale up innovation and support R&D at the European level. This also requires measures to facilitate SMEs' access to capital and innovation networks, as they represent a significant share of the euro area's productive structure. Europe's growth and competitiveness is also hindered by structurally higher energy costs. The Action Plan for Affordable Energy aims to lower energy prices and further reduce dependency on fossil-fuels. For this, completion of the Energy Union, electrification, energy efficiency, an accelerated deployment of renewable and clean energy, improved grid capacity, including cross-border interconnectors, and the efficient use of existing ones, smart grid infrastructure, and greater energy system flexibility are essential.

(12)

Well-functioning goods, labour and financial markets are essential for investment, resilience and productivity. Mobilising resources for sectors displaying high productivity growth potential requires the removal of bottlenecks to capital and labour reallocation, including to facilitate start-ups and scale-ups. Despite its major contribution to Europe's welfare and convergence, the Single Market remains incomplete – particularly in services, digital and energy – due to internal barriers, regulatory disparities, complex procedures and transposition gaps. In May 2025, the Commission launched a new Single Market Strategy (11), to be reinforced by a forthcoming Single Market Roadmap to 2028, to reduce barriers, prevent new ones, and align the Single Market with Europe's strategic objectives. Beyond the Single Market, fostering supportive business environments with an emphasis on simplification, the reduction of administrative burdens and strengthening the governance of productivity policies through stronger National Productivity Boards could help raise productivity across Member States. In addition, in the current context of geoeconomic fragmentation, fostering strong trade and financial relationships with like-minded partners could also drive sustainable growth and investments. The implementation of structural reforms, including those listed in the medium-term fiscal-structural plans, and those supported by Union funds, such as the RRF and other EU Funds, help boosting Member States' competitiveness by removing investment obstacles, improving the business environment and enhancing economic stability.

(13)

The EU generates abundant savings to finance investments and its strategic priorities. The euro area is a net supplier of capital to the rest of the world, a consequence of a persistent significant surplus in its current account, while investment needs at home – including R&D, clean energy, climate adaptation and digital infrastructure, defence and space – remain substantial. The Savings and Investment Union (12) aims to improve the flow of domestic savings into domestic investment as well as to improve European companies' access to financing, consistent with the objectives of a deep and well-functioning Single Market. It also aims to give citizens more opportunities to build their wealth by investing in capital markets thereby mobilising savings. This means strengthening retail investor participation and financial literacy, mobilising Europe's large pool of institutional investors' assets, and expanding financing options beyond the banking sector for all firms – including to support start-ups and scale-ups. It also calls for tackling fragmentation in capital markets, enabling cross-border economies of scale and tackling administrative burden through more efficient supervision within the Single Market and a reduction of national goldplating. This agenda rests on sustained progress with respect to both the Capital Markets Union and the Banking Union. By deepening capital markets, retail and institutional investors, including occupational and personal pension schemes, could gain access to more diverse investment opportunities to build citizens' wealth and channel funds into European firms and infrastructure. At the same time, completing the Banking Union by making further progress on all of its outstanding elements in line with the June 2022 Eurogroup Statement and promoting competitive and well-functioning banking sectors would support more integrated, stable and efficient financial intermediation across Member States, lowering fragmentation and strengthening the resilience of the financial system. Member States' initiatives such as the European Competitiveness Lab can also help to advance further and faster towards the achievement of the Savings and Investment Union. Together, these reforms would allow the euro area and the Union as a whole to channel its abundant savings to productive investments domestically, transforming these savings into a driver of competitiveness, innovation, and security.

(14)

The euro plays a strong role as a regional currency, widely used for invoicing by neighbouring economies and as a reserve currency, thereby serving as a macroeconomic anchor for the stability of the wider European region. It is also widely used by European exporters and importers in their transactions with the rest of the world. At the same time, the international monetary and financial system is undergoing a profound change, marked by geopolitical shocks, growing multipolarity, and rapid technological innovation. The weaponisation, and threats of weaponisation, of economic and financial interdependencies have highlighted vulnerabilities in the financial strategic autonomy of the Union and of the euro area. A wider international use of the euro would support the EU's strategic autonomy, lower financing costs, and reduce firms' exchange rate exposures, albeit with potentially new responsibilities for maintaining international macro-financial stability. In this context, the development and adoption of a digital euro, alongside efforts to enhance the interoperability and adoption of domestic and regional private payment solutions and to explore the potential for issuance of euro-denominated and EU-issued stablecoins and the development of tokenised deposits, would contribute to strengthening Europe's monetary sovereignty thereby reducing dependence on non-European financial infrastructures and enhancing the resilience and preparedness of Europe's financial and payment system.

(15)

The financial sector has remained resilient. The results of the European Banking Authority's 2025 EU-wide stress test exercise confirmed that European banks remain robust even under a severe hypothetical economic downturn. Yet risks to financial stability are elevated and vulnerabilities remain. In the first half of 2025, the banking sector in the euro area continued to perform strongly, supported by robust capital and liquidity positions, as well as sustained profitability, despite weakening global and domestic conditions and falling interest rates. Bank valuations have risen significantly since mid-2024, while asset quality has held up so far, with non-performing loan ratios stable overall. At the same time, the international environment has become more volatile. Global policy uncertainty and volatile global financial conditions raise the risk of asset price corrections, and renewed pressures on liquidity and sovereign debt markets. Both banks and non-bank financial intermediaries (NBFIs) have significant exposures to trade-sensitive sectors such as steel and car making. Where unmitigated, liquidity mismatches and high leverage in key NBFI sectors are important sources of vulnerabilities. Growing interconnectedness between banks and NBFIs, together with significant links with other non-EU NBFIs and markets, add more complexity and exposures that are currently not sufficiently visible and monitored. Risks in the commercial real estate sector persist, requiring close monitoring. Developments in the housing market also merit attention, given their links to bank lending and private indebtedness, as well as with investment and economic activity more in general. Amid elevated geopolitical tensions, cyber risks continue to grow in importance as key operational vulnerabilities, including for banks. There are also risks to the financial sector stemming from climate- and environment-related exposures. Against this backdrop, safeguarding financial stability will demand continued vigilance, forward-looking supervision and strengthened resilience across all segments of the financial system including through appropriate safety nets.