IMF warns Europe about the risk of economic stagnation

The International Monetary Fund (IMF) warns of the risk of stagnation in Europe’s economy if urgent measures are not taken to overcome slowing growth, weak investment and growing geopolitical threats. This is stated in a statement by the institution.

In terms of prospects and risks, the eurozone economy is experiencing an increasingly challenging global environment associated with higher tariffs, increased trade policy uncertainty, and geopolitical risks.

In its April report, the IMF predicted that the eurozone economy would grow by only 0.8% y/y in 2025 and by 1.2% in 2026.

«Trade tensions and heightened uncertainty have dampened the outlook for domestic demand and exports, outweighing expected increases in defense and infrastructure spending. In addition, the geopolitical situation in Europe is expected to dampen sentiment and weigh on investment and consumption, despite monetary easing and projected real income growth,» the statement said.

The IMF called on the European authorities to take urgent measures to support economic growth, investment and productivity. The fund calls the deepening of the EU single market a key tool.

The Fund estimates that the cost of internal barriers between EU countries is equivalent to a 44% duty on goods and a 110% tariff on services. Their elimination by unifying regulatory requirements, reforming the capital market and improving labor mobility will increase the bloc’s GDP by about 3% over 10 years.

In addition, the IMF points to the need for additional policy actions at the national level. Successful implementation of internal structural reforms (labor market, human capital, fiscal issues, credit markets, etc.) will lead to significant GDP growth – by about 5.7% for the EU in the medium term.

Further diversification of Europe’s economic ties, the Foundation notes, can help strengthen the resilience of supply chains and gain efficiency gains from trade. Any new industrial policy should be limited to clearly defined market failures and be coordinated at the EU level.

The Fund sees the risks of a deteriorating business environment for companies with investments in the US, which could negatively affect bank balance sheets. However, for the time being, he called the European banking system “adequately capitalized and liquid.”

As GMK Center reported earlier, inflation in the euro area in May 2025 increased by 1.9% compared to the same month in 2024. Thus, the indicator slowed the growth rate after +2.2% in April.