The EU ranks second of the G20 economies in terms of overall GDP at market exchange rates, after the US. However, it is now just two-thirds the size of that economy. It was slightly larger in the early 1990s. The EU is only 8th of the G20 economies in terms of GDP per head at PPP.
A substantial decline in the population of working age (taken as the number of 15-64 years old) over the next 25 years is forecast by the UN. That will constrain GDP growth, as will weaker productivity growth in the EU than the US. That has been the trend for many years. It is possible that there will be a productivity resurgence but, looking ahead, that depends on the success the EU has in embracing new technology. That will require substantial new investment in decarbonisation and digitalisation on top of the increase required for greater defence spending.
We see the longer-run trend growth of GDP at around 1% p.a. Trends in the first half of 2025 and the IMF’s forecast for the full year are broadly in line with that potential.
One former concern – high inflation – has been successfully tackled. CPI headline inflation is at target and underlying inflation is trending lower, reaching 2.3% in July.
The EU has low CO2e emissions per head by international standards but is still not on track for net zero in 2050, on our estimate.
The level of government debt is high but the debt/GDP ratio rises only modestly, from 89% in 2025 to 93% in 2030 on the IMF's forecast. Even so, high debt levels remain a concern in France and Italy.
The overall EU current account surplus is expected to be maintained over the next five years. Coupled with a modest net external asset position, the fundamentals supporting the euro are strong.