Jan Stráský
Christian Gréus
OECD Economic Surveys: European Union and Euro Area 2025
Abstract
Economic growth has been slow amid elevated uncertainty and growing trade and geopolitical tensions. Consumer and investor confidence is low and gross fixed capital formation has remained weak. Tight labour markets are gradually easing while growth will be supported by easing financial conditions. Monetary policy should remain vigilant until inflation durably returns to target, while macroprudential policy needs to stand ready to counter risks to financial stability not captured by the microprudential framework. Fiscal policy should make space for new spending priorities, such as higher defence expenditure by EU countries, while remaining prudent to ensure long-term sustainability and support disinflation. Next Generation EU spending needs to be accelerated and implementation issues in the new governance framework resolved.
1.1.1. Subdued domestic demand weighs on growth
Economic recovery in the euro area continues, benefitting from strong policy responses to external shocks from both European institutions and national governments. The euro area has been resilient, supported by a strong labour market and stable financial sector. The post-Covid recovery has been stronger than previous recoveries, such as from the great financial crisis, but further shocks and long-term challenges underline the need to step up structural reforms. GDP growth slowed down in 2022 and stagnated in 2023, as the energy price shock triggered by Russia’s war of aggression against Ukraine and the impact of higher interest rates weighed on the economy (Figure 1.1, Panel A). The euro area has returned to growth in 2024, when it expanded at an annual rate of 0.9% (1% in the EU). Moreover, GDP growth, in quarter-on-quarter terms, continued in 2025, at 0.3% in the first quarter, up from 0.2% in the previous quarter. However, consumption and investment only moderately contributed to aggregate demand, reflecting elevated uncertainty and weak confidence (Figure 1.1, Panel B). Short-term indicators suggest that GDP growth will continue to improve in the near term as stronger manufacturing and business activity is supported by expanding services activity. The consumer confidence indicator deteriorated sharply in April2025, driven by weak expectations of households about the general economy, and despite a partial rebound in May remains well below its long-term average.
Source: Eurostat National Accounts database; OECD Business Tendency Surveys database; and OECD Consumer Opinion Surveys database.
Real per capita consumption increased by 0.4% in the fourth quarter of 2024, after an increase of 0.7% in the third quarter. The rebound in real per capita consumption was supported by an increase in real incomes associated with declining headline inflation . The rebound has partly offset the effects of the recent inflation surge when consumption of goods fell below its pre-pandemic level at the beginning of 2023 and largely stagnated until the second quarter of 2024. Meanwhile consumption of services continued to rise at a very moderate pace. The inflationary shock has also reduced the real net wealth of households while the subsequent monetary policy tightening further encouraged saving. Empirical evidence suggests that the increase in the household saving rate between 2022Q2 and 2024Q2 can be largely attributed to rising real incomes and interest rates, together with negative wealth effects. Precautionary motives may have also explained increased savings, especially in 2022 after the start of Russia’s war of aggression against Ukraine (Bobasu, Gareis and Stoevsky, 2024[1]). The household saving rate is likely to decrease only gradually, as the effects of monetary policy easing materialise, weighing on consumption in the near term. Moreover, bouts of uncertainty can further slow down or reverse this process.
Investment remains subdued, with elevated uncertainty, weak demand and still restrictive financial conditions weighing on businesses in both the euro area and the European Union (Figure 1.2). This may also reflect long‑standing structural issues such as regulatory burdens and a lack of business dynamism, particularly compared with the United States (see Chapter 4). Business investment grew robustly in the fourth quarter of 2024, amid a strong rebound in transport investment, while machinery and other equipment contracted. However, weak capital goods data and contracting industrial production point to stagnating investment in the first quarter of 2025. Housing investment remains similarly weak. Despite a stabilisation of building construction, residential building permits remained at low levels in the fourth quarter of 2024, pointing to a limited pipeline of projects (ECB, 2025[2]). In contrast to weak private investment, public investment was supported by disbursement of the Next Generation EU (NGEU) funds, and stood, as a share of GDP, at 3.3% in 2023, broadly in line with the levels seen before the euro area sovereign debt crisis. However, both private and public investment will need to step up further to meet new challenges, such as the green transition and the ramping up of defence capabilities.
Real gross fixed capital formation, index 2019 average = 100
Note: Data refers to euro area member countries that are also members of the OECD (17 countries) and to the 27 EU Member countries.
Source: OECD Economic Outlook: Statistics and Projections database.
Net exports contributed positively to growth in 2024, despite a moderation in global trade at the end of the year. This was mainly driven by expanding services exports, while import growth remained limited. Trade in goods strengthened in the first months of 2025, partly reflecting front-loading amid growing trade frictions and elevated geopolitical tensions. The current account balance returned to surplus at the end of 2022, as the prices of energy imports gradually normalised (Figure 1.3). In the fourth quarter of 2024, the seasonally adjusted current account surplus was 2.2% of GDP. While the heterogeneity of current account positions across EU countries has increased, it remains below levels seen before the euro area sovereign debt crisis. Most countries have seen further current account improvements in 2024, and some, like Germany, Ireland and the Netherlands recorded strong increases in surpluses, while Greece and Slovakia faced a widening current account deficit (Eurostat, 2025[3]).
Current account balance, % of GDP
Note: Data refers to the euro area including 20 countries as of 2013, while to euro area including 19 countries from 2005 to 2012.
Source: Eurostat Balance of Payments database; Eurostat International Trade by SITC database; Eurostat National Accounts database; and OECD calculations.
1.1.2. Tight labour markets are gradually easing
Strong labour markets across the euro area supported household incomes, although this was only partially reflected in consumption. The unemployment rate stood at 6.2% in March 2025, close to a historic low, and the employment rate of people aged 20-64 in the EU reached a high of 75.9% in the fourth quarter of 2024. Employment growth since end-2019 has been stronger for women than men, while youth employment growth rebounded from the lows recorded during the pandemic. Those with tertiary degree benefited more than those with low to medium education. Employment growth has been broad-based across sectors, most notably in information and communication technologies and financial services, as well as in the public sector.
The labour market has been resilient following the pandemic. Unemployment remained low and employment has grown, despite weak economic growth and the strong monetary policy tightening. The surge in inflation at the onset of the energy crisis considerably reduced real wages, making labour cheaper relative to most other inputs and incentivising firms to hire or retain more workers. This initial effect has been gradually reversed, as strong nominal wage growth and ongoing disinflation allowed real wages to catch up broadly back to the level before the inflation surge (Figure 1.4). Catching up with past inflation has been an important driver of recent wage growth. Recent ECB estimates of augmented wage Phillips curve suggest a high degree of backward-lookingness, as workers sought to recoup their real wage losses and past inflation has become more important as a determinant of wage inflation. As the euro area’s real wage gap is now broadly closed, wage setting could become more forward-looking again, further easing wage growth (Bates et al., 2025[4]). At the same time, many lower-income households are still affected by the drop in real incomes during the inflation surge and indicators of material and social deprivation as well as financial distress remain elevated (European Commission, 2024[5]).
Euro area, index 2021Q4=100
Note: Labour productivity is measured as GDP per employee. Real wages are calculated as wages and salaries per employee and then deflated by the GDP and individual consumption expenditure deflators.
Source: Eurostat Labour productivity and unit labour costs database; Eurostat National Accounts database: and OECD calculations.
Other factors have helped ensure strong employment growth. Higher profit margins and lower average hours worked per employee made labour hoarding by firms affordable despite weak economic growth. Increased labour participation by women, older and highly educated workers as well as migration flows, including more than 4 million Ukrainian refugees benefitting from temporary protection in EU countries, helped alleviate labour shortages in some sectors. However, recent ECB research suggests that a key factor behind the decoupling of output and employment, at least until 2023, was the substitution of production factors by firms. Afterwards, the normalisation of energy and intermediate input prices as well as the catch-up of real wages made factor substitution less relevant, helping a realignment of employment dynamics and a recovery in productivity (Berson et al., 2024[6]).
Weak economic growth and resilient employment combined to yield a decline in labour productivity growth, even below its weak long-term trend. After declining by 0.9% per person in 2023, the fall in labour productivity reversed to 0.4% growth in annual terms in the fourth quarter of 2024. Productivity growth has been slow in the construction sector, while in some services, such as information and communication, productivity grew strongly. Conversely, employment growth was most prominent in the construction and professional services sectors and weak in the manufacturing sector, which tends to be more energy intensive. Recent weak productivity growth reinforces the long-term slowdown in labour productivity mainly driven by structural factors beyond the labour market, such as weak investment and a decline in technological innovation, which are discussed in Chapter 4.
Labour demand has been robust, but it recently started to ease. The ECB labour hoarding indicator started to weaken in 2024, as the proportion of firms that hoard workers decreased from 22% in the third quarter of 2023 to 16% in the second quarter of 2024 (Berson et al., 2024[6]). At the same time, the unemployment rate has remained low across the euro area, albeit with some country-level variation. Spain and Italy experienced the largest reductions in unemployment rates since January 2020, whereas Germany recorded a slight increase. Weakening labour demand coupled with a stable unemployment rate has resulted in a close-to-vertical Beveridge curve in 2023 and 2024, suggesting improved efficiency matching (Figure 1.5). It remains to be seen whether it will be possible to sustain this decrease in the vacancy-unemployment ratio needed to control inflation without at least a temporary increase in unemployment, in particular if productivity growth remains weak (Blanchard and Bernanke, 2024[7]). The ECB’s wage tracker data up to April and information from contacts with companies point to gradually moderating wage growth throughout 2025. The easing of wage growth pressures is consistent with a decrease in labour compensation demands and cooling labour demand (ECB, 2025[2]).
Note: Four-quarter moving average rates. Data refers to the euro area including 20 countries and to the 27 EU Member countries.
Source: Eurostat Job Vacancy Statistics database; Eurostat Labour Market Statistics database; and OECD calculations.
1.1.3. Headline inflation has declined, but services inflation remains elevated
Disinflation remains incomplete, but inflation is decreasing towards the symmetric 2% medium-term target. The effects of a negative energy shock turned out to be mostly temporary, while inflation remained elevated in the services sector. Headline inflation decreased from a peak rate of 10.6% in October 2022 to 1.7% in September 2024, mainly driven by falling energy prices in the second half of 2023. Food and non-energy industrial goods continued to contribute to the fall in inflation, as domestic and global demand weakened in 2024. After a steady decline in the second half of 2024, headline inflation ticked up at the end of the year (Figure 1.6, Panel A). Annual headline inflation stood at 2.2% in April, unchanged from March and down from 2.3% in February 2025, primarily reflecting a decline in energy inflation partly due to favourable base effects, as past declines in energy prices fell out of the calculation. Services inflation increased to 4% annually in April (partly related to Easter), up from 3.5% in Marchand remains well above its long-term average of 1.9%. Non-energy industrial goods inflation, hovering around its long-term average, is adding to the underlying price pressures (Figure 1.6, Panel B). Food inflation in April increased to 3%, reversing its previous moderation (Figure 1.6, Panel C). Energy inflation stood at -3.6% in April, further down from -1% in March, reflecting downward base effect and a decline in transport fuel prices (Figure 1.6, Panel D). Although inflation dynamics need to be closely monitored, downside risks to inflation also exist, mostly related to the uncertainty surrounding trade tariffs. Factors limiting upside pressure on euro area prices include declining energy commodity prices, appreciation of the euro exchange rate, particularly against the US dollar, which dampens import price growth, as well as disinflationary effects of re-routing of exports from countries with overcapacity into the euro area.
Underlying inflation appears consistent with a sustained return of headline inflation to the target, as most measures of trimmed inflation remain between 2% and 3%. Import price inflation, with the exception of manufactured food prices, is moderate, while domestic cost pressures, still above their pre-pandemic average, continued to ease further in the fourth quarter (ECB, 2025[2]). At the same time, differences in inflation rates among euro area countries have narrowed, following the sharp increase in the inflation differentials during the energy crisis (European Commission, 2024[8]).
Source: OECD Price Statistics database; and Eurostat.
1.1.4. Growth is projected to strengthen gradually, but uncertainty is high
Growth is projected to improve moderately in 2025 and 2026, supported by easing financial conditions and benign energy and commodity prices but hampered by uncertainty. The labour market will remain tight, with labour shortages in many occupations and historically low unemployment slowing down wage growth normalisation. As disinflation continues, growing real disposable incomes will support consumption. Elevated uncertainty from trade tensions will weigh on private investment, while public investment will be supported by spending under the NGEU programme. The gradual pickup in domestic demand is projected to bring average annual growth of real GDP to 1% in 2025 and 1.2% in 2026 (Table 1.1). Growth in the European Union will follow a broadly similar profile and rebound to 1.2% and 1.4% in 2025 and 2026, respectively, on the back of stronger private consumption (Table 1.2).
Headline inflation is projected to moderate further, to 2.2% in 2025 and 2% in 2026, as employment growth stabilises and labour cost pressures gradually dissipate. Slower global trade growth and benign energy prices will limit the inflationary pressure from higher import prices. Core inflation is similarly projected to decline, at a slower pace reflecting still elevated services price inflation.
Note: Data refers to euro area member countries that are also members of the OECD (17 countries).
1. OECD estimates.
2. Contribution to changes in real GDP.
3. Index of consumer prices excluding food, energy, alcohol and tobacco.
Source: OECD Economic Outlook: Statistics and Projections database.
The uncertainty surrounding the outlook is considerable and the risks to projections are tilted to the downside (Table 1.3). Worsening trade tensions, such as the introduction of further US tariffs and possible EU countermeasures would weigh on external demand, while the tariffs already in place could trigger trade diversion flows towards the euro area. Trade retaliation measures by the EU could add to inflationary pressures. Financial stability risks continue to exist in the euro area, with pockets of financial vulnerabilities in the commercial real estate and non-banking financial sectors. On the upside, a stronger use of accumulated household savings could strengthen private consumption. In addition, a durable reduction of geopolitical uncertainty and trade tensions could hasten disinflation and help lift external demand.
Increasing global trade tensions and disruptions remain a significant concern. Although trade growth remained robust in the first quarter of 2025, reflecting strong front-loading of purchases ahead of tariffs, global trade is projected to expand at a weaker rate over the projection horizon. The standoff between the United States and its neighbours as well as China has intensified, as a first round of import tariffs was quickly followed by announced countermeasures. A proliferation in barriers to international trade and broader fragmentation of the global economy could add to the adverse impact of the tariff changes already announced. The negative impact would be magnified if policy uncertainty were to increase further or there was broad risk repricing and tightening of credit standards in financial markets. Conversely, early agreements that would ease trade tensions between the EU and the US, along with renewed momentum in trade negotiations with other countries and regions, would help to improve policy certainty and growth prospects.
Note: Data refers to European Union member countries that are also members of the OECD (22 countries).
1. OECD estimates.
2. Contribution to changes in real GDP.
3. Index of consumer prices excluding food, energy, alcohol and tobacco.
Source: OECD Economic Outlook: Statistics and Projections database.
More broadly, deepening the network of EU trade partners and continuing support for a rules-based international order would help diversify trade flows and bolster resilience, while enhancing the EU’s attractiveness as a base for global firms. The EU is currently negotiating and ratifying several important free trade agreements, including with Mercosur, India, Indonesia, Australia, Mexico and Ukraine. With other countries, such as South Korea and Singapore, the EU is negotiating further digital trade agreements to remove unjustified barriers to digital trade. Preserving trade openness alongside efforts to expand free trade agreements is welcome.
1.2.1. The monetary policy stance has been relaxed
After rapidly raising interest rates in 2022 and 2023, the ECB has started to reduce the degree of monetary policy restriction in 2024. In reaction to the inflation surge that started in 2021, the ECB raised interest rates by 450 basis points between July 2022 and September 2023. The ECB also continued to unwind the Asset Purchase Programme (APP) and Pandemic Emergency Purchase Programme (PEPP) portfolios and further reduced reinvestments from maturing securities, which added to the restrictiveness of the policy stance at the margin. As headline inflation in 2024 approached the medium-term target of 2%, the ECB decided to reduce the degree of monetary policy restriction, by further cutting interest rates, which are the primary tool for setting the policy stance. A series of 25 basis points cuts of policy interest rates in June, September, October and December 2024, as well as January, March and April 2025, brought the deposit facility rate down from 4% to 2.25%, amid market expectations for further cuts in 2025 (Figure 1.7, Panel A). To incentivise bidding in the weekly refinancing operations and limit volatility in short‑term money markets as the ECB balance sheet normalises, the spreads between policy interest rates were reduced in September 2024, when both the rate on main refinancing operations (MRO) and the marginal lending facility rate were cut by 60 basis points. This resulted in a tighter, 15 basis points spread between the deposit facility rate and the MRO rate.
Note: Panel A, the shaded area refers to OECD EO117 projections. Panel B, the Financial markets stress for the euro area is the ECB composite indicator of systemic stress combining 15 mainly market-based financial stress measures; while the Economic policy uncertainty index for Europe, developed by Baker, Bloom, and Davis (2016), measures policy-related uncertainty by tracking the newspapers’ coverage of economic policy-related uncertainty for 5 European economies (Germany, the United Kingdom, France, Italy, and Spain). The indicators are standardised to show the number of standard deviations above or below their average value over the period 2007-2024. A positive (negative) value indicates high (low) systemic stress in the financial markets. Data are shown up to May 2025.
Source: OECD Economic Outlook: Statistics and Projections database; Refinitiv; US Federal Reserve; and OECD calculations.
Financing conditions remain tight, in part reflecting the lagged effect of past rate hikes, but the policy interest rate cuts are gradually lowering borrowing costs for firms and households. The monetary policy stance has been transmitted smoothly to short-term market interest rates and lower bank lending rates. The average interest rate on new loans to firms declined to 3.9% in March and the average rate on new mortgages edged down to 3.3% (Figure 1.8). Bank lending to firms and households continued to grow, but annual growth rates remain far below historical averages reflecting still weak demand and tight credit standards. There has been a slight decrease in the net demand for loans of firms and a strong increase in net demand for housing loans by households, broad-based across the euro area and mainly driven by declining interest rates. Consumer credit was similarly supported by declining interest rates and slowly improving consumer confidence. At the same time, credit standards for loans to firms tightened further in the first quarter of 2025, mainly reflecting higher perceived risks related to the economic outlook. Credit standards eased further for loans to households for house purchase, while tightening for consumer credit, after several quarters of easing (ECB, 2025[9]).
Note: Data are shown up to April 2025.
Source: European Systemic Risk Board (ESRB); and European Central Bank (ECB).
Economic uncertainty increased markedly following the global inflation surge (Figure 1.7, Panel B). Apart from raising the policy interest rates, the ECB also clarified its monetary policy reaction function and the way it communicates its decisions. The three-pronged reaction function to support ECB decision-making in managing uncertainty involves the assessment of the inflation outlook, the most likely future path for inflation and the surrounding risks, developments in underlying inflation, and the strength of monetary policy transmission (Lane, 2024[10]). As monetary policy transmission is probably state-dependent and anticipating all the channels in real time is difficult, it is important to communicate effectively the uncertainty regarding the monetary policy stance. One option to do so would be to regularly and consistently use alternative scenarios to communicate uncertainty surrounding the projections or conduct regular sensitivity analysis of technical assumptions (Schnabel, 2024[11]).
1.2.2. Monetary policy should remain vigilant
The shift from a high-inflation environment to a level of inflation consistent with price stability has implications for the conduct of monetary policy. In a high-inflation regime, during the inflation surge between 2021 and 2023, firms reacted to higher energy prices, supply-side bottlenecks and pent-up demand after the pandemic (Borio et al., 2023[12]). In addition, second-round effects pushed wage demands higher across firms. The frequency of price changes increased and as the changes were mostly upward, this led to a sharp increase in the common component of inflation. Monetary policy, which directly affects aggregate demand and the inflation expectations of consumers and firms, is powerful in counteracting such common shocks. The ECB has reacted with some delay, but the increase in policy rates during the high inflation episode has ultimately helped to stabilise prices and re-anchor inflationary expectations (Karadi et al., 2024[13]). However, in the coming regime of price stability, price shocks may mostly be independent of each other and mainly reflect relative price changes. Such shocks are less responsive to the tools of monetary policy. This is especially so when relative price shocks reflect supply-side or structural changes, such as permanently higher energy costs, the green transition or rising regulatory costs (Schnabel, 2024[14]).
In normal times, monetary policy may react less forcefully, using its credibility in fighting inflation. When relative price shocks dominate, inflation is mostly self-stabilising and the ECB’s monetary policy might be more patient with moderate deviations of inflation from the target (Schnabel, 2024[14]). At the same time, the experience from the recent inflation surge may shape future responses, if inflation expectations again become unanchored (Figure 1.9). If bondholders, price-setters and employees expect inflation more promptly in response to the next inflationary shock, the ECB may have to act decisively and quickly, despite the cost of doing so (Cochrane, Garicano and Masuch, 2024[15]).
Euro area, 12-month % change
Note: Data refer to the euro area aggregate and are based on the ECB Survey of Professional Forecasters (SPF) and refer to the inflation expectations for the next 12 months. Data on expected consumer price variation refer to the responses to the question "By how many per cent do you expect consumer prices to go up/down in the next 12 months?" contained in the European Commission Consumer opinion survey.
Source: Refinitiv; Eurostat. ECB Survey of Professional Forecasters; European Commission, Business and consumer surveys, https://economy-finance.ec.europa.eu/economic-forecast-and-surveys/business-and-consumer-surveys_en; and OECD calculations.
The ECB’s monetary policy should remain vigilant and data dependent as disinflation progresses. As the estimates of a neutral policy interest rate, at which the inflationary risks are balanced and output is at potential, are of limited help in the presence of major shocks, the ECB’s three-pronged reaction function discussed above is an appropriate tool for setting the monetary policy stance. At the same time, a recent ECB assessment of the unobservable neutral policy rate puts its econometric estimates between 1.75% and 2.25%, suggesting some room for further cuts and the output gap, which is estimated to be marginally negative, points in the same direction. In addition, recent research suggests that drivers of the neutral policy rate are partly cyclical, meaning that the rate increases when the economy recovers. After a decline during the pandemic crisis, the neutral rate has picked up recently, broadly coinciding with the rise of global and euro area interest rates (Christensen and Mouabbi, 2024[16]). Moreover, current short-term rates, both nominal and real, are below the historical levels prevailing before the global financial crisis and other data, such as the strong increase in net demand for housing loans recorded in the Bank Lending Survey suggest that the overall monetary and credit conditions have become less restrictive (ECB, 2025[9]). In the view of incomplete disinflation and the uncertainty surrounding the precise stance of monetary policy, it would be prudent for the ECB to remain vigilant when setting its monetary policy stance until price stability conditions are reliably achieved. After that, the ECB should maintain a small positive real short-term interest rate (Angeloni, 2024[17]).
1.2.3. Risks to financial stability are building up in the non-bank sector
The banking sector in the euro area has been stable in recent years, enjoying strong aggregate capital and liquidity buffers, despite the gradual phasing out of funding form targeted longer-term refinancing operations. This reflects the successful implementation of the Basel III reforms designed to strengthen banks’ resilience. To ensure a level playing field and not penalise banks that have duly prepared, this process should continue as planned by the implementation of the remaining elements in all jurisdictions. The overall Common Equity Tier 1 ratio, at 15.9% at the end of 2024, was well above the minimum and combined buffer requirements. Despite some signs of deterioration, non-performing loans (NPLs) remain limited, while strong profitability of banks that continued in 2024 makes higher loan-loss provisions more affordable (Figure 1.10). Moreover, European banks benefit from effective supervision and a comprehensive regulatory framework, which helped them withstand the 2023 banking turmoil. However, as bank profitability may have peaked, macroprudential capital buffers should be kept at levels preserving resilience and existing borrower-based measures should also be maintained to ensure sound lending standards over the financial cycle (ECB, 2024[18]).
Note: Data refer to euro area member countries that are also members of the OECD (17 countries). 2024Q4 data for the euro area and OECD average is calculated on the basis of latest available quarter for the 17 euro area and OECD countries, ranging from 2023Q4 to 2024Q4.
Source: IMF Financial Soundness Indicators database.
Credit risks are emerging in parts of the corporate sector that would affect both banks and non-bank lenders. Despite lower rates on new borrowing, interest costs continue to weigh on firms’ profitability. Ongoing trade tensions are weighing on financing conditions for corporates with trade exposures to the US and could lead to periods of heightened financial market volatility. Data on bank loan defaults show that small and medium-sized enterprises (SMEs) and firms in the commercial real estate sector have the most fragile balance sheets. Insolvencies have been rising in the euro area, albeit from moderate levels, reflecting both the fading previous support and the effect of weak growth on firms’ debt servicing ability. While conditions in the commercial real estate markets are stabilising, in line with less restrictive monetary policy, structural factors related to the shift to remote working and e-commerce, as well as the need for energy-efficiency investment, continue to weigh on the outlook. The exposures to commercial real estate are small but concentrated and banks with high exposures face elevated risks. At the same time, the deterioration of SME credit quality has been less pronounced, while being more widespread (ECB, 2024[18]).
Residential real estate prices in the euro area returned to growth in 2024, increasing by 1.3% and 2.6% year-on‑year, respectively, in the second and third quarter of 2024. The orderly contraction in house prices masks significant differences among countries, with some not experiencing a decline in prices (Figure 1.11). Housing affordability has deteriorated in recent years, together with borrower capacity of households (European Commission, 2024[8]), but easier credit conditions and increasing demand for mortgage loans are expected to support price growth going forward. Household vulnerabilities have eased on aggregate, on the back of resilient labour markets and high savings rates, but interest costs are challenging for low-income cohorts. Although housing market adjustments have been orderly so far, risks are skewed to the downside (ECB, 2024[18]). Weaker growth and a softer labour market, especially in countries with elevated mortgage debt levels and overvalued property markets could trigger a housing market correction.
Non-banking financial institutions have been resilient so far, but the risks are building up. The sector’s vulnerabilities, such as low liquidity and high leverage of some actors, require a comprehensive policy response at the EU level, to reduce both the macroprudential risks and the possibility of regulatory arbitrage (ECB, 2024[18]). For example, some types of open-ended investment funds have low liquid asset holdings and significant liquidity mismatches, which in the presence of an adverse market shock could lead to forced asset sales to cover sudden outflows of funds or margin calls on derivatives exposures. Similarly, the resilience of money market funds (MMFs) to liquidity shocks also needs to be strengthened by increasing the liquidity buffer requirements for private debt MMFs and making them more usable. Non-bank leverage should also be reduced to close potential gaps in the existing EU policy framework, starting with adopting the FSB minimum haircut framework for securities financing transactions (FSC, 2024[19]). Another concern is the widening gap in insurance protection caused by the growing frequency and severity of natural catastrophes linked to climate change. Recent proposals for EU-level solutions put forward by the ECB and the European Insurance and Occupational Pensions Authority (EIOPA) include a voluntary EU public-private reinsurance scheme to increase insurance coverage and an EU fund for public disaster financing (ECB and EIOPA, 2024[20]).
Index 2019=100, seasonally adjusted
Note: Latest observation refers to 2024Q4.
Source: OECD Price Statistics database; and OECD calculations.
1.3.1. Prudent fiscal policy is needed to reduce high debt levels
Fiscal prudence is needed to ensure long-term fiscal sustainability and support the ongoing disinflationary process. In light of pressing needs for additional spending and investment in priority areas such as defence and innovation, expenditures should be reprioritised and structural reforms accelerated. While higher defence spending is needed, it cannot be financed by debt issuance in the long term and reprioritisation of fiscal spending is necessary to ensure fiscal sustainability. At the same time, gradual fiscal consolidation coupled with reforms and investments, partly funded by the Recovery and Resilience Facility (RRF) and other EU funds, could protect economic growth and boost potential output (European Commission, 2024[21]). To meet additional spending on agreed priorities, including European public goods and defence spending, EU countries could also increase the size of the EU budget or set up a common fiscal capacity, similar to that discussed in the 2021 OECD Economic Survey of the Euro Area. Such a decision would likely include a reduction in fiscal spending at the national level.
After strong fiscal expansion during 2020-2023, fiscal policy in the euro area is projected to tighten in 2024, and to a lesser extent in 2025 and 2026, with cumulative tightening of less than 1½ % of GDP over these three years (Figure 1.12). The considerable fiscal impulse in 2020-2023 has not been offset, as the energy and income support measures have still not been fully rolled back. The constraints on fiscal policy were relaxed in March 2025 as the EU called for the coordinated use of national escape clauses for up to 1.5% of GDP for defence purposes, enabling additional spending of about EUR 650 billion (4.3% of euro area GDP) from 2025 to 2028. In addition, the Security Action for Europe (SAFE) instrument, if approved by the Council, will allow EU countries to borrow up to EUR 150 billion to facilitate the increase in defence spending.
The policy measures proposed in the ReArm Europe Plan aim at supporting EU’s defence industry, stepping up defence spending and deepening the single defence market. They build on existing instruments established in the 2021-2027 Multiannual Financial Framework, such as the European Defence Fund, and other measures, including the Act in Support of Ammunition Production (ASAP), the European Defence Industrial Reinforcement through Procurement Act (EDIRPA) and the off-budget European Peace Facility. However, the successful implementation of the ReArm Europe plan would likely require an agreement to pool procurement and prioritise EU-made equipment (de Cordoue, 2025[22]), as well as expanding an integrated defence industrial base (Wolff, 2024[23]).
The high debt levels in many euro area countries were somewhat reduced between 2021 and 2023, partly reflecting favourable denominator effects from the high inflation episode, but primary deficits are set to continue. The euro area’s fiscal position has been hit hard by the pandemic, but the debt-to-GDP ratio gradually decreased in recent years, from 98.5% in 2020 to 89.1% in 2023, reflecting reduced debt ratios in several euro area countries (Figure 1.13). However, in the coming years, the ratio is projected to increase again, to 91.7% in 2026, as ongoing primary deficits are only partly offset by a shrinking interest-growth rate differential (European Commission, 2024[8]). One reason for continuing headline deficits is rising debt servicing costs as maturing debt is rolled over at higher interest rates than on outstanding debt. A small impact on the primary balance also comes from the ongoing fiscal measures in response to the energy and inflation shock, which have been considerably reduced in 2024 and are projected to further decrease to 0.1% in both 2025 and 2026 (Ferdinandusse and Delgado-Téllez, 2024[24]).
Euro area fiscal stance measured by structural primary balance
Note: Data refer to euro area member countries that are also members of the OECD (17 countries). 2025 and 2026 represent projections.
Source: OECD Economic Outlook: Statistics and Projections database.
The favourable effects of the NGEU spending on debt-to-GDP ratios until 2031 are estimated at 7 to 8 ppt for the main recipients, Italy and Spain, and at about 3 ppt for the whole euro area (Bankowski et al., 2022[25]). The ECB’s model-based simulations assume that the effects operate via a direct debt-increasing effect of RRF loans, a confidence channel affecting sovereign bond yields and risk premia, the demand driven stimulus from higher spending and the supply side effects from additional investment and reforms. However, the effects may be smaller than previously thought and occur later than expected. This is driven by delays in implementation, which have reduced both budget outcomes and GDP and resulted in significantly lower potential GDP growth. At the same time, this implies that substantial resources will be deployed in the coming years, lifting the potential output gains (Bankowski et al., 2024[26]).
General government debt, Maastricht definition, as a percentage of GDP
Note: Data refer to the European Union and the euro area member countries that are also members of the OECD (22 and 17 countries respectively).
Source: OECD Economic Outlook: Statistics and Projections database.
1.3.2. The NGEU spending is executed more slowly than planned
The Next Generation EU (NGEU) programme agreed in reaction to the COVID-19 pandemic aims at fostering potential growth and transforming the economy. EU countries had applied for 733 billion euro under the NGEU by August 2024, which amounts to about 5.2% of EU GDP. Most of the funds, 650 billion euro are provided under the Recovery and Resilience Facility (RRF). Euro area countries are entitled to RRF funds of up to 532 billion euro and the ECB’s Working Group on Public Finance estimates that some 489 billion euro, 295 billion in grants and 194 billion in loans will be spent, as some countries may not use their loan entitlements in full. The Commission had until November 2024 borrowed on financial markets more than 320 billion euro to pay out the NGEU funds. NGEU loans will be repaid by the borrowing countries, while the grants will be repaid through the EU budget. The repayment is guaranteed by the commitment by EU countries to provide up to 0.6% of gross national income (GNI) of additional budgetary “headroom”, which seems sufficient under all plausible paths of future costs of servicing the debt (Bankowski et al., 2024[26]). The ECB estimates that the annual repayment cost of the RRF grants will peak at 26 billion euro in 2028 and steadily decrease afterwards. The financial burden will ultimately fall on EU taxpayers, either through agreeing on new EU own resources, which would imply less potential revenue for national budgets, or GNI-based national transfers to the EU budget (see Chapter 2). Hence, the EU countries should account for the NGEU repayments in their medium-term fiscal plans.
Sovereign borrowing costs have been growing in recent months, partly reflecting increased uncertainty regarding future growth and partly in anticipation that public spending will increase (Figure 1.14). For example, German yields on ten-year sovereign bonds stood above 2.5% in February from just above 2% at the beginning of December 2024. At the same time, recent auctions of government debt showed strong demand by investors, even as the ECB continues to reduce its sovereign bond holdings. However, a resurgence in inflation or downside surprises to economic growth could translate rapidly into falling asset prices with broader systemic effects. An increase in risk premia could also cause stress in sovereign bond markets amid high debt levels and substantial refinancing needs over the next two years (OECD, 2025[27]).
Source: LSEG; and OECD calculations.
RRF expenditure has been lagging the initial indicative timeline and had a small impact on euro area GDP so far. In 2021-2023, there was a significant underspending of RRF funds compared to the original plans. The delay has occurred in most euro area countries and was mainly driven by the revision of national recovery and resilience plans in 2023 to include a RePowerEU chapter, limited administrative capacity and the effect of high inflation on already drafted procurement contracts (Dorrucci and Freier, 2023[28]). By April 2025, about a half of envisaged payments has been disbursed, 56% of grants and 38% of loans, pointing to a need for acceleration in the remaining life of the instrument. Similarly, only 30% of milestones and targets, both investments and reforms, have been assessed as fulfilled by the Commission so far, with an additional 23% reported as completed by EU countries (European Commission, 2025[29]). EU countries with weaker administrative capacity and large RRF allocations have experienced particularly long implementation delays. From the RRF progress reports submitted in the context of the European Semester, it also seems that delays have become increasingly frequent in 2022 and 2023 (ECA, 2024[30]), while the trend appears to have reversed in 2024. To improve the RRF implementation, the Commission should provide as needed additional guidance to national implementation bodies (see Chapter 2).
1.3.3. Implementation of the new governance framework should be strengthened
The new fiscal rules adopted in April 2024 reformed both the preventive and the corrective arms of the Stability and Growth Pact (SGP). Most importantly, the new framework replaced multiple operational targets with a single indicator, net expenditure growth over the medium term. As discussed in the 2023 Economic Survey of the EU and the euro area, this is a positive change, which puts more emphasis on country-specific debt sustainability pursued through EU-endorsed medium-term fiscal-structural plans that set out national fiscal adjustment plans under a common framework. Such anchoring of the fiscal requirement on debt sustainability could also help make fiscal policy more counter-cyclical and improve national ownership.
Countries exceeding the 60% of GDP debt threshold or the 3% of GDP deficit threshold will have to comply with newly defined numerical safeguards strengthening fiscal adjustment. Countries with debt below the 60% of GDP and no plans to exceed it may only receive warnings and recommendations, unless they breach the 3% of GDP deficit threshold (Box 1.1). The possibility of a general escape clause is preserved in the new framework and a national escape clause was introduced. Although these provisions could in principle be used to address extraordinary spending needs, for example on defence, their use is conditional on preserving fiscal sustainability in the medium term.
The Stability and Growth Pact (SGP) constraining government deficits and debt in the EU consists of the preventive arm setting out the medium-term objective of fiscal sustainability and the corrective arm or excessive deficit procedure (EDP), which specifies adjustment requirements for countries with deficits above 3% of GDP or debts above 60% of GDP that are not falling fast enough. Each arm of the SGP corresponds to an EU regulation. The April 2024 reform of the SGP put in place a new preventive arm regulation and amended the existing EDP procedure.
In addition, Directive 2024/1265 updates the requirements for national budgetary frameworks, including new reporting requirements on climate change risks and the capacity and tasks of national independent fiscal institutions (IFIs). For example, the IFIs should have members appointed based on experience and competence, by transparent procedures. To ensure independence, the IFIs should have adequate and stable resources, timely access to all the relevant information and be subject to external evaluations. The Directive has to be transposed into national laws by end-2025.
The new preventive arm
Each country submits a medium-term fiscal-structural plan (MTFSP), which in principle covers the period coinciding with the term of the national legislature and outlines a fiscal adjustment path, focussed on net expenditure, i.e. primary expenditure net of discretionary revenue measures, cyclical unemployment expenditure and one-off and temporary items. By the end of the adjustment period of four years at minimum, extendable to a maximum of seven years conditional on an additional set of investment and reform commitments, government debt must be on a plausibly downward path or staying below 60% of GDP over the 10-year period after the end of the adjustment, based on projections with unchanged policies. Over the same period, also based on projections with unchanged policies, the budget deficit should remain below 3% of GDP. The Commission verifies this forward-looking requirement at the time of endorsement of the plan, based on its debt sustainability analysis (DSA) methodology. A “plausibly downward path” means, in deterministic stress scenarios including pre-defined adverse assumptions about the evolution of interest rates, GDP and the primary fiscal balance, that debt is declining throughout the DSA period. In stochastic stress scenarios, a “plausibly downward path” means at least 70% probability that, after drawing 10 thousand randomised shocks from a predefined distribution, debt will decline during the DSA period. A working group has been established to review the existing DSA methodology.
Moreover, the reform has introduced additional constraints for the setting of the net expenditure path in the MTFSP, which apply to countries with debt above 60% of GDP or a deficit above 3% of GDP, namely:
A debt sustainability safeguard requires the projected debt-to-GDP ratio to decrease over the adjustment period by a minimum annual average amount of 1 percentage point of GDP, for countries with debt ratios above 90%, and by ½ percentage point of GDP, for debt ratios between 60% and 90% of GDP.
A deficit resilience safeguard requires that the structural deficit should eventually reach a level of no more than 1.5% of GDP. The improvement in the structural primary balance should reach 0.4 percentage point of GDP per year (or 0.25 percentage points per year if the adjustment period is seven years).
No backloading requires that the annual fiscal adjustment must not increase during the adjustment period.
Fulfilment of these requirements is verified by the Commission and the Council of the EU, which can ask countries for revisions. Once a MTFSP is endorsed by the Council, the net expenditure path becomes the sole reference for assessing compliance with the EU fiscal rules. To allow for some flexibility, positive and negative deviations from the net expenditure path are accumulated in a notional control account. If the balance reaches 0.3% of GDP in one year or 0.6% of GDP cumulatively, countries with debt-to-GDP ratio above 60% and with a budgetary position not close to balance or in surplus are liable, after the Commission’s assessment, to the EDP for breach of the debt criterion, with the associated prescriptions and possible penalties.
The Regulation also provides for opinions on the macroeconomic forecast and assumptions underpinning the net expenditure path prepared by national independent fiscal institutions (IFIs), initially at the request of the government, and independently after 1 May 2032, provided they have built up sufficient capacity.
Amendments to the Excessive Deficit Procedure
The reform has left the EDP for breach of the deficit criterion broadly unchanged, although it provides more time to correct the excessive deficit than the one year usually recommended before the reform. Unless the deviation is assessed to be small and temporary, countries with deficits of more than 3% of GDP are required to implement a corrective net expenditure path and adjust their deficit by at least 0.5% of GDP per year, measured in terms of the structural primary balance in 2025-2027 and in terms of the overall structural balance afterwards. In addition, the Regulation makes a distinction, within a single legal procedure, between the deficit-based and debt-based EDP criteria. Where the excessive deficit procedure was opened on the basis of the debt criterion (see above), the corrective net expenditure path needs to be at least as demanding as the old one and remove the cumulated deviations of the control account by the time set by the Council.
The Regulation also modified the provisions on escalating the EDP, including the possibility of fines after the repeated failure by a country to take effective action to correct excessive deficits. The sanctions for non-compliance were substantially reduced from a minimum of 0.2% of GDP per year, as stipulated by the 2011 “six-pack” legislation, to 0.05% of GDP every six months. This change still needs to be harmonised with the “six-pack” legislation, which remains in place.
Source: European Commission (2024[31]); Pench (2024[32]); Darvas, Welslau and Zettelmeyer (2024[33]).
The Council adopted the net expenditure growth paths in national medium-term fiscal-structural plans (MTFSPs) for twenty-one EU countries and for the Netherlands a path consistent with the technical information, as recommended by the Commission. The net expenditure paths in some MTFSPs are higher than those in the prior guidance, reflecting differing macroeconomic and fiscal assumptions, including updated information on the macroeconomic outlook and on budget execution, which became available during the time between the prior guidance and the MTFSP and which the Commission acknowledged as justified (European Commission, 2024[31]). For five countries – Finland, France, Italy, Romania and Spain – the adjustment period has been extended from 4 to 7 years, as their reforms and investment commitments were assessed as supporting fiscal sustainability and improving growth and resilience. Except for Portugal and Finland, the adjustment required under the new framework, even taking into account the effect of numerical safeguards, seems less demanding than the requirements implied by the last medium-term objective (MTO) in the old framework (Darvas, Welslau and Zettelmeyer, 2024[33]). At the same time, the approved MTFSPs for some countries imply backloading of fiscal adjustment compared to the prior guidance, sometimes not fully protecting public investment (Box 1.2).
Some national plans are more backloaded than the Commission’s prior guidance
The net expenditure growth path issued by the Commission in the prior guidance is for some EU countries different from the path set out in the national medium-term fiscal structural plans (MTFSPs) approved by the Council. For Estonia, Finland, Greece (until 2026), Italy (from 2027 onwards), and Spain (until 2029), the MTFSPs project a higher net expenditure growth than the prior guidance. On the other side, the MTFSPs of France, Portugal and Slovakia set out tighter fiscal policy constraints from 2025 onwards.
However, several factors may help explain these differences, in both directions. For example, some countries included in their MTFSPs a lower net expenditure path than implied by the Commission (Boivin and Darvas, 2025[34]). The difference comes from applying less than unitary revenue elasticity to nominal potential GDP in the Commission’s formula for translating a structural primary balance (SPB) target into a net expenditure growth target and leads to more demanding fiscal effort. Another reason for differences in the net expenditure growth path could be differences in potential GDP growth projections. This can reflect either positive developments since the preparation of the prior guidance or the national authorities having successfully justified their macroeconomic assumptions to the Commission. To assess these effects, Figure 1.15, Panel A plots the cumulative differences in potential GDP growth with cumulative changes in structural primary balance (SPB), both between the MTFSP and the prior guidance (in red) and between MTFSP and the EO116 data (in blue). In many cases, the differences in cumulative potential GDP growth lie within +/- 1 percentage point, which can be viewed as negligible. This is remarkably so for almost all countries when comparing MTFSPs to OECD projections in EO116. Only Croatia, Hungary and Latvia narrowly exceed this range. The differences in potential growth between the MTFSPs and the prior guidance are more substantial, partly reflecting more pro-cyclical nature of the Commission’s estimates. This is the case notably for France, Greece and Finland, weakening the comparability of the projected changes in SPB. Leaving out these outliers, we can see that the MTFSPs for Spain and Italy involve smaller SPB adjustment than foreseen in the prior guidance, while the converse is true of Portugal and to a smaller extent of Slovakia, Slovenia and Poland. For many countries, the SPB adjustment projected in EO116 is smaller than the fiscal effort implied by the national MTFSPs.
Note: Panel A, horizontal lines at 1 and -1 indicate “negligible” difference in potential growth.
Source: OECD calculations based on the Commission’s prior guidance, the MTFSPs approved by the Council and EO116.
The aggregate euro area fiscal effort can be calculated for the countries where MTFSPs are available, which account for 51% of euro area GDP. The weighted average of annual changes in SPB suggests a reduction in fiscal effort under MTFSPs compared to that foreseen in the prior guidance (Table 1.4). Fiscal consolidation is shifted from 2024 to the subsequent years, partly reflecting new information on macroeconomic outlook and budget execution that became available between the prior guidance publication in June 2024 and the submission of the national plans in October and November. From 2026 onwards, the aggregate fiscal effort of the euro area set out in the MTFSPs is roughly aligned with the one in the Commission’s prior guidance. In addition, for the years 2024-2026 the fiscal consolidation assumed in the national plans is backloaded to 2025 and 2026, while being less strenuous in 2024.
Aggregate fiscal effort of the euro area as weighted sum of annual changes in the countries’ SPBs
Note: The column “MTFSP” refers to the aggregate fiscal effort of the euro area based on the national MTFSPs as adopted by the Council. The column “Prior Guidance” refers to the trajectories set out in the Commission’s prior guidance. Countries with MTFSPs included in the table are Estonia, Finland, France, Greece, Italy, Portugal, Slovenia, Slovakia, Spain (accounting for around 51% of the euro area’s GDP in 2023).
Source: European Commission, OECD, authors’ calculations.
In most countries, growth of public investment is protected
During the euro area sovereign debt crisis, countries under macroeconomic programmes often implemented large fiscal adjustments that disproportionately cut public investment. The new economic governance framework aims to protect public investment, even in periods of necessary fiscal tightening. Comparing the average annual difference between growth in nationally financed public investment and growth in net expenditure shows that most countries plan a higher average annual growth in public investment than in net expenditure. However, Estonia, Greece and Hungary project in their plans a considerably lower annual growth in public investment than in net expenditure. In the case of Greece, the decrease comes after a surge in public investment to 3.8% of GDP in 2024. A similar point about declining public investment in some countries can be made by comparing cumulative changes in the ratio of public investment to GDP (Figure 1.15, Panel B).
Source: Boivin and Darvas (2025[34]); OECD EO116 database and authors’ calculations.
The new framework could be further improved. For example, the new rules rely on bilateral exchanges with the Commission, albeit complemented by peer-reviews at a technical level, which entails risks of political pressure. This concern reinforces the need for uniform and equal application of the rules by the Commission. Another area of possible improvement is that the minimum adjustment requirement for countries breaching the 3% deficit benchmark could be pro-cyclical. Similarly to the previous framework, a country that is hit by an adverse output shock, which is not considered resulting from a severe economic downturn in the euro area or from exceptional circumstances outside government’s control, but that results in a deficit exceeding 3% of GDP, may be asked to undertake additional fiscal adjustment. Such an outcome would depend on the initial requirements of the national MTFSP. If the national plan envisages fiscal adjustment of less than 0.5% of GDP per year, the EDP will effectively require a faster fiscal adjustment. It is also possible that the deficit resilience safeguard would imply a more ambitious medium-term consolidation target than the DSA requirements considered alone, for example for countries where ageing costs are increasing slowly or where GDP growth is projected to be strong (Darvas, Welslau and Zettelmeyer, 2024[33]). Another concern is the interplay of the provisions of the MTFSPs in the preventive arm and the operation of the EDPs, including the discretion enjoyed by the Commission and the Council around the benchmarks of the corrective arm (Pench, 2024[32]). While the discussions on a future code of conduct continue, additional guidance on how to resolve potential conflicts and interpret existing provisions would be useful.
Another area of possible improvement relates to some details of the Commission’s debt sustainability analysis (DSA) methodology. To assess fiscal sustainability, the Commission’s DSA uses a baseline (no policy change) projection for the next 10 years and applies deterministic as well as stochastic scenarios covering a range of possible shocks derived from past data. The methodology is described in the Debt Sustainability Monitor 2023, while the files replicating the deterministic projections have been published and the code for stochastic projections has been shared with national authorities. In addition, to further improve transparency, the code for stochastic projections could also be made public, alongside the findings and recommendations of a new working group established to review the DSA methodology. It would ensure that both the current methodology and its future modifications are disclosed, at a level that allows replication. Moreover, unlike the old framework, which required an annual decline in the debt-to-GDP ratio that was proportional to the initial debt level (the 1/20th excess debt rule), under the new framework countries with an estimated low volatility of debt-to-GDP ratio may be required to target only a small reduction in their debt ratio, even if their debt level is high (Cottarelli, 2024[35]). While the 1/20th excess debt rule was a source of pro-cyclicality in the old framework, the implied speed of debt reduction under the new framework may in some cases be too slow.
1.3.4. Empowered fiscal councils and redesigned sanctions could improve compliance
While the track record of the new system still needs to be established, it remains to be seen whether partial compliance present in the old system will be resolved. Compliance with the EU fiscal rules has been imperfect in the past and the average numerical deviations from the rules non-negligible (Figure 1.16). In addition to uniform application of the rules, well-resourced and effective national independent fiscal institutions (IFIs) could help improve compliance and ownership in the new framework. The reform incrementally strengthened the minimum safeguards for IFIs independence, for example adequate as well as stable funding and timely access to necessary information. The reform also introduces an extensive comply-or-explain requirement for governments on all the tasks introduced in the updated Budgetary Frameworks Directive. This is welcome as it could help increase the effectiveness of national IFIs by enabling a regular dialogue with government on fiscal policy issues (Horvath, 2018[36]). However, the IFIs remain vastly heterogeneous in terms of size, capacity and challenges they face (Figure 1.17). For example, less than a third of EU IFIs has access to legally protected stable funding and the deadlines for complying with IFIs information requests are mostly non-existent (EFB, 2024[37]). To ensure effective discharge of responsibilities under the new fiscal governance framework, national IFIs should be strengthened and the differences in their capacities reduced. To facilitate this, the Commission should systematically monitor effective compliance by EU countries with the IFIs independence safeguards (Network of EU IFIs, 2019[38]; ECA, 2019[39]).
Note: Data refer to the 27 EU Member countries.
Source: Eurostat; and OECD calculations.
Shares of the level of IFIs capacity by type of task, %
Note: Based on the survey responses of 29 IFIs from 25 EU countries. The category ‘strong’ includes IFIs that reported having sufficient or complete capacity, and the category ‘weak’ includes all IFIs that reported having minor or no capacity to carry out the proposed tasks.
Source: Network of EU IFIs (2022).
Sanctions for rules violations were not effective under the old rules and likely will not be in the future (Kirchsteiger and Larch, 2025[40]; OECD, 2023[41]). While the deficit-based EDP has been partly effective in reducing both large deficits and surpluses, this seems more related to increases in sovereign borrowing costs than the possibility of sanctions (Pench, 2024[32]). Under the new rules, sanctions were reduced, to limit their macroeconomic effect, and became more automatic, but the incentives for the Commission and the Council to avoid them remain in place. In any case, enforcement proceedings could provide a useful signal to markets even if fines ultimately do not materialise. A scale of escalation steps, set out by the Commission based on the extent of deviation from the agreed path, would help markets to reprice the risks gradually.
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