Europe enters the summer of 2025 with cautious optimism. After several years of economic uncertainty, inflation spikes, and geopolitical tensions, the European economy is showing signs of steady—if modest—growth.
The euro area’s GDP is expected to grow by approximately 1.0% this year, with the broader European Union forecast slightly higher at around 1.1%. While these numbers are far from robust, they mark an important turning point: stability after volatility. Countries like Germany, France, and Spain are seeing a gradual recovery in both domestic demand and exports.
One of the most encouraging developments is the rapid decline in inflation. From double-digit peaks in recent years, euro area inflation has dropped to around 1.4% in Q1 2025 and is expected to average close to the ECB’s 2% target. With price pressure easing, consumers and businesses are regaining confidence, and purchasing power is slowly being restored.
The European Central Bank has responded to these trends by cautiously easing monetary policy. Following several interest rate hikes in 2022–2023, the ECB has already cut rates three times since late 2024. The most recent cut came in June, lowering the key rate by 25 basis points. However, ECB officials remain vigilant, signaling that future adjustments will depend on external risks such as geopolitical tensions, wage growth, and energy costs.
While inflation is easing overall, labor costs are rising. In the eurozone, wage-related expenses increased by 3.4% year-on-year in Q1 2025, while in some Central and Eastern European countries such as Romania, Bulgaria, and Croatia, increases reached double digits. This reflects strong labor markets but also raises concerns about a new wave of cost-driven inflation.
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