Key takeaways

• Eurozone growth remains sluggish, but rising incomes, lower ECB rates, and strong household savings support a potential strengthening. US tariffs still pose a significant threat to key European industries like automotive manufacturing. 
• EU defence spending is increasing, but it still mainly benefits the US. Building a unified European military industry will take years even with broad political consensus. The European Defence Industrial Program (EDIP) aims to shift procurement within Europe to 50% by 2030, but challenges in financing and coordination make this a long-term objective rather than an immediate solution. 
• Germany’s new government plans to increase public investment through a €500 billion fund and loosen debt constraints on defence spending. This fiscal expansion could provide a fiscal stimulus of 1.5% to 2% of GDP annually from 2026, with potential spillover effects on other European economies.

Weak growth in the short term, but prospects remain favourable 

Multiple surveys suggest that economic growth in the Eurozone remains sluggish at the start of the year, while labour market conditions have begun to weaken in several countries. Recent data also indicate a significant moderation in wages, with companies expecting an average increase of +3.3% over the next 12 months, compared with +4.5% at the same time last year. However, wages are still projected to rise faster than prices. 

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