EU June Macro Update: Out of the Rut

EU Chartbook — June 2025: Out of the Rut

In their latest EU Chartbook, Chief Economist Dimitris Valatsas and Lead Analyst Cosimo Shahenshah present a comprehensive analysis of the Euro area's economic recovery. The revised GDP data reveals that the Euro area has finally emerged from its rut, posting a 1.5% growth and a notable 2% year-on-year real increase in domestic demand. This positive trend indicates that the economy is on the right track, with growth improving and gross fixed capital formation strong across major economies.

The delayed effect of rate cuts and German fiscal impetus is expected to provide further upside over the next four quarters. A deal with the U.S. is likely to happen in the third quarter of 2025, although higher tariffs may be imposed by both sides until then. And the European Central Bank (ECB) could do more to help, but the Governing Council has turned unnecessarily hawkish. 

The key issue is that the Eurozone household and corporate sector remain underlevered, with corporate and consumer loan demand lagging behind mortgages. Despite this, the outlook for the Eurozone economy remains optimistic over the next four quarters, aided by AI adoption which should boost productivity.

Macrosignificant Politics in Brief

• Germany's government has announced a further stimulus package, including accelerated depreciation and reduced corporate tax rates, to boost growth.
• Poland's Eurosceptic Karol Nawrocki won the presidential runoff with 50.89%, while Prime Minister Donald Tusk won a vote of confidence in the Sejm.
• The Dutch government collapsed after the far-right PVV withdrew from the coalition, with early elections scheduled for October 29.
• France's center-right LR selected Interior Minister Bruno Retailleau as party leader and likely 2027 presidential candidate. Portugal's Democratic Alliance won the May 18 snap election, forming another minority government.
• Spain's PM Pedro Sánchez faces growing calls for early elections amid corruption allegations.
• Romania's pro-EU Bucharest mayor Nicușor Dan won the general election, defeating far-right candidate George Simion.

Focus On: EU Labor Market

Despite tepid growth, the Euro area remains close to maximum employment, with the employment to population ratio at 75.3%, up from 72.7% pre-pandemic. Vacancies also remain above pre-pandemic levels, and Ukrainian returnees are draining labor supply. Earnings continue to lag CPI, explaining the tepid recovery in consumption. As inflation undershoots and the trend reverses, growing real incomes are expected to add to European growth.

Focus On: Transatlantic Trade

Despite the CIT ruling Trump's "Liberation Day" tariffs illegal, his administration is pressing ahead with the protectionist agenda, doubling steel and aluminum tariffs to 50%. EU negotiator Maroš Šefčovič proposed a "zero-for-zero" deal eliminating all industrial goods tariffs, but Trump has reportedly rejected the offer. EU exports to the U.S. normalized in April following a March surge in frontloaded shipments. EU efforts to reduce trade reliance on the U.S. continue, with negotiations advancing on FTAs with India, Australia, and the UAE. The Commission has announced a consultation on new potential tariff countermeasures that could target up to €95bn in U.S. imports and €4.4bn in export restrictions.

For more in-depth analysis and updates on the European economy, sign up for our Europe coverage at https://auroramacro.com/europe-coverage. Stay informed with the latest insights from our team of experts, including Chief Economist Dimitris Valatsas and Lead Analyst Cosimo Shahenshah. Don't miss out on the opportunity to gain valuable knowledge and stay ahead in the ever-changing economic landscape.