The year end prediction of 2 per cent threshold for the GDP will not happen now as the current expectation is a paltry 0.9 per cent for 2025, 1.1 per cent for 2026 and 1.3 per cent in 2027, but surprisingly, Europe had experienced a strong recovery in 2022 with a 3.4 per cent growth, until the Ukrainian war spoilt it all.
WAR – THE MAJOR ECONOMIC DISRUPTOR
As of now, even the predicted 2 per cent threshold will not be reached for a few years as the impact of the war has crippled European Union (EU’s) supply chains far too long. Former Italian Prime Minister Paolo Gentiloni, who oversaw the European economy, attributes the causes squarely to the sustained Ukrainian war with Russia. He said, “the war has had significant economic consequences, particularly with energy costs, inflation and broader difficulties across Europe. While the invasion was a global event, its economic effects have been felt more acutely in Europe than anywhere else.
DEBT FEARS AMID RECOVERY
Consequently, Europe had to issue an 800 billion euros common debt despite the fairy-tale 3.4 per cent GDP growth in 2022, fearing a risk of fragmentation within the colossal single market. One silver lining in the current slow ambience is that the public investment is increasing and is expected to steadily grow through 2026, which is quite the contrary to the 2008 scenario when it steeply declined. Due to the war crisis, European trade, which was a surplus in 2023 and 2024, is currently experiencing a trade deficit as its share of world imports dipped to 14.4 per cent and exports sank to 15.8 per cent. So, the European economy is going through an elongated period of convalescence, and the pundits forecast difficult times and future uncertainties, but sternly term any protection ism will be negative. If someone thinks Europe’s competitiveness is getting eroded, it is, yes, due to several factors such as uncertainty over climate change and the tech start-ups scaling outside the EU, chiefly to the US. The trend is that many overseas investors are buying out EU companies, and 300 billion euros in savings are going out owing to the innovation gap. Also, EU generously doles out 20 billion euros (0.1 per cent of euro GDP) to the Ukraine war from the 50 billion euros Ukraine kitty and 85 billion euros (0.2 per cent of euro GDP) loan financed from frozen Russian assets in Europe.
RISING GLOBAL PLAYERS INTENSIFY PRESSURE
The slow growth is also due to the contributions of countries like India and Brazil to world trade. India has increased its exports by 3.16 per cent in the first quarter of 2025, and the exports are expected to go up to 6 per cent in the next five years. Brazil also posted a positive trade balance, increasing its exports by 5.64 per cent in March and April 2025. Another major thorn in the flesh is the phenomenally increasing energy costs across Europe, including Britain, due to the war and supply chain disruptions, as well as weakening demand within and externally. This crisis is augmented by low productivity growth and a lack of competitiveness.
MOUNTING DEBT-GDP RATIO
Paul Krugman, an Economic Nobel laureate said, “One of the biggest barriers to economic growth in Europe has been an obsession with reducing debt, especially in Germany. Since the Euro debt crisis of 2010, the EU has prioritised trying to reduce fiscal deficits, leading to weak economic growth.” The cause of the decline is predominantly attributed to the failure to reduce the debt-to-GDP ratio. Italy’s debt soared while the country took stern efforts to cut borrowing. The outcome is a reduced tax revenue due to sluggish economic growth. The entire EU is caught in a quagmire of low productivity and austerity, thus lowering confidence levels. It is widely believed that Italy is representative of the EU’s economic stagnation, having the worst wage growth among the developed nations. To add insult to injury, the soaring interest rates across Europe have compounded the livelihood difficulties. The mortgage interest rates jumped to 5.75 per cent from 2.7 per cent, on average, after the Covid era and the lending rates too, affecting both households and businesses. Some of the countries worse off in terms of mortgage interest rates are Hungary – 7.2 per cent, Poland – 6.9 per cent and Romania – 6.86 per cent. The European Central Bank increased the interest rates steeply to tackle inflation. But the expected cuts have not happened yet as inflation has not relented until now, pushing households to exercise austerity. Also, the expected wage increases happened only minimally. The external borrowings or public debt of national governments further add to the woes. For example, if an economy is USD 6 trillion and its external debt is USD 3 trillion, its debt-to-GDP ratio is 50 per cent. None of the EU countries have the ratio under control, which will ultimately lead to economic instability. Greece is the worst with a debt of 158. 2 per cent debt to the GDP, Italy (136.3 per cent), France (113.8 per cent), Belgium (105.6 per cent), Spain (104.3 per cent), Portugal (97.5 per cent), Austria (87.2 per cent), Finland (81.5 per cent), Hungary (76 per cent), Germany (62.4 per cent) and Britain (100 per cent). According to the Organisation for Economic Cooperation and Development (OECD) figures, the over all EU’s debt-to-GDP ratio has increased from 88 per cent in 2023 to nearly 90 per cent in 2025 and will further increase to 92 per cent in 2026. Most of the slowdown of the EU economy is directly proportional to the mindless borrowing of these major EU countries. Even though the ideal debt-to-GDP ratio varies from country to country and is based on its revenue generation and economic growth, a high ratio is not at all desirable, and it amplifies the default risk at some point. Former Governor, Reserve Bank of India Dr Subbarao said, “High debt-to-GDP ratio is a major concern for any n tion as this would worry the overseas investors as it is one of the principal factors affecting the macroeconomic stability.”
STRUCTURAL GAPS IN THE EU FRAMEWORK
Federico Steinberg, a visiting Fellow of Europe, Russia and Eurasia programme of the Centre for Strategic and International Studies based in Washington, sums up the shortcomings of the EU, “EU is the deepest and most successful integration experiment in history and is a single market for trade, services, investment and the movement of workers, with strict competition rules that ensure a level playing field and a complex supranational political structure composed of the European Commis sion, the EU Council and the European Parliament. But the EU has an incomplete banking union as there is no common deposit guarantee fund and has neither a capital markets union nor a full fiscal union like the US or Israel.”
CAN EUROPE BOUNCE BACK?
So, what are the choices for Europe to stage a solid recovery? Europe has employed several remedial measures such as a strong industrial policy that does not out-run climate change targets, rectifying economic sluggishness ravaged by pandemic, war and supply chain disruptions, while reducing the risk from dependency on unstable regions, narrowing the gap of overlapping red-tape between national governments and European Commission and boosting both public and private investment. According to Trading Economics, the EU’s total exports, in 2024, stood at 2.8 trillion dollars, which is expected to decline to 2.5 trillion in 2025 and is expected to further decline in 2026. The EU’s total imports in 2024 stood at 2.64 trillion dollars with a trade surplus of 159 billion dol lars. Despite exports being affected by front-loading amid growing trade frictions and elevated geopolitical tensions, the balance of services trade remained positive, and the current account surplus for the last 12 months increased to 2.9 per cent of euro area GDP in March 2025. The EU now scrambles to bridge the innovation gap by recapitulating the technological edge it once had similar to US, Israel, China, Japan, Korea and a few other developing nations. Europe’s economic struggle is not rooted in a single cause but is a confluence of persistent structural weaknesses, geopolitical tensions, and policy missteps. While there are signs of resilience—like public investment and a stable services trade—recovery remains fragile and un even. Without bold fiscal integration, targeted innovation strategies and competitive reforms, Europe risks lagging further behind global peers. The challenge now lies not just in weathering the storm, but in building long-term economic coherence across the union.