The International Monetary Fund (IMF) Executive Board has concluded its 2025 discussions on euro area policies with member countries. This year's consultation included a review of the Financial Sector Assessment Program (FSAP) findings for the region.
The IMF projects moderate growth for the euro area over 2025-27, impacted by trade tensions and geopolitical uncertainties despite increased defense and infrastructure spending. Inflation is expected to remain stable, with headline inflation reaching target levels by mid-2025 and core inflation returning to 2% in 2026.
Growth risks are seen as negative due to potential tariff escalations and ongoing geopolitical tensions, which may outweigh any positive effects from fiscal easing. Inflation risks are considered two-sided, influenced by factors such as trade diversion and recent euro appreciation.
A comprehensive policy strategy is deemed necessary to enhance Europe's growth potential and financial resilience. Reforms suggested include strengthening the EU single market, enhancing energy security, and focusing EU budget investments on common public goods.
The FSAP identified that while the banking system is generally well-capitalized and liquid, certain banks could face stress-related challenges. Recommendations include implementing international capital standards (Basel III), enhancing resources for non-bank financial institution oversight, introducing a common deposit insurance system, and improving liquidity arrangements during bank resolutions.
Executive Directors noted the resilience of the euro area's economy but highlighted challenges from US tariffs, geopolitical tensions, and elevated uncertainty affecting growth prospects. They urged decisive actions at the EU level to strengthen economic footing in a complex global environment.
Directors emphasized deepening the single market to boost investment and innovation. They supported proposals for uniform corporate regulations across Europe to facilitate business expansion. Advancing capital markets union was seen as crucial for channeling savings into innovative projects.
Coordinated efforts at the EU level were recommended to manage fiscal tradeoffs effectively. Directors stressed creating a streamlined budget responsive to changing needs through regular borrowing paired with resources supporting debt service.
Monetary policy close to neutral was advised given current inflation targets and output gaps. Directors welcomed FSAP findings but encouraged further monitoring of banks' exposure to liquidity risks amid expanding nonbank financial intermediation sectors.