Europe may find itself in “negative growth territory” before the end of the year if the Iran war and US macroeconomic development misalign, eurozone finance ministers heard on Thursday.
This week’s Eurogroup agenda ranged from tanks to tokens. Ministers covered defence spending, artificial intelligence, digital finance, the international role of the euro, and the fiscal outlook for 2026 and 2027. But it was Pierre Gramegna, managing director of the European Stability Mechanism, who delivered the starkest warning of the evening.
ESM simulations show that if a Middle East re-escalation and a sharp repricing of US assets were to materialise simultaneously, the euro area could move into “slightly negative growth territory”, a polite economist’s term for recession (even as a shrinking economy does not necessarily mean a recession in the technical sense of the word). Also, inflation may rise to close to five per cent by year-end. “Every exception carved out today will require more fiscal adjustments tomorrow,” Mr Gramegna warned against possible doveish pressures.
Spending more, but carefully
The breadth of the discussion on 9 July reflected a deliberate strategic choice by the group’s new president. Kyriakos Pierrakakis opened by framing the meeting’s purpose in expansive terms. “Competitiveness, technology, artificial intelligence, energy security and geopolitics are no longer separate policy areas,” he said. “They are different dimensions of the same economic reality.”
That philosophy shaped both the agenda and the new twelve-month work programme the Eurogroup approved, built around four priorities: fiscal policy coordination, the Savings and Investment Union, competitiveness and economic security, and strengthening the euro as an international and digital currency.
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The macroeconomic backdrop was sobering. The European Commission’s Spring Forecast now expects euro area growth to slow in 2026 before a moderate recovery in 2027. Inflation due to higher energy prices in connection to the Middle East conflict, is likely to reach three per cent this year before easing toward the two per cent target in 2027.
The aggregate euro area deficit is likely to rise to 3.3 per cent of GDP in 2026 and 3.5 per cent in 2027. Public debt is to reach 90.2 per cent of GDP this year and 91.2 per cent in 2027.
A mild expansion
The fiscal stance for 2026 is to turn mildly expansionary, driven by the Recovery and Resilience Facility, growth in national current expenditure, and rising defence investment. The Eurogroup endorsed the Commission’s assessment that this stance is appropriate, while cautioning that a more expansionary position would not be.
In 2027, with the RRF winding down, the stance is projected to return to broadly neutral. Mr Pierrakakis put the numbers plainly: the group expects an expansionary rate of 0.27 per cent of GDP this year, moving to broadly neutral next year.
Competitiveness, technology, artificial intelligence, energy security and geopolitics are no longer separate policy areas. — Kyriakos Pierrakakis, Eurogroup president
Fourteen euro area member states have activated the national escape clause for defence, allowing additional spending outside normal fiscal rules. The Eurogroup backed extending the clause’s scope to cover measures that strengthen energy system resilience and accelerate the shift away from fossil fuels, while insisting that fiscal sustainability must be maintained.
Algorithms and anchors
European Commission Economy Commissioner Valdis Dombrovskis was direct on the limits of flexibility. “While we must continue to invest to confront new challenges, many member states will need to take steps to be in line with the EU’s fiscal framework next year,” he said.
A substantial portion of the meeting addressed artificial intelligence and digital finance. The Eurogroup welcomed Arthur Mensch, founder and chief executive of Mistral, one of Europe’s leading AI companies, for a discussion on AI’s implications for financial stability and European competitiveness. Both the European Systemic Risk Board and the Single Supervisory Mechanism had, in the same week, flagged risks from frontier AI models.
Mr Pierrakakis acknowledged both the opportunity and the threat. “Artificial intelligence can significantly strengthen our financial system by improving risk management, increasing the efficiency of financial services and enhancing our resilience against even more sophisticated cyber attacks,” he said. “At the same time, however, those very capabilities can also be used maliciously, creating new vulnerabilities and new systemic risks.”
The euro’s global moment
The Eurogroup also adopted a common statement on digital finance, concluding a dedicated work stream that had run for several months. Ministers welcomed the European Parliament’s vote earlier on 9 July in favour of the digital euro. Mr Dombrovskis described the project as central to the EU’s digital finance agenda and said he looked forward to trilogue negotiations beginning the following week.
The meeting’s third substantive discussion concerned the euro’s international role. An ECB report presented to ministers confirmed that the euro strengthened its international position moderately in 2025, with signs of growing use as a safe-haven currency amid dollar diversification. Mr Gramegna noted that Europe’s large savings pool, exceeding €10tn, could, through the Savings and Investment Union, be channelled into productive investment, reinforcing the currency’s global standing.
While we must continue to invest to confront new challenges, many member states will need to take steps to be in line with the EU’s fiscal framework next year. — Valdis Dombrovskis, EU economy commissioner
Spain’s proposal to create a common EU safe asset generated discussion. Mr Gramegna confirmed that ministers would examine it further at deputies’ level in the coming months. He declined to characterise the mood in the room—the meeting is informal—but was clear that disagreements remain. “All of us, regardless of where we agree and where we disagree, have a common understanding about the fact that we need to move fast,” he said.
The Eurogroup will review euro area budgetary policies again in December, informed by Commission opinions on member states’ draft budgetary plans for 2027.
