EU defies tariff headwinds with steady growth through 2027

BRUSSELS (CN) — The European Union’s economy is holding up better than expected despite a wave of U.S. tariffs and global trade tensions, but officials warned Monday the bloc can no longer rely on external demand for growth.

The European Commission projects the EU economy will grow 1.4% in both 2025 and 2026, edging up to 1.5% in 2027 — modest expansion that masks a fundamental shift as the bloc pivots from export-led growth to domestic demand amid historic trade barriers. The eurozone — 20 member states that have adopted the euro — will see slightly slower growth: 1.3% this year, 1.2% next year, and 1.4% in 2027.

The forecast follows a turbulent fall season that saw the trade balance flip from an 11.4 billion-euro ($12.3 billion) surplus to a 5.8 billion-euro deficit in August, while Germany’s industrial output collapsed 5.2%. But officials warned the temporary September recovery won’t last.

“We can no longer afford to contend with just getting by,” Economy Commissioner Valdis Dombrovskis told reporters at a news conference Monday unveiling the commission’s fall economic forecast. “We have a window of opportunity, and we must seize it now.”

Growth in the first nine months of 2025 beat projections, initially driven by companies rushing to export goods before tariffs hit. But the momentum continued even after those levies took effect.

Germany, Europe’s largest economy, continues to struggle. After contracting 0.5% in 2024, German GDP is forecast to grow just 0.2% this year before recovering to 1.2% in 2026 and 2027. The country’s industrial sector has been hit particularly hard, with factory output falling sharply through the summer as tariffs hammered exports to the U.S., Germany’s largest export market.

But Berlin’s fiscal stimulus package — announced earlier this year — provided some lift to the EU-wide forecast. Dombrovskis credited the German measures with contributing to the upward revision from spring projections, noting the positive spillover effects across the bloc’s largest economy.

Berlin is financing the package with nearly 98 billion euros in new borrowing — a controversial break from Germany’s traditionally strict debt limits as the country prioritizes defense and infrastructure spending.

Spain, by contrast, is expected to grow 2.9% this year, 2.3% next year and 2.0% in 2027 — well above EU averages. Greece will see 2.1% growth this year and 2.2% in 2026.

Those aren’t blockbuster numbers. But they represent steady expansion despite mounting challenges. The forecasts assume U.S. tariffs imposed by Oct. 31 will stay in place through 2027, with European exporters now facing average tariffs of 15% on goods shipped to the United States — higher than Brussels anticipated last spring.

“Globally, trade barriers have reached historic highs,” Dombrovskis said. “The message is clear. We must act and we must act now.”

But European exporters face lower tariffs than major competitors like China and India, giving the EU a “modest relative advantage,” Dombrovskis said — though the strong euro and weak global demand are dampening the upside. With external trade constrained, growth will depend on what’s happening inside Europe’s borders.

“Europe must rely on Europe for growth,” Dombrovskis said.

Trade rebound proves temporary

The trade picture tells a more complicated story than headline numbers suggest. September saw the EU bounce back to a 16.3 billion-euro trade surplus — up from 9.5 billion euros a year earlier and recovering from August’s deficit. But the improvement came almost entirely from companies rushing shipments before tariffs took full effect — a practice known as front-loading.

Seasonally adjusted data for July through September showed EU exports to non-EU countries falling 0.8% while imports dropped 1.3%. The September bounce was driven almost entirely by chemicals — especially pharmaceuticals — where the surplus jumped to 26.9 billion euros from 15.4 billion euros in August.

Machinery and vehicles — Germany’s industrial core — saw their surplus decline to 13.8 billion euros from 16.4 billion euros a year earlier, continuing a slide that saw the sector’s surplus cut in half between July and August.

Net exports are expected to subtract from growth this year and next before turning neutral in 2027 — meaning trade will drag down rather than contribute to economic expansion. Goods exports will slow down in 2026 before rebounding mildly in 2027.

Brussels warned of additional risks from “global trade fragmentation” as trade flows are reshuffled, with goods blocked from U.S. markets seeking other destinations including Europe — potentially intensifying competition for European exporters.

Services exports will continue growing robustly throughout the forecast period, driven by tourism and corporate spending on artificial intelligence and IT infrastructure. But the divergence between struggling goods exports and resilient services highlights Europe’s lopsided recovery.

Andrew Kenningham, chief Europe economist at Capital Economics, said the commission’s tariff impact estimate of 0.1% to 0.3% of GDP is roughly accurate — his firm projects tariffs will reduce eurozone GDP by around 0.1% this year.

But he pointed to a deeper structural problem. “The bigger difference between the euro-zone and U.S. will be that Europe is not benefitting much from investment in AI, whereas that is driving a boom in the U.S.,” Kenningham told Courthouse News. “Also, diffusion of AI tools through the economy is lagging that [of] the U.S. and will continue to do so in our view.”

The technology gap helps explain why U.S. growth is forecast at 1.8% this year — slowing from 2.8% in 2024 but still outpacing the eurozone’s 1.3% — despite both economies facing similar global headwinds. EU officials also flagged concerns about “repricing of risks in equity markets, especially in the U.S. technology sector” that could impact investor confidence and financing conditions across the Atlantic.

Daniel Kral, lead economist at Oxford Economics, pointed to another structural challenge: a “China shock 2.0,” as declining demand from Beijing and intense competition from Chinese producers hit European markets. “This is not going away, so the coming German fiscal stimulus, aimed at kick-starting a cyclical turn, will not help,” he said.

Overall, risks to the outlook tilt negative. Further restrictions, geopolitical flare-ups, financial market turbulence and domestic political uncertainty could all drag down growth.

Domestic demand holds up

EU pandemic recovery funds are cushioning budget cuts in several member states, propping up domestic demand as the main growth engine. Inflation is moderating toward the ECB’s 2% target by 2027, falling from 2.6% in the EU this year to 2.2% in 2027. Services prices, which spiked to 3.2% in September, are expected to decline as wage pressures ease. The improving inflation outlook gives the ECB room to continue cutting rates if growth disappoints.

The job market remains solid, with the EU adding 380,000 jobs in the first half of 2025. Unemployment should tick down to 5.8% by 2027 from 5.9% this year.

Still, budget deficits are widening as European countries ramp up military spending. Defense outlays are climbing from 1.5% of GDP last year to 2% in 2027 — meeting NATO’s longstanding 2% target, though the alliance agreed in June to raise the goal to 3.5% for core defense spending by 2035. The EU’s deficit is expected to rise from 3.1% of GDP in 2024 to 3.4% in 2027.

Eleven member states are projected to run deficits exceeding the EU’s 3% limit this year, including Germany, France, Poland and Romania. France’s deficit remains elevated at 5.5% this year, putting major strain on the government.

Italy, meanwhile, is on track to exit excessive deficit procedure — Brussels’ enforcement mechanism for countries breaking budget rules — with its deficit forecast at 3.0% this year — a milestone for a country that has struggled with fiscal discipline for decades.

Public debt is also rising, from 82% to 85% of GDP EU-wide by 2027, with Greece, Italy, France and Belgium all expected to exceed 100% of GDP.

On the upside, progress on reforms, defense spending focused on European production and new trade deals could boost activity beyond projections.

The commission will reassess its projections in May 2026, when the full impact of front-loading’s end and potential further trade restrictions should be clearer. By then, Europe will also know whether domestic demand can truly compensate for weakening external trade.

Courthouse News correspondent Yuval Molina is based in Brussels, Belgium.