The eurozone economy nearly ground to a halt in the second quarter of 2025, with growth flatlining amid a sharp downturn in industrial production and renewed concerns over the region’s fragile recovery.
According to Eurostat’s second-quarter estimate released Thursday, gross domestic product (GDP) in the euro area expanded by just 0.1% in the three months to June, matching the initial flash reading. The wider European Union (EU) recorded a modest 0.2% gain. Both results marked a steep slowdown from the first quarter, when eurozone GDP rose by 0.6% and EU GDP by 0.5%, buoyed by strong exports.
The latest data puts the eurozone well behind the United States, where the economy grew 0.7% in the same period after contracting slightly in the first quarter. On an annual basis, eurozone GDP rose 1.4%, compared to the US’s 2.0%.
National Divergences
Economic performance varied widely across member states. Spain emerged as the standout performer with 0.7% quarterly growth, driven by strong domestic demand and increased capital investment. Portugal followed with a 0.6% gain, while France posted a modest 0.3% rise.
Germany and Italy, the bloc’s largest and third-largest economies, both contracted by 0.1%. Germany’s decline reflected weakness in investment, particularly in construction and capital goods, while Italy’s downturn was linked to sluggish consumption and falling industrial activity. Ireland recorded the steepest contraction at 1%.
Elsewhere, Eastern European members fared better, with Romania and Poland expanding by 1.2% and 0.8% respectively, supported by resilient consumer spending and EU recovery fund inflows.
Industrial Output Slump
Adding to concerns, eurozone industrial production fell 1.3% in June, reversing a 1.1% rise in May and exceeding expectations for a smaller drop. The decline was broad-based, with capital goods output down 2.2% and non-durable consumer goods tumbling 4.7%. The EU as a whole saw a 1% fall.
Ireland experienced the sharpest monthly production drop at 11.3%, followed by Portugal and Lithuania. In contrast, Belgium, France, and Sweden recorded notable gains.
Shifting Sentiment
While the euro area continues to trail the US in growth and productivity, analysts at Goldman Sachs note a shift in investor sentiment toward Europe. They cite Germany’s fiscal policy adjustments and increased uncertainty in the US as factors attracting capital flows to the continent. The bank has raised its eurozone growth forecast for 2027 by 1.2% since January, while lowering its US forecast by 1.7%.
Challenges and Opportunities
Despite the more optimistic outlook, Europe faces persistent structural challenges, including high energy costs, fragmented regulation, and sluggish productivity growth. Competition from China in manufacturing has further eroded export strength.
However, policymakers see potential in increased public investment, particularly from the EU’s recovery fund and Germany’s €500 billion infrastructure programme. The bloc’s leadership in pharmaceuticals, green technologies, and potential for deeper capital market integration could underpin future growth.
Efforts such as the European Commission’s Competitiveness Compass, shaped by the Draghi and Letta reports, aim to accelerate reforms and strengthen the single market. Economists argue that decisive action now could help Europe sustain stronger growth through 2028.
