Euro Area Policies: 2025 Annual Consultation-Press Release; Staff Report; and Statement by the Executive Director for Member Countries

This paper presents Euro Area Policies’ 2025 Annual Consultation. Growth in the euro area is likely to stay moderate over 2025-27. Trade tensions and elevated uncertainty are expected to weigh on activity, despite some boost from higher defense and infrastructure spending. Risks to growth are on the downside while they are two sided for inflation. Trade policy uncertainty, potential tariff escalations, and ongoing geopolitical tensions may negatively impact demand and growth more than previously anticipated. The euro area financial sector assessment program (FSAP) found the banking system to be adequately capitalized and liquid overall, while some banks would dip into their buffers under stress. It identified financial stability risks stemming from interlinkages with non-bank financial institutions and called on the authorities to enhance data sharing, strengthen systemic risk monitoring, and conduct system-wide stress tests. The FSAP recommended fully implementing the international capital standard for banks (Basel III); strengthening the resources and prudential powers of the European authorities overseeing nonbank financial institutions; introducing a common deposit insurance system; making bail-in requirements more flexible; and strengthening arrangements for liquidity in resolution.