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The European Union’s economic and financial outlook for 2025 presents both challenges and opportunities. Trade uncertainties, fiscal tightening, and the restructuring of international aid programs are key factors influencing the EU’s trajectory. At the same time, shifts in U.S. foreign aid policy, particularly changes in the United States Agency for International Development (USAID), are prompting the EU to reassess its approach to international partnerships and foreign aid. The euro area economy is expected to grow by 0.8% in 2025, falling short of the 1.2% consensus forecast. Despite trade uncertainties with the U.S. and ongoing fiscal tightening, modest growth is anticipated. Goldman Sachs Research predicts that Germany’s GDP will contract by 0.3%, France’s economy will shrink by 0.7%, and Spain’s GDP will grow by 2%. Several factors contribute to this subdued outlook, including increased trade policy uncertainty, structural challenges in manufacturing such as high energy prices and competition from China, and fiscal consolidation efforts across the Euro area. Nevertheless, positive growth momentum, rising real incomes, and resilience in Southern Europe provide some optimism. The EU’s 2025 budget is set at €200 billion, a 6% increase from the previous year. This budget is intended to address the needs of European citizens while managing debt repayment. However, proposed funding cuts to programs such as Horizon Europe, the Digital strand of the Connecting Europe Facility (CEF-Digital), InvestEU, Erasmus, and the Citizens, Equality, Rights, and Values (CERV) program have raised concerns. The EU continues to struggle with filling its investment gap, as many member states are running high budget deficits that violate fiscal rules. Eight countries, including France and Italy, face an “excessive deficit procedure” for breaching the EU’s 3% budget deficit threshold. The European Commission is emphasizing private investment to address these gaps, particularly as the EU’s €800 billion “NextGenerationEU” COVID-19 recovery fund is set to expire in 2026 with limited support for renewal. Donald Trump’s decision to freeze U.S. emergency and development aid programs has caused significant concern among European humanitarian organizations.

The U.S.’s retreat from foreign aid creates an opportunity for other global powers, particularly China and Russia, to expand their influence through strategic investments. China’s Belt and Road Initiative (BRI) has already demonstrated its ability to fill aid and infrastructure gaps worldwide, particularly in Africa and Eastern Europe—two regions where USAID has historically played an active role. If the EU does not respond proactively, it risks losing its standing as a leader in global development, ceding influence to authoritarian regimes that may not prioritize democratic governance and human rights.

In 2023, USAID distributed $62.4 billion in aid to over 130 countries, and the potential permanent shutdown of USAID poses major challenges for European NGOs. The loss of U.S. funding could also impact EU-funded Multi-Donor Action programs, which rely on support from multiple contributors. While the European Commission has reaffirmed its commitment to humanitarian aid, several European countries, including France, the UK, and Germany, have announced foreign aid cuts for 2025. The EU is reviewing its foreign aid programs to better align them with strategic interests in response to the shifting global aid landscape. With the Trump administration restructuring USAID, the European Commission is working to make EU foreign aid more targeted and effective. The EU aims to use its aid strategically to strengthen alliances, secure access to raw materials, and manage migration challenges. However, its overall budget remains strained due to competing priorities such as the green transition and defense spending. The EU’s economic and financial landscape in 2025 is shaped by trade policies, structural challenges, and fiscal constraints. The region is projected to experience modest growth, but risks remain. Changes in U.S. foreign aid policy and the restructuring of USAID introduce additional uncertainties for European NGOs and aid organizations. The EU must balance budget constraints while addressing economic growth, social programs, and international commitments. By restructuring its foreign aid strategy and adapting to shifting global dynamics, the EU can work toward maintaining stability and promoting its interests in the international arena.

Written by: Nenad Stekić