LONDON: Weak external demand and the impact of conflicts slowed economic growth again in countries covered by the European Bank for Reconstruction and Development (EBRD), the lender said in a semi-annual report released on Thursday.
The 0.3 percentage point revision, to 3.2% growth for 2025, is the bank’s third straight downward change to the economic outlook for its region, which covers emerging Europe, central Asia, the Middle East and Africa.
It warned that uncertainty around tariffs, trade wars, flagging European competitiveness and a fading “peace dividend” loomed over future prospects.
“What we see is subdued global growth momentum,” said EBRD Chief Economist Beata Javorcik. While uncertainty over trade rules can by itself have a “significant detrimental effect” on trade, investment and production, Javorcik said, slowing growth in Germany would have an even more significant direct impact on EBRD economies than tariffs.
Already, she said, there was anecdotal evidence of lower demand, for example from German automakers for Romanian IT services.
“What matters for our countries is this persistent differential between Europe, advanced Europe, and the US that has emerged,” she said.
Javorcik pointed to data showing European companies falling behind those in China and the United States in research and development spending.
The fading “peace dividend” could further sap that sort of investment as countries plow more money into defence at the expense of other investments.
“We are seeing this erosion of the peace dividend that’s going, particularly in the environment of higher interest rates, to crowd out social spending, crowd out spending that leads to investment in long-term growth.”
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Defence spending as a portion of GDP in EBRD regions nearly doubled over the last decade, from around 1.8% of GDP in 2014 to around 3.5% in 2023, with big increases in Ukraine, Poland and Estonia but also Lebanon, Armenia and Kyrgyzstan.
Whether such spending could boost economic growth, Javorcik said, hinged on whether it benefited domestic industry or focused on imports.
But, she added, a European version of the US Defense Advanced Research Projects Agency, which develops new technologies for the military, could help.
“If the EU were to embark on this mission-led approach to defence, with big investments in research and development…, spillovers of that R&D effort to civilian usage could boost competitiveness and innovation in Europe,” she said.
“That could alleviate some of the challenges related to Europe falling behind our innovation relative to the US”.
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