The Council adopted its position on 21st October, proposing an exemption from the obligation to appoint an authorised representative in another EU country when the amount of packaging placed on that country’s market remains below one tonne per calendar year.
The measure addresses complaints from small and medium-sized enterprises that the Packaging and Packaging Waste Regulation, which became applicable on 12th August 2026, creates unnecessary expenses for companies engaged in relatively modest volumes of cross-border commerce.
The proposal forms part of the EU’s eighth legislative simplification package and will now be negotiated with the European Parliament.
Under the Packaging and Packaging Waste Regulation, businesses placing packaging or packaged products on the European market are subject to obligations concerning waste management and extended producer responsibility.
The extended producer responsibility system requires producers to contribute to the management of waste generated by products and packaging placed on the market.
For businesses operating across borders, the framework also includes requirements concerning authorised representatives in member states where producers are not established.
These representatives perform specified compliance functions and provide a point of contact for national authorities.
The system can create substantial administrative obligations for businesses trading in several countries, particularly when the quantity of packaging supplied to individual markets is limited.
A small Belgian retailer, for example, may sell products to customers in Germany, France and the Netherlands without maintaining physical operations in those countries.
The requirement to arrange representation separately across different markets can add compliance costs regardless of whether the volume of trade justifies them.
Under the Council’s proposal, eligible EU-based producers placing less than one tonne of packaging annually on another member state’s market could be exempted from appointing a representative there.
The threshold would be assessed by reference to the quantity placed on the market of the member state concerned.
However, the proposed exemption would not abolish the wider principle of extended producer responsibility or automatically release businesses from their other environmental obligations.
The regulatory changes come only two months after the EU’s revised packaging framework began applying across the single market.
The legislation, Regulation (EU) 2025/40, is intended to reduce packaging waste, improve recyclability and establish more consistent requirements for products and packaging materials.
It covers an extensive range of commercial activities, including manufacturing, retail, food distribution, transport packaging and online sales.
As EU Today reported when the regulation began applying in August, the legislation introduces new requirements affecting packaging design, materials and waste prevention.
However, the practical implications for smaller firms have generated pressure for modifications.
In September, EU Today examined the emerging campaign for simplification, as business organisations questioned whether the compliance system adequately reflected the circumstances of smaller producers.
The Council’s latest agreement represents a further legislative step, replacing general calls for administrative relief with a specific negotiating position.
The Commission also issued detailed implementation guidance in June 2026 after receiving numerous questions from member states and businesses about how the regulation should be interpreted.
The proposed exemption would not apply without conditions.
The Council’s negotiating mandate includes a safeguard allowing the relevant authorities to respond when a producer fails to comply with extended producer responsibility obligations.
It also provides for the European Commission to review the duration of the temporary suspension by 31st December 2030, ahead of its scheduled expiry in 2032.
The timetable reflects the possibility that broader reform of producer responsibility arrangements could replace the temporary measure.
The Commission is preparing a Circular Economy Act intended to address additional problems affecting Europe’s recycling and secondary raw materials markets.
That initiative could provide a more comprehensive framework for the administration of producer responsibility systems across member states.
For now, the Council has opted for a narrower intervention designed to reduce the immediate burden on smaller companies without reopening the entire packaging regulation.
The proposal also reflects a broader problem with European regulatory integration.
Although companies can sell goods throughout the single market, compliance requirements often remain administered through national systems, requiring businesses to deal with separate authorities and procedures.
For multinational corporations, such costs can be distributed across substantial commercial operations. For smaller exporters and online retailers, similar administrative requirements can consume a much greater proportion of turnover.
The Council argues that removing unnecessary representation requirements would support cross-border trade while preserving the objectives of European environmental legislation.
The Irish presidency will now seek agreement with the European Parliament on the proposed amendment.
Until that legislation is adopted and becomes applicable, businesses must continue to comply with the existing rules, including relevant national producer responsibility requirements.
The agreement, announced on Wednesday, 21st October, follows negotiations between the Council and European Parliament over changes to prudential requirements and the regulation governing securitised financial products.
The reform package agreed by EU negotiators would reduce capital requirements for lower-risk transactions, introduce a new category of resilient securitisations and simplify administrative procedures for financial institutions and investors.
It forms part of the EU’s Savings and Investments Union initiative, which aims to channel more private capital into the European economy.
Securitisation allows banks and other lenders to combine financial assets, including mortgages, consumer credit and corporate loans, into securities that can be purchased by investors.
By transferring some of the financial risks associated with these assets, banks can reduce the amount of regulatory capital they are required to maintain against particular exposures.
This can increase their capacity to extend new loans, although it does not guarantee that additional lending will follow.
The provisional agreement would recalibrate capital requirements according to the risk of individual transactions.
Lower-risk securitisations would receive more favourable treatment, while higher capital requirements would continue to apply to riskier structures.
A new category of resilient securitisations would be introduced alongside the existing framework for simple, transparent and standardised transactions, commonly known as STS securitisations.
The agreement would also strengthen supervision of independent organisations responsible for verifying compliance with the STS criteria.
The Council said that third-party verifiers would become subject to EU-level supervision, with the aim of improving consistency across national markets.
The reforms address a long-standing concern that European banks face higher administrative and capital costs for securitisation than competitors operating under other regulatory systems.
Following the financial crisis of 2008, European authorities introduced tighter rules governing structured financial products, including restrictions intended to improve transparency and ensure that lenders retained appropriate exposure to credit risks.
The resulting framework, which began applying in 2019, strengthened investor protection but also increased compliance costs.
The European Commission proposed the latest review in June 2025, arguing that the existing arrangements had constrained the development of securitisation as a financing tool.
According to the Association for Financial Markets in Europe, approximately €252.3 billion in securitised products was issued across Europe in 2025, with €156.3 billion placed with investors.
Those figures cover the wider European market, including activity outside the EU.
Brussels regards the development of deeper financial markets as necessary to finance infrastructure, technological investment and industrial development.
As EU Today previously reported, the EU’s largest economies have also been examining proposals to strengthen supervision and reduce fragmentation across European capital markets.
The potential benefits of securitisation are not automatic.
Research published by economists on the European Central Bank’s website in September 2026 found that banks using synthetic securitisation increased corporate lending only modestly, while also distributing more capital to shareholders.
Synthetic securitisation allows banks to transfer credit risk to investors without necessarily removing the underlying loans from their balance sheets.
The researchers found that a one per cent increase in synthetic securitisation issuance was associated with an increase of approximately 0.02 per cent in corporate loan growth.
Their findings also indicated that banks participating in the synthetic securitisation market made greater use of capital released through these transactions to increase dividend payments.
The study suggests that easing capital requirements alone may not generate the substantial expansion in business lending envisaged by European policymakers.
Credit demand, economic conditions and banks’ commercial decisions will also influence whether the reforms produce measurable increases in investment financing.
The provisional agreement includes additional measures intended to encourage participation by institutional investors.
Investment limits for certain regulated funds, known as UCITS, would be increased, while targeted changes would allow insurers and reinsurers greater participation in specified synthetic securitisation transactions.
The package also seeks to facilitate securitisation arrangements used to finance infrastructure projects before they become operational.
Together, these provisions could widen the investor base and make financing structures available to a broader range of businesses and projects.
However, transferring credit exposure between banks and investors does not eliminate the underlying risk.
If borrowers default or the financial institutions providing protection encounter difficulties, losses may still emerge within the wider financial system.
European regulators will therefore have to assess whether the new classification and supervisory arrangements adequately reflect the risks of different securitisation products.
The political agreement now requires legal finalisation and formal approval by the Council and European Parliament.
The new arrangements would then form part of the EU’s wider programme to strengthen financial markets and reduce barriers to investment across the single market.
The eurozone economy has proved more resilient to the energy price shock of 2026 than economists initially expected, supported by increased investment in artificial intelligence, reduced dependence on fossil fuels and higher government expenditure, according to an assessment published by the European Central Bank on Wednesday, 21 October.
ECB economists Óscar Arce, Gerrit Koester and Beatrice Pierluigi found that structural changes in European energy consumption have reduced the economic consequences of rising oil and gas prices. Stronger international demand for technology equipment and additional public spending, particularly in Germany, have also supported growth.
The findings come as the ECB faces renewed inflationary pressure following disruption to global energy markets caused by the conflict involving Iran, raising questions about the outlook for interest rates and economic activity.
In their assessment of the eurozone’s economic resilience, ECB economists reported that economic output continued to expand despite the sharp increase in energy prices earlier this year.
Excluding Ireland, where economic statistics are frequently affected by the activities of multinational companies, real eurozone GDP in the second quarter was 0.6 per cent above its level at the end of 2025.
The ECB also identified quarterly growth of approximately 0.3 per cent over the preceding four quarters, excluding Irish figures.
These results exceeded earlier expectations that the disruption to energy markets would have a greater impact on European manufacturing, consumer spending and business investment.
Nevertheless, the eurozone’s rate of expansion remains modest compared with its longer-term historical performance.
The ECB’s findings suggest that the economy has become better able to absorb international disruptions without experiencing the immediate contractions that might previously have followed comparable energy price increases.
One of the most significant structural changes concerns energy consumption.
According to the ECB, the eurozone economy is now approximately half as dependent on oil as it was during the early 1990s, measured against economic output.
Greater energy efficiency, the expansion of services and investment in alternative electricity generation have progressively reduced the amount of fossil fuel required to produce economic activity.
The growth of renewable energy has also altered the relationship between natural gas prices and electricity costs.
In Spain, the proportion of hours during which gas-fired power stations determined wholesale electricity prices fell from approximately 80 per cent in 2020 to just over 20 per cent during the first nine months of 2026.
France recorded a similar decline, from approximately 60 per cent to around 20 per cent, supported by its extensive nuclear generating capacity.
Consequently, increases in international gas prices are having a smaller effect on electricity markets in countries with substantial renewable or nuclear generation.
The ECB cautioned, however, that European economies remain exposed to global energy disruptions, particularly through industrial activity and international supply chains.
The international expansion of artificial intelligence has generated an additional source of demand for European manufacturers and technology companies.
Investment in computing infrastructure, digital services and specialised equipment has increased demand for products supplied by European businesses.
According to the ECB, global trade has performed considerably better than expected at the end of 2025.
The latest projections indicate international trade growth of approximately 4.7 per cent in 2026, compared with the 2 per cent forecast in December.
AI-related investment accounts for part of that improvement.
European manufacturers producing specialised machinery and technology equipment have benefited from increased export orders, while domestic investment in technology has supported economic activity.
However, the ECB found that the effects vary considerably between sectors.
Technology-equipment manufacturers recorded comparatively strong growth in output, employment and new orders.
Software companies performed better in output terms, but the improvement was less evident in employment and new business.
This uneven performance suggests that the economic benefits of the AI investment cycle are concentrated in particular industries.
Fiscal policy has provided another source of support.
The ECB estimates that the expansionary fiscal stance in the eurozone has increased to approximately 0.5 percentage points of GDP, twice the level anticipated in December 2025.
Much of the additional stimulus reflects higher German government spending on defence and infrastructure.
Other eurozone governments have introduced measures to limit the effect of energy prices on households and businesses.
Public investment and expenditure have therefore helped compensate for weakness in areas affected by higher import costs and international uncertainty.
Yet the ECB warned that fiscal support cannot necessarily continue at its present level.
Several eurozone governments face borrowing constraints, while additional public spending can place pressure on national budgets.
The ECB’s assessment comes amid expectations of further monetary tightening as policymakers respond to renewed energy-related inflation.
The central bank must consider whether higher energy costs will remain temporary or begin influencing wages, prices and inflation expectations more broadly.
Additional interest-rate increases could reduce inflationary pressures but would also raise borrowing costs for businesses, governments and households.
The economic recovery remains exposed to potential reversals in global demand, international trade and investment in artificial intelligence.
The ECB’s economists also identified geopolitical escalation and further supply-chain disruption as continuing risks.
Their findings indicate that reduced fossil-fuel dependence has made the eurozone less vulnerable to energy shocks, while technology investment and government spending have provided additional support.
Whether that resilience continues into 2027 will depend partly on the durability of international demand and the ability of European governments to maintain investment without increasing inflationary pressure.
Russia has carried out its largest sustained reduction in gold reserves since the financial crisis of 1998, disposing of approximately 62 tonnes of the precious metal since December 2025 as the government draws on accumulated reserves to finance a growing federal budget deficit.
According to figures released by the Bank of Russia on Tuesday, 20 October, the country’s monetary gold reserves declined by another 200,000 troy ounces, equivalent to approximately 6.2 tonnes, during September.
The latest reduction brings Russia’s official gold holdings to 72.8 million troy ounces, or approximately 2,264 tonnes, their lowest level since the end of 2019.
The central bank has now reduced its gold holdings for ten consecutive months, reversing the accumulation strategy pursued by Moscow in the years preceding its full-scale invasion of Ukraine.
The scale of the current reduction is exceptional by Russian historical standards.
According to International Monetary Fund data cited in reporting on the latest figures, the only more rapid depletion of Russian gold reserves in the country’s modern history occurred during the 1998 financial crisis.
At that time, Russia’s central bank disposed of approximately 118 tonnes of gold over three months as the government defaulted on domestic debt and the rouble collapsed.
Some of those holdings were subsequently replenished, leaving the country’s gold reserves approximately 50 tonnes lower at the end of 1998.
The reduction recorded during 2026 has already exceeded that annual net decline, although Russia’s present financial position differs substantially from the circumstances surrounding the 1998 default.
The monetary value of Russia’s remaining gold reserves stood at approximately $301.6 billion at the end of September, compared with $333.5 billion a month earlier. The change reflects movements in gold prices as well as the reduction in physical holdings.
The sales come as the Russian government struggles to contain expenditure associated with its continuing military campaign against Ukraine.
Moscow now expects its federal budget deficit to reach 7.3 trillion roubles, approximately $87 billion, in 2026. That represents 3.2 per cent of gross domestic product, twice the deficit originally anticipated.
Military and security expenditure is expected to account for approximately 38 per cent of total federal spending this year.
The government has increasingly relied on its National Wealth Fund, established to accumulate surplus energy revenues, to cover budget shortfalls.
The central bank’s gold transactions are linked to operations involving the fund. Under this mechanism, the Bank of Russia conducts corresponding market sales following Finance Ministry transactions using the fund’s assets.
Figures published by Russia’s Finance Ministry earlier this month showed that the National Wealth Fund’s liquid assets had fallen to approximately 3.8 trillion roubles, equivalent to $45 billion, as of 1 October. This was down from approximately 4 trillion roubles a month earlier.
The fund’s total assets remained substantially larger, at almost 13 trillion roubles, but much of that amount is invested in shares, bonds and other holdings that cannot immediately be converted into funds for government expenditure.
Russia’s fiscal problems have been compounded by weaker oil and gas revenues, a slowdown in economic activity and the increasing cost of sustaining military operations.
Although energy exports continue to generate substantial income, government revenue has failed to keep pace with spending commitments.
Moscow has consequently increased domestic borrowing, introduced additional taxes and sought alternative sources of budget financing.
The latest gold figures provide further evidence of the financial demands imposed by the war, now approaching its fifth anniversary.
They do not indicate that Russia is approaching an immediate financial collapse. The country still holds considerable gold and foreign exchange reserves, with the central bank reporting total international reserves of approximately $731.8 billion at the end of September, although access to part of its overseas assets remains restricted by Western sanctions.
Nevertheless, the continued liquidation of gold holdings reduces the reserve assets available to the Russian authorities at a time when military spending remains elevated and the government faces pressure to meet its domestic financial commitments.
For President Vladimir Putin, the growing budget deficit introduces an additional economic consideration into decisions over the duration of the war.
The September figures show that Moscow is increasingly drawing on assets accumulated before the invasion to support current expenditure, while its capacity to rebuild those reserves remains dependent on future revenues and the government’s ability to restrain spending.
The data show that 300,202 battery-electric cars were registered during the month, accounting for 32.6 per cent of new passenger-car registrations in the markets surveyed.
The figures emerge three days after Paris and Berlin announced a joint position on the future of Europe’s automotive industry, proposing greater flexibility in the EU’s 2035 emissions regime while introducing measures intended to favour vehicles manufactured in Europe.
The latest figures, compiled by E-Mobility Europe, New Automotive and Fier Automotive, indicate that electric vehicle demand accelerated sharply during September.
According to the industry data published on 19 October, approximately 1.98 million battery-electric cars have been registered across the 17 markets during the first nine months of 2026, an increase of 38.1 per cent compared with the equivalent period last year.
Higher oil prices, government incentives and the introduction of more affordable electric models have all contributed to demand.
The figures represent a substantial change in the composition of European new-car sales, although they cover selected markets rather than constituting a complete statistical account of the EU’s 27 Member States.
France recorded 65,243 battery-electric registrations in September, representing 41.7 per cent of its new-car market. Germany registered 88,724 electric vehicles, giving the technology a market share of 34.6 per cent.
Both countries have substantial automotive manufacturing industries and are directly involved in negotiations over Europe’s future emissions legislation.
Despite the overall increase, electric vehicle adoption remains uneven across the continent.
Norway retained its position as Europe’s most electrified new-car market, with battery-electric vehicles accounting for 98.8 per cent of registrations in September.
Denmark followed with 88.8 per cent, while Finland recorded 62.7 per cent and Sweden 49 per cent.
Electric models also accounted for approximately half of new-car registrations in Belgium, the Netherlands, Ireland and Portugal.
At the other end of the market, battery-electric vehicles represented only 11.2 per cent of registrations in the Czech Republic, 7.6 per cent in Italy and 6.2 per cent in Poland.
These differences illustrate the difficulty of establishing a uniform European transition timetable.
Household incomes, purchase incentives, vehicle prices and charging infrastructure differ substantially between countries. The availability of affordable electric cars is particularly important in markets where buyers are more sensitive to the initial purchase price.
The varying national figures also complicate the EU’s industrial calculations, since manufacturers must operate across markets progressing at different rates.
On 16 October, French President Emmanuel Macron and German Chancellor Friedrich Merz agreed on a joint approach to changes in European automotive regulations.
Under the proposed compromise, car manufacturers would be required to reduce carbon dioxide emissions from new vehicles by 90 per cent by 2035 compared with the 2021 reference level.
The agreement would also remove a proposed requirement to compensate for the remaining emissions through measures such as the use of low-carbon steel.
The change would create additional opportunities for manufacturers to continue selling vehicles powered by combustion engines beyond 2035, subject to the final legislative framework.
In their joint declaration on the automotive industry’s future, the French and German governments argued that emissions reduction must be combined with industrial competitiveness, investment and European manufacturing capacity.
The agreement also envisages preferential treatment for vehicles produced in Europe under certain public procurement and subsidy arrangements.
Britain could potentially benefit from provisions allowing selected European partners to qualify under the proposed industrial framework.
The Franco-German understanding is not, however, a final EU legislative decision. Changes to the regulatory regime require agreement through the relevant European legislative procedures.
The principal argument advanced by supporters of greater regulatory flexibility is that European manufacturers need additional time to adapt production, protect employment and compete with international rivals.
German manufacturers retain extensive investment in combustion-engine and hybrid technology, while French producers have placed considerable emphasis on electric vehicles and maintaining European supply chains.
The negotiations therefore concern more than emissions limits. They also involve battery production, access to raw materials, manufacturing costs and the ability of European companies to compete with producers in China and other markets.
Supporters of the existing transition timetable argue that weakening long-term requirements could discourage investment in electric manufacturing capacity just as consumer demand is increasing.
Manufacturers seeking greater flexibility maintain that regulatory targets must account for uneven market conditions and the cost of developing new technologies.
September’s sales figures provide evidence that electric vehicle adoption is accelerating, but they do not establish whether the same rate of growth will continue without existing incentives.
The debate now centres on whether regulatory relaxation will preserve Europe’s automotive industry during the transition or slow investment in the technology that is already capturing an increasing share of the market.
Brussels, 19 October, (Brussels Morning Newspaper) – European stocks fall across major financial markets on Monday as violent protests in France intensify concerns about political stability, government debt and economic growth. French shares led regional losses after a … Read more
The European Public Prosecutor’s Office (EPPO) announced on 16th October that three suspects had been detained in Cyprus, one in Germany and one in Italy following an investigation coordinated by its Munich office.
Investigators believe the suspects established and controlled a network of companies designed to exploit the tax treatment of goods traded between EU member states.
The alleged operation involved smartphone transactions through businesses and so-called missing traders operating in Germany, Albania and Sweden. Prosecutors estimate that the activities caused VAT losses of approximately €80 million in Sweden and €34 million in Germany.
According to the official announcement of the arrests, the operation forms part of a wider investigation known as Midas, which is examining organised cross-border tax fraud.
The arrests were accompanied by searches and seizures in Cyprus, Greece and Italy, conducted with the assistance of national police, financial investigators and tax authorities.
Prosecutors said 12 searches had been carried out at premises connected with the suspects and companies under investigation.
Assets of up to €80,000 were frozen, while investigators also seized or took action against bank accounts, vehicles and property.
The operation involved cooperation between Germany’s tax authorities, Cyprus’s financial intelligence and cybercrime units, the Greek financial police and Italy’s Guardia di Finanza.
The suspects are believed to have played leading roles in organising and controlling the alleged scheme, although prosecutors have not publicly established their individual criminal responsibility.
The investigation remains subject to proceedings before the competent German courts. All suspects are presumed innocent unless proven guilty.
The case concerns a form of tax evasion known as missing-trader intra-community fraud, commonly described as carousel VAT fraud.
Under the EU’s VAT system, qualifying business-to-business transactions involving goods transported between member states are generally exempt from VAT in the country of dispatch.
The purchaser accounts for VAT under the rules applicable in the destination country, while subsequent domestic sales normally involve VAT being charged to the buyer.
Fraudsters can exploit those arrangements by establishing companies that purchase goods through cross-border transactions before reselling them domestically.
A missing trader collects VAT from the purchaser but fails to remit it to the relevant tax authority. Other companies in the transaction chain may then seek deductions or refunds.
The same goods can pass through several businesses and, in some arrangements, move repeatedly between countries, allowing the fraud to be repeated.
Smartphones and electronic equipment are particularly attractive because they are relatively expensive, easily transported and can be traded in large volumes.
The complexity of the arrangements makes investigations difficult when businesses are established in several jurisdictions and transactions move rapidly between companies.
The latest arrests follow another substantial VAT fraud operation announced earlier this month.
On 7th October, the EPPO reported that 62 suspects had been detained in a separate investigation involving alleged losses of at least €410 million.
That operation, known as Hermes, involved searches across eight countries and allegations concerning the sale of mobile phones and other electronic devices.
Although separate from Midas, the investigation illustrates the scale and organisation of suspected VAT fraud involving internationally traded consumer electronics.
According to the EPPO‘s 2025 annual report, prosecutors were handling 3,602 active investigations at the end of last year, with estimated potential damage exceeding €67 billion.
Of that amount, more than €45 billion related to suspected VAT and customs fraud.
Those figures concern estimated losses under investigation, rather than sums established by final court judgments or amounts that have already been recovered.
The financial consequences extend beyond the immediate losses attributed to individual schemes.
VAT is a major source of revenue for national governments and forms part of the system used to calculate certain contributions to the EU budget.
Fraudulent transactions can also distort competition by allowing dishonest operators to offer prices that legitimate businesses cannot match.
The Commission’s 2025 VAT gap report estimated that EU countries failed to collect approximately €128 billion in expected VAT revenue in 2023.
That broader figure includes losses arising from several causes, including administrative errors and insolvency, and cannot be attributed entirely to criminal fraud.
The latest arrests also demonstrate the importance of cross-border investigative cooperation when suspected financial offences involve companies, transactions and assets located in different countries.
In the Midas investigation, prosecutors must now establish the precise roles of the suspects, prove the alleged transactions and determine whether criminal proceedings can result in convictions and financial recovery.
The arrests represent another stage in the investigation, not a judicial finding that the alleged €114 million fraud has been proved.
European Central Bank President Christine Lagarde has warned that a sharp sell-off in government bonds is tightening financial conditions across the eurozone, threatening to weaken economic growth at a time when European governments are already struggling with mounting debt and higher energy prices.
Speaking during the International Monetary Fund’s annual meetings on Saturday, 17 October, Lagarde said rising bond yields were imposing additional pressure on the European economy, potentially reducing demand and helping to bring inflation down.
Her comments came as investors demanded higher returns on government debt across major developed economies, reflecting concerns about persistent inflation, widening budget deficits and the substantial borrowing requirements associated with investment in artificial intelligence.
The development presents a complicated situation for the ECB, which has already raised its key interest rate twice this year in response to renewed inflationary pressure following the conflict in the Middle East.
Higher government bond yields effectively tighten monetary conditions even without a further decision by the central bank to increase official interest rates.
The latest sell-off has pushed borrowing costs higher across Europe, although the pressure is particularly acute in countries with large public debts and persistent budget deficits.
When investors sell government bonds, their market prices fall and yields rise. Those higher yields eventually feed into the costs of borrowing for governments, businesses and households.
Lagarde indicated that financial conditions had become tighter than assumed in the ECB’s September economic forecasts.
According to her latest assessment of the bond market, the resulting slowdown in demand could help moderate inflation, but would also place additional pressure on an economy whose growth prospects remain limited.
The ECB’s September projections forecast eurozone economic growth of just 0.9 per cent in 2026, followed by 1.4 per cent in 2027 and 1.5 per cent in 2028.
Inflation was expected to average 3.0 per cent this year before declining to 2.5 per cent in 2027 and 2.1 per cent in 2028.
Those forecasts were based on assumptions about financial conditions and energy prices that may no longer fully reflect developments in international markets.
France has emerged as one of the most vulnerable major eurozone economies because of its high public debt, persistent deficits and political disagreements over fiscal consolidation.
French government bond yields have risen sharply as investors question whether Paris can deliver the spending reductions required to stabilise its finances.
As EU Today reported earlier this month, eurozone finance ministers have been pressing France to produce a credible budget that would restore confidence in the country’s fiscal position.
The borrowing premium demanded on French debt relative to German government bonds has also widened, reflecting investors’ concerns about the financial outlook and the political difficulties surrounding the 2027 budget.
The IMF has warned that continued increases in borrowing costs could eventually force the French government to undertake more substantial fiscal adjustments.
In its assessment of French bond yields, the Fund said the immediate pressures remained manageable, partly because France benefits from established debt markets and relatively long borrowing maturities.
Nevertheless, persistently elevated yields would increase the cost of refinancing government debt as existing bonds mature.
The wider concern is that higher borrowing costs could reduce the room available for public investment and other expenditure across several European economies simultaneously.
Lagarde’s intervention coincided with renewed warnings from the IMF about the sustainability of European public finances.
In its latest European economic assessment, the Fund argued that governments must either accelerate economic growth or reduce borrowing to prevent debt burdens from becoming increasingly difficult to manage.
The IMF expects eurozone growth of approximately 1.1 per cent in 2026 and 1.2 per cent in 2027, with continuing pressure from energy costs, demographic changes and weak productivity.
The European Commission’s forecasts indicate that eurozone government debt could rise from 88.7 per cent of GDP in 2025 to 91.2 per cent in 2027.
The IMF has also identified structural weaknesses, including barriers within the European single market, which restrict investment and productivity growth.
These problems are becoming more difficult to address as European governments face demands for greater defence expenditure, infrastructure investment and support for industries affected by higher energy prices.
The ECB has already increased its deposit rate to 2.5 per cent following successive increases in June and September.
As EU Today reported after September’s decision, the central bank has been attempting to contain inflation generated by rising energy costs without causing a more substantial economic slowdown.
The IMF now expects at least one additional quarter-percentage-point increase before the end of 2026.
Such a decision would bring the deposit rate to 2.75 per cent, although the ECB has not committed itself to that outcome.
The challenge is that tighter monetary policy would coincide with financial restrictions already being imposed by bond markets.
At the same time, higher energy prices continue to affect household purchasing power and business operating costs.
In her statement to the International Monetary and Financial Committee, Lagarde acknowledged that the eurozone had proved more resilient than expected, while warning that risks to growth remained tilted to the downside and risks to inflation to the upside.
The duration of the Middle East conflict, developments in energy markets and changes in investor confidence will be important in determining the economic outlook.
For the ECB, a bond-market slowdown could reduce the need for further interest-rate increases by weakening demand. But if energy-driven inflation remains elevated, the central bank may still face pressure to tighten policy.
Europe’s governments, meanwhile, have considerably less control over the borrowing costs demanded by international investors.
The next ECB interest-rate decision will therefore take place against an increasingly difficult combination of sluggish growth, persistent inflation and financial markets imposing their own constraints on public and private borrowing.
Industrial production in the eurozone fell by 0.5 per cent in August compared with July, according to figures released by Eurostat on Thursday, adding to evidence that European manufacturers are struggling to sustain a recovery amid rising energy costs and uncertain demand.
The decline followed a revised contraction of 0.3 per cent in July, while output across the wider European Union fell by 0.3 per cent in August. Compared with the same month last year, eurozone production was down 1.1 per cent, against a decline of 0.2 per cent across the EU as a whole.
Belgium recorded the largest monthly contraction among the member states covered by the release, at 5.1 per cent, followed by Ireland at 3.1 per cent and Portugal at 2 per cent.
The latest industrial production figures underline the uneven performance of Europe’s factories, with losses concentrated in some economies and sectors while others continue to expand.
The sectoral breakdown presents a particularly revealing picture of the pressures facing European industry.
Production of intermediate goods, which include materials and components supplied to other manufacturers, declined by 0.8 per cent across the eurozone in August. Energy production fell by 0.6 per cent, while output of non-durable consumer goods contracted by 2.7 per cent.
By contrast, capital goods production increased by 0.4 per cent, indicating that activity in equipment and machinery manufacturing remained comparatively resilient.
The divergence was also pronounced between member states. Industrial production increased by 6.5 per cent in Sweden, 4.3 per cent in Estonia and 2.6 per cent in the Netherlands.
On an annual basis, Ireland recorded a 15 per cent decline, followed by Belgium at 7.1 per cent and Bulgaria at 5.4 per cent. The Netherlands, meanwhile, registered growth of 9.8 per cent compared with August 2025.
These variations make it difficult to describe Europe’s industrial position as a single, uniform downturn. National production figures reflect different industrial structures, production cycles and exposure to particular markets.
Ireland’s figures, for example, can be influenced by changes in output among large multinational enterprises, while Belgium’s manufacturing economy is particularly exposed to developments in chemicals, pharmaceuticals and energy-intensive production.
Nevertheless, the simultaneous contraction of industrial output across the eurozone reinforces concerns about the strength of the European economic recovery.
The continuing disruption of global energy supplies has complicated the position of European manufacturers, particularly businesses that depend on predictable electricity and gas prices.
The Middle East conflict has increased uncertainty over energy costs and transportation, making production planning more difficult for companies operating with substantial fuel, heating or electricity requirements.
As EU Today reported earlier this week, Brussels has already moved to delay certain methane requirements for energy imports as governments seek to limit additional pressure on gas supplies.
The decision reflects a wider debate over whether the EU’s existing regulatory framework adequately accounts for the international cost disadvantages facing European industrial producers.
Chemicals, metals, fertilisers and other energy-intensive industries must compete with manufacturers operating in markets where energy costs and regulatory requirements can differ considerably.
The problem extends beyond immediate profitability. Persistently unfavourable operating costs can affect decisions about new factories, maintenance, modernisation and the location of future investment.
Those decisions may have longer-lasting economic consequences than monthly fluctuations in production.
The figures arrive as EU governments debate the future of European industrial policy, including the treatment of imported products and the conditions under which companies should qualify for public support.
Recent disagreements over proposed European-content requirements have illustrated divisions between governments seeking greater protection for EU manufacturers and those concerned that restrictive rules could increase costs or disrupt supply chains.
In a recent warning over the proposed Made in Europe framework, Mercedes-Benz chief executive Ola Källenius argued against excluding Britain from industrial arrangements intended to strengthen European production.
The debate is particularly consequential for automotive manufacturers whose supply chains extend across EU borders and into neighbouring countries.
Meanwhile, the proposed EU budget for 2028–2034 has become another focus of disagreement, with member states questioning how much funding should be devoted to industrial competitiveness, strategic technologies and energy infrastructure.
The immediate economic issue is whether European factories can recover production as energy costs remain elevated and external demand fluctuates.
Eurostat’s August figures do not establish how individual government policies have affected output, nor do they determine whether the contraction will continue. They do, however, show that industrial activity entered the autumn with limited momentum.
The next industrial production release, covering September, is scheduled for 16 November and will provide an indication of whether the late-summer weakness persisted into the final quarter of the year.
The head of Mercedes-Benz has warned that excluding British manufacturers from the European Union’s proposed industrial preference rules would damage the competitiveness of carmakers across Europe, challenging Brussels over legislation intended to protect European production from growing international competition.
Ola Källenius, chief executive of Mercedes-Benz and president of the European Automobile Manufacturers’ Association (ACEA), criticised the prospect of restricting British participation in the forthcoming “Made in Europe” framework during discussions in Brussels on Wednesday, 14 October.
His intervention comes as European governments negotiate the Industrial Accelerator Act, which would introduce European-content requirements affecting public procurement and certain forms of industrial support.
The proposed legislation is intended to strengthen manufacturing within the EU, but its treatment of production in neighbouring countries has become contentious, particularly in an automotive industry whose factories and suppliers operate across national borders.
British manufacturing remains closely integrated with continental European automotive production despite the United Kingdom’s departure from the single market.
Components manufactured in Britain are incorporated into vehicles assembled in EU member states, while British factories depend on engines, batteries, electronics and other parts produced in continental Europe.
The value of this integrated manufacturing system depends on companies being able to source components across borders without unnecessary restrictions.
Källenius warned that excluding the UK from the proposed rules would weaken manufacturers operating on both sides of the Channel.
His position reflects industry concerns that a narrowly defined European-content regime could impose additional costs on companies already facing pressure from Chinese competition, slowing demand and substantial investment requirements.
As EU Today reported in September, British Prime Minister Andy Burnham has been pressing Brussels to recognise the UK as a trusted industrial partner under the emerging framework.
Germany has also supported a broader approach that would allow selected trading partners to qualify under European-content rules where reciprocal conditions are met.
France has favoured stronger preferences for production within the EU itself, reflecting differences among member states over how far European industrial policy should extend beyond the Union’s borders.
The Industrial Accelerator Act proposed by the European Commission is intended to strengthen Europe’s manufacturing base and support production in strategically important sectors.
Its provisions address public procurement and industrial incentives affecting products including vehicles, steel, aluminium and clean technologies.
The Commission wants European public spending to support local industrial capacity rather than reinforce dependence on imports from major international competitors.
China has become the principal focus of those concerns because of its expanding manufacturing capacity, particularly in electric vehicles and batteries.
However, measures designed to counter Chinese industrial competition could also affect established trading partners whose manufacturers form part of European supply chains.
The United Kingdom, Norway, Switzerland and Turkey occupy different legal positions in their economic relations with the EU, but all maintain important industrial connections with member states.
An approach that treats their production as equivalent to imports from countries with substantially different market conditions could require European companies to reorganise existing supplier relationships.
For manufacturers, replacing a supplier may involve more than simply ordering components from another factory. Production standards, technical certification, logistics and long-term investment arrangements can make changes expensive and difficult.
Following an ACEA board meeting on Wednesday, European manufacturers called for faster progress on the wider automotive legislative package.
In its 14 October statement, ACEA urged EU institutions to advance negotiations so that the package could be finalised early next year.
The association argues that manufacturers require a predictable regulatory framework to plan investments in electric vehicles, production facilities and new technologies.
Källenius linked the industry’s transition towards zero-emission mobility with the need to preserve employment and strengthen economic security.
European manufacturers are simultaneously investing heavily in electrification while competing against Chinese companies with established battery supply chains and significant production capacity.
The resulting financial pressures are particularly serious for manufacturers that must develop new vehicle platforms while maintaining existing factories and dealer networks.
Additional restrictions on component sourcing could complicate those decisions at a time when companies are seeking to reduce costs.
The dispute has acquired a further dimension following remarks by British Business Secretary Jonathan Reynolds.
Speaking on Wednesday, Reynolds indicated that Britain would not automatically follow the European Union in imposing tariffs on Chinese vehicles.
The UK government maintains that trade measures must be determined according to British economic interests rather than adopted simply to align with Brussels.
That position complicates London’s attempt to secure favourable treatment under European industrial rules.
EU policymakers have argued that closer alignment on trade defences could support Britain’s claim to be treated as a trusted partner.
British ministers, however, must consider whether restrictions on Chinese imports would benefit domestic manufacturers and consumers.
The disagreement will form part of the broader economic relationship being discussed ahead of the next UK–EU summit, scheduled for 20 November.
The automotive dispute follows earlier negotiations over British participation in European defence procurement and other industrial programmes.
In both cases, London wants access to initiatives designed to strengthen European production while remaining outside the EU’s institutional framework.
Brussels must determine how far preferential treatment can extend to non-member countries without undermining the objectives of its industrial policy.
The Commission’s proposals have already revealed disagreements between governments favouring a tightly defined European manufacturing base and those seeking to preserve wider commercial partnerships.
Källenius’s intervention strengthens the argument that industrial protection cannot be considered separately from the supply chains on which European manufacturers depend.
The final legislation will influence investment decisions, procurement arrangements and the position of British suppliers within the continental automotive industry.
The outcome will also provide an indication of how far the EU is prepared to accommodate its closest trading partners as it attempts to strengthen European manufacturing against growing competition from China.
European Union finance ministers have reached an agreement to expand centralised supervision of financial markets, but Germany has secured provisions allowing important parts of Deutsche Börse to remain under national oversight, substantially narrowing the European Commission’s original reform proposals.
The compromise, agreed at a meeting in Luxembourg on 9 October, would transfer responsibility for supervising selected trading venues, clearing houses and securities settlement institutions to the European Securities and Markets Authority (ESMA).
However, the agreement introduces exemptions and thresholds that reduce the number of institutions automatically subject to direct European supervision.
The result is a significant political compromise between governments seeking deeper financial integration and those reluctant to surrender oversight of nationally important market operators.
The most contentious element of the negotiations concerned Deutsche Börse, the German financial-market group that operates the Frankfurt stock exchange and provides trading, clearing and other financial infrastructure services.
Germany opposed arrangements that would place all major market operators under direct ESMA supervision, arguing that institutions with predominantly domestic activities should continue to be regulated nationally.
The agreed compromise refines the criteria for determining which trading venues qualify for centralised oversight.
These conditions allow certain Deutsche Börse operations to remain outside the new supervisory regime.
The exemption had already become a point of contention during negotiations among European governments.
As EU Today reported in June, Berlin had sought to protect Deutsche Börse from mandatory European supervision despite Germany’s broader support for integrating EU capital markets.
The October agreement formalises a narrower approach within the Council’s negotiating position, although the legislation remains subject to approval by the European Parliament.
The European Commission has repeatedly argued that fragmented national supervision weakens the EU’s ability to compete with financial markets in the United States.
Although the Union operates a single market, many financial institutions continue to face differing regulatory interpretations, procedures and supervisory relationships across member states.
These differences can increase operating costs and discourage financial businesses from expanding across borders.
The Market Integration and Supervision Package is intended to simplify those arrangements and strengthen common oversight of financial infrastructure with significant cross-border activity.
Under the Council’s position, ESMA would assume direct supervision of selected trading platforms and institutions involved in clearing and securities settlement.
Such institutions perform essential functions in financial markets, including managing transactions, transferring securities and controlling risks between counterparties.
Differences in supervisory arrangements can complicate the operation of financial services that increasingly function across national borders.
The Commission argues that greater consistency would allow European capital to move more efficiently between member states and provide businesses with improved access to investment.
The Commission’s original approach envisaged broader centralisation of supervisory responsibilities.
The Council agreement of 9 October introduces more restrictive criteria governing the institutions that would fall under ESMA’s direct authority.
In addition to the treatment of trading venues, ministers agreed that direct supervision of crypto-asset service providers should initially concentrate on businesses with the most significant cross-border operations.
The Council also supported changes to ESMA’s governance arrangements, including the creation of a full-time executive board.
The proposed board would strengthen the authority’s ability to make supervisory decisions independently of individual national regulators, while preserving mechanisms for cooperation with those authorities.
The compromise also introduces arrangements allowing national supervisors collectively to challenge certain decisions.
These provisions reflect concerns about concentrating regulatory powers within an institution that must oversee financial businesses operating under different national legal systems.
The supervision reforms form part of the EU’s broader Savings and Investments Union initiative.
European policymakers want to increase the availability of private capital for companies investing in technology, defence, infrastructure and industrial development.
The Union has substantial household savings, but much of that money remains in bank deposits or is invested outside the European economy.
Companies seeking capital for expansion may consequently face higher financing costs or more limited investment opportunities than comparable businesses operating in larger and more integrated markets.
The Commission’s Savings and Investments Union programme seeks to improve access to finance and make cross-border investment more attractive.
Financial-market supervision represents only one element of that programme.
Differences in taxation, insolvency law, national investment products and corporate governance requirements also influence where investors allocate their money.
Nevertheless, regulators regard consistent supervision as an important condition for reducing fragmentation.
The agreement reached by finance ministers does not conclude the legislative process.
The European Parliament must adopt its position before negotiations can determine the final provisions.
Parliamentary discussions could revisit the exemptions secured by Germany and the criteria determining which institutions fall under direct ESMA supervision.
The debate will expose differences over whether European financial integration should proceed through incremental reforms or a more substantial transfer of regulatory authority.
Governments supporting national exemptions argue that supervision should reflect the actual geographic scope of a company’s activities.
Supporters of broader European oversight contend that major trading businesses can influence financial markets beyond their home jurisdictions even when individual operations appear predominantly domestic.
The Deutsche Börse exemption has become a prominent example of the conflict between those positions.
Europe’s largest economies broadly support the objective of deeper capital markets, but remain divided over the institutional powers needed to achieve it.
The final legislation will determine whether the expanded responsibilities granted to ESMA are sufficient to reduce fragmentation or leave important parts of Europe’s financial infrastructure operating under substantially different national supervisory systems.
The arrangement, confirmed on 12 October, follows months of negotiations between Brussels and Beijing and reflects growing concern about the competitive position of European carmakers.
The import ceiling could reduce Chinese hybrid vehicle sales in the EU by more than half compared with previously anticipated volumes, although the actual effect will depend on demand, product classifications and implementation.
The agreement comes as manufacturers gather for the Paris Motor Show, where the future of European vehicle production, Chinese competition and industrial policy have become central subjects.
China’s Commerce Ministry has presented the outcome as a negotiated arrangement intended to preserve trading relations, while the European side has emphasised the need to prevent rapidly increasing imports from undermining domestic production.
Chinese carmakers have expanded aggressively in overseas markets as domestic demand has weakened. Chinese passenger vehicle exports rose sharply in September, with manufacturers increasingly targeting Europe, Latin America and Asian markets.
Hybrid vehicles have become particularly important because they offer consumers lower fuel consumption without requiring the same degree of dependence on charging infrastructure as fully electric cars.
This has allowed Chinese brands to compete in market segments where European manufacturers retain substantial established production capacity.
The new quota limits the number of eligible Chinese hybrid vehicles permitted to enter the European market each year. According to details of the import restrictions, shipments exceeding the permitted volume would face restrictions at EU customs.
The mechanism differs from a conventional tariff because imports beyond the ceiling cannot simply enter the market by paying a higher duty. Manufacturers and importers will need to consider both delivery costs and the availability of import allocations.
The measures arrive amid growing pressure on the European automotive industry, which faces high production costs, expensive energy, competition from Chinese manufacturers and the capital requirements of shifting towards electrified transport.
Companies operating in Germany, France, Italy and other established manufacturing centres must fund the development of new vehicles while maintaining existing factories and employment.
Chinese manufacturers benefit from extensive domestic production networks, considerable scale and access to battery manufacturing capacity.
European policymakers have questioned whether competition takes place under equivalent economic conditions, particularly where Chinese producers receive support from state-directed industrial policies.
Beijing rejects allegations that its export performance results principally from unfair state assistance, arguing that Chinese companies have achieved competitiveness through investment, innovation and efficiency.
The quota represents a departure from the assumption that European consumers will necessarily have unrestricted access to the lowest-priced imported vehicles.
Its economic effects will depend partly on whether European manufacturers can use the additional protection to improve productivity and develop more competitive models.
Restrictions on imports do not necessarily reduce the presence of Chinese-owned companies in the European automotive industry.
Several manufacturers are already developing production capacity outside China, including within the European Union. BYD’s investment in Hungary is one example of how Chinese companies can pursue access to European consumers through local manufacturing rather than relying entirely on imported finished vehicles.
The new arrangements could strengthen the commercial incentive to expand such operations.
For European governments, Chinese investment presents a difficult calculation. New factories may create employment, increase industrial activity and preserve automotive supply chains, while also expanding the influence of Chinese manufacturers within Europe’s domestic market.
The economic consequences depend on how much research, component manufacturing, battery production and other high-value activity takes place locally.
A Chinese-owned assembly plant using predominantly imported components would provide different benefits from a fully developed European production network.
The debate is also drawing attention to the position of the United Kingdom, whose automotive industry remains closely integrated with European supply chains despite Brexit.
Executives from Stellantis and Renault have supported including Britain within proposed European industrial protection measures, reflecting the importance of UK manufacturing operations to their broader businesses.
Such an arrangement would raise questions about regulatory alignment, trade preferences and the conditions under which non-EU production could qualify for European industrial support.
British manufacturers also face the challenge of Chinese competition, and decisions taken in Brussels could influence investment strategies across the wider European automotive sector.
The restrictions may offer European manufacturers additional time to adapt, but they do not eliminate the structural challenges confronting the industry.
Energy prices, labour costs, the availability of batteries and the affordability of new vehicles remain important factors in the competitiveness of European production.
Nor will the quota necessarily prevent Chinese firms from gaining market share through investment, partnerships or vehicles manufactured outside China.
The EU’s approach combines restrictions on imports with the possibility of continued Chinese industrial participation inside Europe.
The outcome will depend on whether European manufacturers use the reduced competitive pressure to strengthen their technological and manufacturing position, or whether the restrictions primarily accelerate the relocation of Chinese-owned production into the EU.
Brussels, 12 October, (Brussels Morning Newspaper) – The US dollar remained near its strongest level in 18 months on Monday as escalating Middle East tensions, elevated oil prices and renewed inflation concerns unsettled global financial markets. The … Read more
European intelligence agencies have warned that Russia is intensifying efforts to assassinate executives of defence companies supplying Ukraine, extending its campaign of sabotage and intimidation into the European military-industrial sector.
According to intelligence assessments obtained from five European security services, Moscow has ordered an expansion of covert operations targeting senior figures at major arms manufacturers and smaller companies producing drones and military components. Germany’s domestic intelligence agency, the BfV, has reportedly advised executives to strengthen personal security, while some manufacturers have already increased protection for senior personnel.
The warnings emerged alongside reports of an alleged assassination plot against Polish Prime Minister Donald Tusk and Defence Minister Władysław Kosiniak-Kamysz. Polish authorities convened an emergency security meeting and subsequently detained a suspect. No connection between the Polish case and Russian intelligence has been established.
The apparent expansion of Russian covert operations reflects a shift in Moscow’s calculations concerning Western military assistance.
President Vladimir Putin had reason to anticipate that Donald Trump’s return to the White House would weaken American support for Kyiv. Trump repeatedly questioned US military expenditure on Ukraine and advocated a negotiated settlement with Russia. A substantial reduction in American weapons deliveries could have increased pressure on Ukraine to accept Moscow’s territorial demands.
Instead, European governments assumed greater responsibility for sustaining Ukrainian defence capabilities, including financing weapons purchases and expanding domestic production.
The European Union’s €90 billion support programme for 2026–2027 allocates €60 billion to defence procurement and industrial capacity. The EU has also established mechanisms allowing Ukraine to participate in European joint procurement programmes.
Disrupting European manufacturers therefore offers Moscow a means of restricting Ukraine’s military capabilities without directly confronting NATO.
Assassination threats can interfere with procurement even when attacks are never carried out. Large manufacturers can afford extensive security arrangements, but smaller companies producing electronics, drone components and specialised equipment often lack comparable resources.
Intimidation could delay contracts, discourage investment and persuade individual suppliers to withdraw from Ukrainian defence programmes.
Russia’s alleged interest in targeting defence executives is not unprecedented. In 2024, American intelligence reportedly uncovered a Russian plot to assassinate Armin Papperger, chief executive of Rheinmetall, one of Germany’s principal suppliers of ammunition and military equipment to Ukraine.
As EU Today previously reported, Moscow has also publicly identified European factories involved in Ukrainian drone production, increasing concerns that civilian industrial facilities could become targets of Russian operations.
European authorities have investigated suspected Russian involvement in arson, infrastructure attacks and clandestine networks. An earlier cross-border investigation into alleged assassination and sabotage preparations demonstrated how intermediaries could be recruited to conduct operations while obscuring their sponsors.
Such activity also carries political consequences. Attacks against infrastructure and industrial facilities can reinforce public fears about confrontation with Russia, particularly during elections when parties advocating accommodation with Moscow seek to exploit security concerns.
Poland has already experienced mounting Russian hybrid pressure, including threats to critical infrastructure and information operations intended to aggravate domestic political divisions.
Ukraine’s continuing strikes against Russian refineries and military-industrial facilities have added economic and operational pressures to Moscow’s prolonged war effort. Russia retains substantial military production capacity, but the costs of sustaining the conflict remain considerable.
Interfering with European weapons manufacturing could serve two objectives: restricting Ukraine’s access to equipment and obstructing Europe’s longer-term rearmament.
The Kremlin does not necessarily need European governments to abandon Ukraine formally. Production delays, disrupted contracts and reluctant suppliers could reduce the practical effect of military assistance even while political commitments remain unchanged.
European governments have acknowledged the industrial challenge. In its June conclusions on European defence, the European Council called for accelerated manufacturing capacity, stronger supply chains and closer cooperation with Ukraine’s defence industry.
Russia’s apparent strategy seeks to exploit the dependence of these programmes on private companies and skilled civilian personnel.
The warnings from European intelligence agencies suggest that protecting defence executives, engineers and contractors is becoming part of the continent’s wider security responsibilities.
For Moscow, intimidation offers the possibility of weakening Ukrainian military resistance without an open confrontation with NATO. For European governments, preventing covert operations from disrupting weapons production is increasingly inseparable from their commitment to sustain Ukraine’s defence.
The economic model that transformed Central and Eastern Europe after EU accession is losing momentum, according to the International Monetary Fund, which is warning governments that structural reforms are needed if the region is to continue narrowing the income gap with Western Europe.
Carlos Mulas-Granados, the IMF’s regional representative, said on Tuesday that medium-term growth potential across Central and Eastern Europe had declined to around 2.5 per cent, compared with roughly 5 per cent before countries in the region joined the European Union.
The slowdown does not mean that every economy is stagnating. Poland continues to grow faster than much of Western Europe, while the Czech economy has recovered from recent shocks. The concern is instead about the underlying rate at which these economies can expand once temporary fiscal stimulus, EU funding and post-crisis recoveries are stripped out.
Several of the forces behind the region’s earlier success are becoming weaker.
EU accession opened access to the single market, attracted foreign investment and integrated Poland, Czechia, Slovakia and Hungary deeply into European industrial supply chains. German manufacturers in particular moved production eastwards, taking advantage of lower labour costs, skilled workforces and geographic proximity.
That process generated rapid gains in productivity and incomes. It cannot simply be repeated.
Demographics are one of the most immediate constraints. Working-age populations are shrinking across much of the region while ageing increases spending requirements for pensions, health care and social support.
The IMF’s country assessments illustrate the problem. Its assessment of Poland says demographic pressures are mounting even as labour productivity remains comparatively strong, and calls for higher labour participation, better skills and deeper capital markets.
In Slovakia, the Fund expects growth of only 0.9 per cent this year and says adverse demographics and weaker productivity are weighing on the medium-term outlook. The economy remains particularly exposed to manufacturing and the automotive industry.
The Czech Republic faces a similar structural constraint. The IMF estimates its medium-term potential growth at around 1.8 per cent, with population ageing and modest productivity gains limiting further convergence.
External conditions have also changed.
Germany, the region’s principal industrial partner, has experienced prolonged weakness in manufacturing. Central European producers therefore face softer demand from the market around which many of their supply chains were originally built.
At the same time, China has moved from being primarily a source of imports and components to a direct competitor in sectors where Central Europe has substantial industrial exposure, including cars, batteries, machinery and electrical equipment.
That combination is particularly difficult for economies built around export-oriented manufacturing.
The problem overlaps with the wider European competitiveness debate. EU Today reported in July that only 15.7 per cent of the reforms recommended in Mario Draghi’s competitiveness report had been fully implemented at that stage, with important work still outstanding on capital markets, energy and investment.
For Central Europe, progress on those issues has a direct bearing on growth. Smaller national capital markets make it harder for companies to finance expansion. Fragmented energy systems add to industrial costs, while limited access to venture capital can restrict the development of businesses outside established manufacturing sectors.
There are significant differences between countries. Poland’s larger domestic market gives it more insulation from industrial weakness elsewhere and the IMF expects relatively strong growth. Hungary has faced a different combination of weak investment and fiscal constraints, while Slovakia’s dependence on car production leaves it particularly exposed to changes in the European automotive sector.
EU funding remains an important source of investment across the region, particularly for infrastructure and modernisation. But EU transfers cannot by themselves replace improvements in productivity.
The IMF’s argument is therefore less about an immediate recession than about the end of an unusually favourable period of convergence.
Central Europe entered the EU with lower wages, substantial scope to import Western technology and a powerful incentive for Western European manufacturers to move production eastwards. As those gaps narrow, future growth depends more heavily on innovation, skills, investment and domestic productivity.
The region is still converging with Western Europe. The question raised by the latest IMF warning is how quickly that process can continue once the economic advantages that powered its first two decades of EU membership become less powerful.
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