The Council and the European Parliament negotiators reached a provisional agreement on measures to incentivise defence-related investments in the current EU budget to implement the so-called ReArm Europe plan, an EU initiative to increase defence spending and strengthen the EU’s military capabilities.
The agreement includes a landmark decision to associate Ukraine to the European Defence Fund, underscoring the EU’s enduring commitment to Ukraine’s security, resilience, and gradual integration into the European defence industrial base.
“The agreement reached today on incentivising defence-related investments in the current EU budget is an important milestone in implementing the ReArm Europe plan and in the EU’s progress towards increasing our defence readiness by 2030. We need to maximise our investments in defence and dual-use technologies to prepare for the future – together in Europe and with Ukraine”, — Troels Lund Poulsen, Minister for Defence of Denmark.
“Today’s agreement sends a strong message: Europe is determined to invest in its security and remove all hurdles in this direction. By opening key EU-programmes to defence-related investments, we are enhancing our efforts in strengthening Europe’s Defence Industrial and Technological Base. It is a necessary step towards a stronger, more resilient, and more capable Europe that is able to defend itself by 2030”, — Marie Bjerre, Minister for European Affairs of Denmark.
The provisional agreement reached today broadly maintains the general thrust of the Commission proposal, which aims to facilitate faster, more flexible and coordinated investments in the European defence technological and industrial base (EDTIB) by amending five EU regulations:
• the Digital Europe Programme
• the European Defence Fund
• the Connecting Europe Facility
• the Strategic Technologies for Europe Platform (STEP), and
• Horizon Europe
The co-legislators agreed to extend EU financial support within Horizon Europe to dual-use and defence-related companies, while largely maintaining the eligibility rules already present in EU instruments such as SAFE (‘Security Action for Europe Instrument’) and EDIP (‘European Defence Programme’).
In addition, co-legislators agreed to associate Ukraine to the European Defence Fund, thus creating new possibilities for Ukrainian entities to join in EU collaborative defence research and development activities in the future.
Next steps
The agreement reached today will have to be confirmed by both institutions before being formally adopted.
Background
The so-called ‘mini-Omnibus for defence’ is a package of legal changes proposed by the European Commission in April 2025 to make it easier for existing EU funds – normally meant for supporting regional development, innovation, industrial support, etc. – to be used also for strengthening the EU’s defence industry.
This initiative is complemented by the so-called defence readiness omnibus package presented in June 2025 by the Commission, which is currently being examined by the Council. Both proposals aim to incentivise defence-related investments and improve Europe’s defence readiness, as requested by the European Council in March 2025.
 
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By Anamaria Piloiu, Oleg Reichmann and Florian Resch
Climate risks affect credit ratings. And these, in turn, influence how banks can use securities as collateral to borrow money. This post takes a closer look at how the Eurosystem integrates climate change risks into its own collateral framework, through the credit risk channel.

Central banks must prepare for the financial risks that come with rising temperatures and fast-evolving green policies. In the Eurosystem, we are actively working to ensure that the euro area’s monetary policy framework keeps pace with the realities of climate change.
One area where these efforts have borne fruit is the incorporation of climate change risks (CCR) into credit ratings. These ratings are central to the Eurosystem’s collateral framework. These rules determine the quantity and type of assets banks can use as collateral when borrowing from the Eurosystem. Banks can only borrow central bank money if they provide assets of adequate credit quality, measured using ratings. If a bank fails to pay back, the Eurosystem can sell these assets to avoid potential losses.
However, if credit ratings fail to properly reflect climate risks, the Eurosystem may end up accepting overvalued, high-risk assets or applying insufficient safeguards. With this in mind, the Eurosystem works both with the external credit assessment institutions (ECAIs) accepted under its credit assessment framework – DBRS Morningstar, Fitch Ratings, Moody’s, Scope Ratings and S&P Global Ratings[1] – and its own in-house credit assessment systems (ICASs). This ensures that both external and internal ratings duly account for all sources of credit risk – including those stemming from the economic consequences of climate change. To this end, the Eurosystem regularly consults with credit rating agencies on how best to take climate change into account. It has also established standards for its ICASs.
Why climate-conscious credit ratings matter at the ECB
Whenever a bank borrows from the Eurosystem, it has to pledge collateral (i.e. the assets that secure the loan). Under the Treaty on the Functioning of the European Union, the Eurosystem can only accept “adequate collateral”. What this means depends largely on an asset’s credit rating. The better the rating, the more a bank can borrow relative to the face value of the asset. For example, an AAA-rated asset carries a lower “haircut” – that is the reduction of its market value acting as a risk cushion for Eurosystem – than one rated BBB. In other words, ratings really do matter.
A lack of sufficient experience and empirical evidence makes it more challenging to incorporate CCR into ratings compared with traditional risks such as financial health, business cycles, competition and innovation. This makes it harder to estimate the extent to which a borrower’s creditworthiness is affected by climate change.
Nonetheless, the ECB’s 2021 climate action plan made the integration of climate risks into all relevant elements of its collateral framework a priority, with a particular focus on credit ratings. The action plan set out a roadmap for making the euro area’s monetary policy framework more resilient to climate risks. This includes improving climate data, incorporating environmental risks into asset valuations and adjusting how the Eurosystem accepts and values collateral. In practical terms, the Eurosystem now requires that climate change be factored into all of the credit ratings used within its collateral framework.
Figure 1

How climate risks are integrated in the collateral framework via the credit risk channel

ICASs: Eurosystem central banks leading by example
All seven Eurosystem ICASs now account for climate change risk in their credit ratings. Managed by the national central banks, these systems mainly rate large and medium-sized businesses. They assess CCR using both quantitative tools and expert judgment. Meanwhile, ICAS analysts evaluate physical risks, such as those from floods and wildfires, and transition risks, such as those linked to carbon pricing and regulation.
Their analysis typically encompasses two stages:
• assessing exposure to climate change risk, using data on emissions, energy use and geographical vulnerability;
• evaluating the impact of these risks on creditworthiness, considering mitigating factors such as insurance, adaptation plans and carbon offsets.
The ICASs use internal carbon stress tests to simulate how transition risks affect company finances. Different jurisdictions apply different pricing scenarios, including the carbon price pathways of the Network for Greening the Financial System (NGFS) and statistical models. These inputs feed directly into the adjusted financial projections of credit issuers – i.e. borrowers’ expected financial performance – and can lead to changes in ratings.
In the case of physical risks, the ICASs use a range of tools to translate environmental hazards (floods, landslides, storms, etc.) into expected financial losses. To ensure consistency and comparability, several ICASs use climate indicators taken from a harmonised dataset developed across the Eurosystem. These indicators help the Eurosystem to better analyse the climate change risks that could affect monetary policy, price stability and the financial system. Crucially, in-house analysts assess not just risks. They also account for the climate opportunities that can enhance creditors’ financial performance, such as the benefits of the energy transition.
How do CCR affect in-house credit scores?
On average, 69% of the credit ratings of the seven ICASs currently include CCR assessments, accounting for 56% of the ICAS-rated collateral mobilised by banks. Some countries are approaching full coverage. This is in line with the ECB’s minimum standards for incorporating climate change risk into ICASs, which have been applicable since the end of 2024.
Across the Eurosystem, the share of ICAS ratings affected by climate risks is currently below 4%, and the adjustments made are typically limited to one rating grade. So climate risks do not have a major overall impact on ratings at present. Transition risks have a more pronounced effect on credit ratings and assessments than physical risks. Here, manufacturing, construction and trade are the most affected sectors. Some ICASs have upgraded ratings thanks to green investments or climate-aligned business strategies. In contrast, physical risks, particularly in the form of acute climate events such as floods, have led to rating downgrades, reflecting the economic damage and cost such events entail. These findings are broadly in line with our observations below on external agencies.
Figure 2

How climate risks are incorporated in ICAS ratings

ECAIs: progress made by external agencies on climate risk integration
As already noted, ICASs are only one side of the coin. The Eurosystem also accepts the credit ratings issued by five External Credit Assessment Institutions (ECAIs): DBRS Morningstar, Fitch Ratings, Moody’s, Scope Ratings and S&P Global Ratings. These agencies have also taken significant steps to integrate CCR into their rating frameworks, reflecting the growing recognition that climate risk also entails financial risk.
Rating agencies now include CCR as part of their analysis of environmental, social and governance (ESG) risks. They generally distinguish between physical risks and transition risks, and apply tailored methodologies and tools to different asset classes and sectors. Moreover, they are now expanding their scenario analyses, developing adaptation metrics and strengthening links between climate data and credit assessments:
• Moody’s uses Issuer Profile Scores and Credit Impact Scores to indicate the relevance of ESG risks. So far, the agency has rated the climate vulnerability of over 12,000 issuers, covering sovereigns, corporates and structured finance.
• Fitch Ratings applies ESG Relevance Scores and has developed Climate.VS – a tool that overlays physical and transition risk data with sector-specific climate vulnerability scores.
• S&P Global Ratings integrates ESG indicators into its sectoral methodologies and conducts forward-looking climate scenario analyses to assess financial resilience under different climate pathways.
• Scope Ratings includes an ESG pillar in its sovereign ratings methodology and is rolling out cross-asset climate stress testing, particularly for financial institutions and corporates.
• DBRS Morningstar incorporates ESG risks via structured checklists and leverages its partnership with Sustainalytics[2] to enhance sector-level analysis, especially for the automotive, energy and insurance sectors.
How do CCR affect external credit ratings?
The impact of climate risks on final credit ratings remains limited. ESG factors influence approximately 13% to 19% of all rating actions across the major agencies, but CCR-specific downgrades account for only 2% to 7%. That said, climate risks now play a greater role in the credit ratings of sovereigns, utilities and the automotive and insurance sectors. These are sectors with high emissions exposures and transition dynamics or direct sensitivity to extreme weather events.
The challenges ahead: from risk recognition to risk integration
Despite the notable progress made by both ICASs and ECAIs, several persistent challenges still limit the full and consistent integration of CCR into credit ratings.
While climate risks are widely recognised, they rarely lead to rating changes. There are several reasons for this:
• strong financials or diversification strategies can mask the vulnerabilities of some debtors;
• risk mitigation strategies (e.g. insurance or carbon offsets) can reduce their perceived exposure;
• rating horizons remain short and medium term, whereas climate risks tend to be long term.
Furthermore, reliable, granular climate change-related data remain scarce, particularly for smaller issuers, sovereigns and structured finance. Public disclosures vary, and asset-level exposure data (e.g. on property flood risk) are often unavailable.
Another challenge increasingly recognised as a financial risk is nature degradation and biodiversity loss. The major credit rating agencies seek to capture this through the environmental pillar of their ESG frameworks. Here, impacts such as deforestation, habitat loss and resource depletion can influence sector and issuer assessments, particularly in agriculture, forestry, fisheries and the extractive industries. Within the Eurosystem, the ICASs also consider these risks when they are deemed credit relevant.
By incorporating these aspects, the ECAIs and ICASs are expanding their coverage of credit-relevant sustainability risks further, thereby helping to ensure that credit ratings reflect a broader range of environmental challenges. However, modelling and data limitations remain more acute in this area.
Keeping climate disclosures on track
The regulatory landscape is constantly evolving, with both progress and potential setbacks. The ECB has pushed for further integration of CCR in banks’ internal models and has welcomed the EBA’s guidelines on ESG risk management. Climate stress testing and supervisory engagement help banks, ECAIs and ICASs to refine their methodologies and expand their climate coverage.
To ensure the continued availability of high-quality climate-related data, the ECB has underlined the importance of maintaining strong disclosure obligations under the Corporate Sustainability Reporting Directive (CSRD). The CSRD is the EU’s main sustainability framework and requires that companies publish detailed information on their environmental and climate impacts, as well as on their own exposure to climate and nature risks. This information is essential if credit rating agencies, banks and the Eurosystem are to properly integrate climate-related risks into their credit assessments and collateral management. In the context of the draft “Omnibus” package proposed by the European Commission, the ECB has stressed that these amendments must strike the right balance between retaining the benefits of sustainability reporting for the European economy and the financial system and ensuring that the requirements remain proportionate.
What comes next?
The Eurosystem’s work on embedding climate risk into credit ratings is not just about making technical adjustments; it also strengthens monetary policy implementation and ensures that the collateral framework is fit for a climate-affected future.
We will continue working closely with ICASs, credit rating agencies, financial institutions and EU lawmakers to refine methodologies, close data gaps and promote credible, science-based financial assessments. By acting now, we can help safeguard financial stability and curb the buildup of unpriced climate risk.
The views expressed in each blog entry are those of the author(s) and do not necessarily represent the views of the European Central Bank and the Eurosystem.
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 The Eurosystem currently accepts five credit rating agencies in its credit assessment framework (ECAF). See this blog post.
Sustainalytics is a firm that rates how companies manage ESG risks and opportunities.

 
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Today, the Commission has published the State of the Energy Union Report 2025 and the accompanying Climate Action Progress Report 2025. They show the significant strides the EU has made in transitioning to a robust and integrated Energy Union by progressing on the clean energy transition with more renewables, addressing high and volatile energy prices and affordability, and further reducing greenhouse gas (GHG) emissions. This is increasing competitiveness, decarbonisation and strengthen energy security and independence reducing EU’s reliance on imported fossil fuels.
The reports confirm once again that the EU is well on track to meet its 2030 climate target, with a 2.5% decrease of GHG emissions in 2024 compared to 2023. The reports also outline how the EU has tackled evolving domestic and global challenges and highlight the crucial role of clean and affordable energy and continuous efforts cutting emissions in reaching EU’s security, energy independence, competitiveness and climate neutrality objectives. 
Progressing towards 2030 climate and energy targets
As confirmed in the Commission’s assessment of national energy and climate plans based on the National Energy and Climate Plans and latest greenhouse gas projections submitted by Member States, the EU continues to progress towards the 2030 targets of reducing net GHG emissions by at least 55% compared to 1990 levels and achieving at least 42.5% renewable energy in the EU energy mix.
Most of the electricity produced in the EU now comes from clean energy sources, although progress differs between Member States. The newly installed renewable energy capacity in 2024 is estimated at around 77 GW and the EU electricity mix counted 47% renewables already in 2024. Final energy consumption keeps going down, with a 3% decrease compared to 2022 mainly in the residential sector, followed by industry and services. 
Reaching the 2030 EU energy targets will require a much faster uptake of renewables and energy efficiency improvements in the coming years. 
GHG emissions in the EU continue to decline, with provisional data for 2024 showing how total net GHG emissions decreased by 2.5% compared to 2023. Emissions were 37.2% lower than in 1990 (or 39% when only domestic net emissions are considered), while GDP was 71% higher, meaning that economic growth continues to decouple from emissions. These figures are aligned with the European Environment Agency Trends and Projections report also release today.  
Lowering energy prices and enhancing competitiveness with clean energy sources
The implementation of the EU’s Affordable Energy Action Plan and Clean Industrial Deal is on track and remains crucial to bring relief to our industries and consumers both in the short and longer term. Nonetheless, average energy prices in Europe are still higher than our competitors, and largely differ across EU Member States, hindering the competitiveness of major industrial players and the economy overall. This is why, the Commission is taking this seriously and stepping up efforts to lower energy prices, building on a set of 7 key actions to bring quick and long-lasting relief to industries and consumers. This is a top priority for the EU and its Member States. The European Investment Bank for instance is launching a €1.5 billion programme to provide bank guarantees to European grid component manufacturers and a pilot project of €500 million in counter-guarantees for clean Power Purchase Agreements.
In the long term, a genuine Energy Union relying on domestically sourced clean energy generation and increased energy efficiency will reduce the EU dependence on fossil fuel imports even further, structurally lower energy prices and contribute to achieve our climate objectives. The EU has significantly reduced the share of Russian gas in its imports from 45% in 2021 to 12% by August 2025.
Electricity consumers in the EU already saved €100 billion thanks to electricity generation from new solar PV and wind power in 2021-2023, while every 1% of improvement in energy efficiency translated into a 2.6 % reduction in gas imports. This underlines importance of unlocking the potential of renewable energy and energy efficiency to enhance energy security and competitiveness.
Seizing the moment to complete the Energy Union
The next decade will be decisive in completing the Energy Union and in achieving climate-neutrality by 2050. The amendment of the European Climate Law, setting an EU climate target of 90% GHG emissions reduction by 2040 compared to 1990 levels is under negotiation. Once agreed by both co-legislators, it will be a benchmark for the post-2030 policy framework.
Several challenges are still to be addressed. The EU needs to deliver large-scale electrification, electricity in final energy to increase from 23% target today to around 32% by 2034 and substantially upgrade investments in grids, step up the efforts on energy efficiency and boost innovation to build a competitive clean tech sector. To overcome such challenges, the Commission estimates that the EU needs to mobilise €695 billion annually from 2031 to 2040 for energy related investments. The proposal for an ambitious EU Multiannual Financial Framework for 2028-2034 is geared towards reinforcing cross-border infrastructure and channeling funding towards strategic clean energy technologies. The upcoming revision of the Governance Regulation on the Energy Union and Climate Action as part of the post-2030 framework will be pivotal in this sense.
Background
The State of the Energy Union Report is published annually to take stock of the EU’s progress towards the objectives of the Energy Union made the previous year and is accompanied by a series of reports covering different aspects of the climate and energy transition. Today one of them is published: the Climate Action Progress Report.
The first part of the State of the Energy Union Report outlines measures taken to implement the Action Plan for Affordable Energy, to lower energy costs, attract investment, and make the energy system more resilient to crises. Building on Member States progress reports, the second part analyses the state of play in the implementation of the Energy Union in all its five dimensions. The last part is forward looking, paving the way to decisive actions to complete the Energy Union and prepare the climate and energy policy framework for the decade ahead.
The Climate Action Progress Report shows progress towards the EU’s emission reduction targets, covering actual (historic) emissions and projected future emissions for the EU as a whole and for every EU Member State. It also includes information on different climate policy areas, EU legislative progress, climate finance and adaptation.
 
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Abstract:
Motivated by current events, this paper assesses the impact of tariff increases on bilateral greenfield foreign direct investment (FDI) over the period 2016-2023. Leveraging a comprehensive dataset of announced greenfield investment projects, official FDI statistics, and bilateral product-level tariff data, we estimate a series of gravity equations to uncover key relationships. Our results show that, at an aggregate level, tariff increases are associated with a rise in greenfield FDI, consistent with the tariff-jumping hypothesis. However, this positive effect reverses for greenfield manufacturing FDI, where high-intensity tariff increases significantly deter investment. A sectoral analysis reveals substantial heterogeneity: consumer-facing industries tend to attract more investment following tariff hikes, while input-intensive sectors experience declines. Overall, our findings suggest that using tariffs to stimulate foreign manufacturing investment is a risky strategy.
Non-technical summary:
In recent years, tariffs have re-emerged as a prominent policy tool in global trade debates. Governments are increasingly using trade barriers not only for protection, but also to encourage companies to invest domestically. A notable example is the 2025 announcement by US President Trump of high import tariffs, explicitly framed as a way to attract foreign direct investment (FDI) into the United States. This raises important questions about how tariffs affect FDI, a major channel for international capital flows, knowledge transfer, and productivity gains.
This paper explores whether and how increases in tariffs influence greenfield FDI, defined as new investment projects that create productive capacity in the host country. While standard trade theory suggests that tariffs are harmful to growth, welfare, and prices, their impact on FDI is less clear. In some cases, firms may respond to tariffs by shifting production into the protected market, a phenomenon known as “tariff-jumping”. In other cases, especially for firms that rely on cross-border supply chains, tariffs may discourage investment by raising production costs.
For our analysis we use a gravity framework, commonly used in studies investigating the drivers of FDI, to assess the relationship between tariffs and greenfield FDI over the period 20162023. Tariff data are sourced from the Global Trade Alert (GTA) database, while greenfield FDI data are drawn from the fDi Markets database, which records announced greenfield investment projects, as well as from official FDI statistics. We also distinguish between all FDI projects and those in manufacturing, and examine sector-specific effects.
Our findings show that, overall, tariff increases are associated with a rise in greenfield FDI, supporting the idea that firms respond to trade barriers by investing in the tariff-increasing country. However, when focusing on manufacturing projects, which are a key concern for policymakers, the effect turns negative for tariff increases that target a large number of products. Moreover, the impact varies across manufacturing sectors.
Our results suggest that while tariffs may appear to stimulate foreign investment in some areas, they can discourage it in others, particularly in manufacturing. The “protectionist gamble” is unlikely to succeed if broad-based tariff increases backfire, driving up supply-chain costs and deterring investment.
See full paper here.
 
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The European Commission today adopted a comprehensive transport package. It will accelerate the roll-out of Europe’s high-speed rail network and to boost investment in renewable and low-carbon fuels for the aviation and waterborne sectors.
Competitiveness and sustainability are the guiding principles of this package, which aims to make the EU transport system more efficient, interconnected, accessible, clean and resilient. The measures presented today cover two key areas – rail, where Europe already leads on sustainability, and fuels, where Europe must now accelerate investments for its energy transition.
Faster, more connected rail across Europe
The new High-Speed Rail Action Plan sets out the steps needed to create a faster, more interoperable and better-connected European network by 2040. It aims to cut journey times and make rail a more attractive alternative to short-haul air travel, thus increasing passenger numbers and boosting regional economies and tourism.
Building on the Trans-European Transport Network (TEN-T), the plan foresees to connect major nodes at speeds of 200 km/h and above. Passengers will be able to travel from Berlin to Copenhagen in four hours instead of the current seven, and from Sofia to Athens in six hours instead of the current 13 hours and 40 minutes. New cross-border links will also enable faster and simpler journeys such as Paris–Lisbon via Madrid and improved connectivity between the Baltic capitals.
To deliver this vision, the Commission proposes four key strands of action:
• Removing cross-border bottlenecks through binding timelines to be set by 2027 and the identification of options for higher speeds, including well-above 250 km/h when economically viable.
• Developing a coordinated financing strategy, including a strategic dialogue with Member States, industry and financiers leading to a High-Speed Rail Deal to mobilise the required investment.
• Improving the conditions for the rail industry and rail operators to invest, develop innovative solutions and operate competitively, including through a more attractive regulatory environment, by enhancing cross-border ticketing and booking systems, supporting a second-hand market for rolling stock, accelerating the deployment of the EU digital management systems, and fostering R&D and cooperation on scalable solutions.
• Strengthening EU-level governance, requiring infrastructure managers to coordinate on capacity for cross-border long-distance services, and facilitating standardisations and authorisations.
Beyond shorter travel times, the plan will ease congestion and free up capacity on conventional lines, facilitating night trains, freight transport, and military mobility, while strengthening Europe’s competitiveness in tourism and industry.
Scaling up investment in renewable and low-carbon fuels
The second initiative adopted today – the Sustainable Transport Investment Plan (STIP) – sets out a common approach to boost investment in renewable and low-carbon fuels focusing on aviation and waterborne transport.
To meet the RefuelEU Aviation and FuelEU Maritime targets, around 20 million tonnes of sustainable fuels (biofuels and e-fuels) will be needed by 2035. Achieving this will require an estimated €100 billion in investment.
The STIP sends a clear signal to investors that Europe’s targets remain in place and that the Commission will support the transition to a climate neutral economy. By accelerating domestic production of biological and non-biological fuels, Europe can reduce its dependence on imported fossil fuels, enhance the competitiveness of its industries and lead the clean-energy transition globally.
Key investment measures aiming to mobilise at least €2.9 billion through EU instruments by 2027 include:
• At least €2 billion for sustainable alternative fuels under InvestEU.
• €300 million through the European Hydrogen Bank to support hydrogen-based fuels for aviation and shipping.
• €446 million for synthetic aviation fuel and maritime fuel projects under the Innovation Fund.
• €133,5 million in fuels-related research and innovation under Horizon Europe.
On the top of these measures, the Commission with the Member States is preparing to launch an eSAF Early Movers Coalition pilot project by the end of 2025, aiming to mobilise at least €500 million for synthetic aviation fuel projects. The Commission will also work to strengthen the enabling conditions for market investments to bridge the investment gap.
In the medium term, the Commission will work towards establishing a mechanism to connect fuel producers and buyers, providing revenue certainty and reducing investment risk. The Plan will also strengthen international partnerships to expand global fuel production and attract imports which meet the EU sustainability criteria while ensuring fair competition for EU producers and users.
 
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Today, the Council has reached an agreement on amending the European climate law (ECL), introducing a binding intermediate climate target for 2040 of a 90% reduction in net greenhouse gas (GHG) emissions, compared to 1990 levels. This new target is a crucial step towards the EU’s long-term goal of achieving climate neutrality by 2050.
The amendment also sets out some areas of flexibility and key elements for the 2040 target and for the post-2030 climate framework. These will steer the Commission’s future legislative proposals to enable member states to hit the 2040 target while supporting European industry and citizens throughout the transition.

Today, we have adopted a 90 percent climate target for 2040 with broad support from the member states. The target is rooted in science and at the same time, it combines our competitiveness and security. This is important for the future of Europe – and it shows that even in challenging times, we can stand united. The target sets a clear direction years ahead for our policies, industries and investments. With this in hand, we are ready to build a stronger, more competitive and secure EU.
Lars Aagaard, Denmark’s minister for climate, energy and utilities

The text agreed today sets out the Council’s position for the upcoming negotiations (‘trilogues’) with the European Parliament that will shape the final text of the legislation.
Main changes agreed by the Council
The Council has maintained the binding 90% reduction of net GHG emissions by 2040 proposed by the Commission. However, it has made some adjustments to reflect concerns about the EU’s competitiveness, the need for a just and socially balanced transition, uncertainty related to natural removals and the diverse national circumstances across member states. These changes were also informed by the strategic guidance provided by EU leaders in the European Council conclusions adopted on 23 October 2025.
Scope for flexibility for the member states
The Commission’s proposal included three flexibility options, to be appropriately reflected in future Commission legislative proposals for achieving the 2040 target. The Council further clarified these areas of flexibility, which include:
• the possibility to use high-quality international carbon credits to make an ‘adequate contribution’ towards the 2040 target, quantified as up to 5% of 1990 EU net emissions, from 2036 onwards, including a pilot period for the period 2031-2035
• a role for domestic permanent carbon removals under the EU emissions trading system (ETS) to compensate for residual hard-to-abate emissions
• enhanced flexibility within and across sectors and instruments to support the attainment of targets in simple and cost-effective ways, allowing member states to address shortfalls in one sector without compromising overall progress
Elements for the post-2030 framework
The amendment to the European climate law proposed by the Commission also establishes a series of principles and conditions that the must be taken into account in developing the post-2030 policy framework to enable member states to achieve the 2040 target and to ensure a fair, cost-effective and socially balanced transition that drives investment. While the Council’s position maintains many of the elements included in the Commission’s proposal, it further develops them, including by:
• placing a greater focus on strengthening the competitiveness of the EU’s economy and industry, as well as on simplification and reduction of administrative burden
• clearly emphasising the need for a just transition and taking into account different national circumstances
• fostering innovation and the deployment of safe, scalable technologies across all sectors in a technologically neutral manner, while ensuring that energy efficiency remains a central principle
• enhancing support for energy security, focusing on renewable energy solutions, energy affordability and grid modernisation to secure the EU’s energy supply
• supporting investment and innovation, through both public and private sector funding and ensuring access to innovative technologies across member states
• addressing the realistic contribution of carbon removals to overall emission reductions, while accounting for the uncertainty associated with them
• focusing on the long-term protection and enhancement of natural carbon sinks and biodiversity, addressing the impacts of climate change and natural disturbances on land use and forestry
Review of the target
The Council’s position also introduces a biennial assessment to track progress towards intermediate targets based on the latest scientific evidence, technological advances and the EU’s global competitiveness.
Member states further elaborated and strengthened the review clause of the existing European climate law. Among other things, the review will cover the status of net removals at EU level in relation to what would be required to achieve the 2040 target and the evolving challenges to – and opportunities to improve – EU industries’ global competitiveness. The review will also take into account the evolution of energy prices and their impact on industries and households.
Based on the findings of the review and where appropriate, the Commission will have to propose a revision of the climate law. This may include adjusting the 2040 target or other additional measures to strengthen the enabling framework, namely to secure the EU’s competitiveness, prosperity and social cohesion.
ETS2 postponement
The Council also introduced a provision to postpone the entry into application of the EU emissions trading system for buildings and road transport (ETS2) by one year, from 2027 to 2028.
Next steps
The Council presidency will start negotiations with the European Parliament once the latter adopts its position, with a view to agreeing on the final text of the amendment.
Background
First adopted in 2021, the European climate law provides the legal foundation for the EU’s long-term climate policies, in line with the Paris Agreement. It sets a binding economy-wide climate neutrality target by 2050 and a 2030 objective of reducing net emissions by at least 55%. It also provides for the establishment of an intermediate climate target for 2040.
After publishing the communication ‘Europe’s 2040 climate target’ in February 2024, the European Commission put forward a proposal on 2 July 2025 to amend the European climate law to set a 2040 target.
More recently, in October 2025 the European Council provided strategic guidance on the way forward to establish a target for 2040. In particular, leaders emphasised the need for a balanced approach that would preserve and boost the EU’s competitiveness, while ensuring the social fairness of the transition. They also emphasised the need to take into account the uncertainties of natural removals. The European Council additionally called on the Commission to further develop the necessary enabling conditions to support European industry and citizens in achieving the 2040 target.
 
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Speech by Alfred Kammer, Director, IMF European Department, at the House of the Euro, Brussels
Thank you, [Mr. Kisselevsky], for the kind welcome and the ECB for hosting us again here in Brussels at the House of the Euro.
The year 2025 marked a period of profound transformation in the global economy, driven by a reconfiguration of trade policies. For Europe, these developments follow a series of crises—from the pandemic, to Russia’s invasions of Ukraine—that have tested the region’s resilience. Timely policy action has helped avoid the worst, and Europe continues to grow—but it is now becoming evident that Europe faces very low growth over the medium term.
My message today is that this has major implications for the fiscal challenges Europe is facing. In short, unless Europe steps up in a major way to lift growth to another level, traditional fiscal consolidation measures will not be enough to prevent debt levels from becoming explosive, putting Europe’s social model at risk. But let me begin by setting the stage and discuss our baseline outlook.
In our just released October forecast we have slightly upgraded our forecast for 2025 for the euro area to 1.2 percent. But the improvement is short-lived, and we see several factors dampening the recovery in 2026. The large front-loading of exports to the U.S. earlier this year is reversing and uncertainty remains. The effects of tariffs on exports will increasingly be felt as profits are squeezed. The preliminary flash estimate for Q3 released last Thursday is broadly in line with this forecast.
Our medium-term forecast expects mediocre growth, due to persistent challenges that will continue to constrain Europe’s economic dynamism. Today, the EU’s GDP per capita is nearly 30 percent lower than that of the U.S., and without meaningful reform, this gap could become even larger.
Let me highlight three key areas:
• Structural Barriers: Intra-EU trade barriers remain high—equivalent to 44 percent for goods and 110 percent for services. Regulatory frictions slow cross-border mobility of capital and labor. And the lack of a unified energy market keeps costs up and weakens energy security and resilience.
• Demographic Headwinds: Europe’s population is aging. By 2050, over two-thirds of EU countries will see a decline in their working-age population. This gives urgency to the reform agenda around labor markets and skills.
• Investment Gaps: In some countries, especially in the CESEE region, large investment gaps are depressing labor productivity and growth, pointing to the importance of both EU-level and domestic reforms to deepen capital markets and incentivize private investment.
European policymakers recognize the urgency to act. But progress has been slow, at best. This needs to change. This brings us to the question, “how Europe is going to pay for the things it cannot afford?” We are all familiar with the difficult fiscal landscape in the region, with high debt in many countries, and pressures on public spending levels. But the actual fiscal situation is worse. Europe’s fiscal challenge will become even more pressing, for several reasons.
First, new demands on public spending have emerged, in defense, and for energy security. This adds to spending pressures accumulating in pension and health care systems. Overall, we estimate additional spending in these four areas of 4½ percent of GDP in Advanced Europe including the UK but excluding CESEE economies (AE excl CESEE) by 2040, and 5½ percent of GDP in CESEE countries.
Second, rising bond yields are combining with high debt levels to create a rising interest bill in many countries.
Third, the mediocre outlook for medium-term growth and labor supply weighs on revenue collection and puts upward pressure on debt levels.
What is abundantly clear is that doing nothing is not an option! Our simulations show that, under current policies, public debt would be on a steeply-increasing path over the next 15 years. The average debt ratio across European countries could reach 130 percent by 2040.
How big of a problem is this?
For the purposes of our simulations, we use a sustainable reference debt path that—over the longer term—does not exceed 90 percent of GDP. This benchmark reflects increased debt-carrying capacity in many countries over the past three decades. It suggests an enormous sustainability gap: if no action is taken, by 2040, average debt ratios could be 40 percentage points above sustainable levels. If the debt path was anchored around debt of 60 percent of GDP, as is still embedded in the European fiscal framework, the gap would reach an even more daunting 70 ppts of GDP. So, the question is, how to prevent debt from becoming rapidly unsustainable, while absorbing rising spending pressures?
A sustainability gap that large is hard to address by conventional fiscal consolidation alone. Without reforms, the amount of deficit cutting needed to bring debt in line with the reference path would be almost 1 percent of GDP per year for five years, or cumulatively almost 5 percent of GDP. This would go far beyond what past consolidation efforts in Europe have delivered. On average, successful consolidation campaigns have yielded cumulative savings of just about 3 percent of GDP and lasted only about 3-4 years. As any Minister of Finance will tell you, a sustained fiscal effort generating 3 percent of savings is an enormous political endeavor. 5 percent is an almost impossible feat and would require deep cuts into the European model and social contract.
The way out is to accelerate growth. In our analysis, we show that even a set of moderate reforms can make a difference. It includes:
• growth-enhancing domestic reforms closing one quarter of the gap to the best performers;
• taking first steps to deepen the single market and increase the EU budget for public goods like innovation and defense, funded through joint borrowing;
• pension reforms that help to stabilize spending;
• and measures to catalyze private investment through public investment banks.
This moderate set of reforms on its own would lower the cumulative fiscal adjustment needs from around 5 to slightly above 3.5 percent and bring the average debt path one third of the distance to the sustainable path. Not all countries are the same, and some have lower starting levels of debt or less fiscal pressures to deal with. But we calculate that around three-quarters of European countries will need to consolidate, after implementing the “moderate” set of reforms. The amount of required consolidation implied by our illustrative exercise is notably larger on average than what has been committed to in the Medium-Term Fiscal and Structural Plans under the EU fiscal framework. For instance, the average adjustment under submitted and signed off plans would fall about 2 percent of GDP short of our estimates.
But let me be clear that more reforms could change this picture. In forthcoming work, we show that an all-out reform effort can make a significant contribution to closing Europe’s GDP per capita gap with the U.S. This would obviously lower the need for fiscal consolidation compared with the scenario we have modeled here. For some countries with already-high debt levels, our simulations show that a combination of reform and conventional consolidation may not be enough to keep debt sustainable. We find that around one quarter of European countries would need fiscal consolidation of above one percent of GDP per year for five years, after implementing the “moderate” set of reforms. As mentioned, this is more than what has proved feasible in the past.
These countries will therefore face difficult choices about the scope and ambition of government given the available resources. In some cases, this may mean a discussion about the social contract underlying the “European model.” For example, if resources are truly limited, providing public services fully without cost might no longer be affordable. Instead, private financing could be increased while protecting the most vulnerable. This could be done by charging user fees for some services, like health care, while keeping the services free for those on low incomes. Large tax reforms can also be designed in a progressive way, which is  particularly relevant for CESEE countries, which have more scope for revenue mobilization. Privatization of SOEs is another option in these countries to create fiscal space, that doesn’t necessarily have to impact those on the lowest incomes.
The potential savings from these more fundamental changes are substantial. For instance, if all European countries were to reduce the share of public financing in health, education, pensions, infrastructure and energy security, to the OECD average, then this could generate savings of up to 3 percent of GDP on average. So what does this analysis tell us about how Europe can pay for these things that are hard to afford? Well there are some key takeaways.
One, there are no silver bullets. For most countries, the policy package will be a mix of reforms and consolidation.
Second, it’s time to stop muddling through and be more strategic. Tinkering at the margins will likely not be sufficient to keep debt sustainable, but can still generate political opposition. Instead, a carefully-selected set of significant reforms and sizable consolidation measures will be needed to bridge the gap.
Finally, the approach to the reform process will be critical to maximize its chances of its success. Its purpose will have to be well communicated, with dialogue between relevant stakeholders, to highlight the economic and social benefits of avoiding a more painful and disorderly correction forced by financial market pressure. Different parts of the policy package can be bundled together, to increase net benefits to key constituencies, with careful sequencing so that the burden of reform does not become overwhelming.
These steps will be the key to a durable policy package, that meets the fiscal challenge, and builds a more prosperous and stable economy for all.
 
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By Ferdinand Dreher and Nils Hernborg, ECB

Many Bulgarians are still hesitant about giving up the Lev on 1 January. Mixed feelings are not uncommon in countries adopting the euro. However, survey data show that support significantly increases once people start using the euro in their daily lives.

When countries prepare to adopt the euro, public sentiment is often hesitant or split. People tend to worry about prices going up, as well as a loss of their country’s sovereignty or sense of national identity. They can also be sceptical as to whether the benefits will truly outweigh the costs. This is understandable: a currency is a powerful symbol of national identity, and major changes naturally create uncertainty.
Yet survey data reveal a striking and consistent trend: mixed sentiment prior to adoption shifts as support for the euro rises significantly after adoption. This pattern holds true across all eight countries that joined the euro area after 2002.[1]
Why does public opinion shift so markedly once people have the euro in their hands? This blog post draws on data from Eurobarometer surveys to shed light on this phenomenon. As Bulgaria prepares to join the euro area on 1 January 2026, this analysis helps us understand how public opinion could evolve after the changeover.
How public support changes before and after euro adoption
Eurobarometer data from the eight countries that joined the euro area after 2002 reveal a remarkably consistent pattern: public support for the euro tends to rise sharply after adoption.
In the final survey before accession, public opinion is often mixed. Support typically begins to increase slightly just before adoption, around the time when the country gets formal approval to join the euro area. However, the most significant shift occurs immediately after the changeover. On average, support for the euro jumps by 11 percentage points from the last survey before adoption to the first survey conducted afterward. Following adoption, public opinion stabilises at a clear majority in favour in all countries, with an average of 73 percent supporting the euro and only 22 percent against. That is a large net support of 51 percent.

Chart 1
Cumulative change in public support for the euro

(percentage point changes in public support before and after last pre-adoption survey)

Sources: European Commission Standard Eurobarometer, ECB calculations.
Notes: The European Commission’s biannual Standard Eurobarometer survey asks people a straightforward question – whether they are for or against “a European economic and monetary union with one single currency, the euro”. For each country, we looked at how the share of those “for” the euro changed before and after they adopted the euro, using the last pre-adoption survey as a reference point (indexed at 0). The Standard Eurobarometer first asks its respondents about their support for the euro in its spring 2000 survey, at which point 11 of 12 countries introducing the euro into circulation in 2002 had already officially introduced the currency in 1999. The cumulative change in support for the euro is calculated as an arithmetic average across eight accession countries and is plotted against the respective survey count relative to the accession date of that country. The cumulative change is indexed at zero in the last survey before accession. The exact time of the year in which Standard Eurobarometer surveys were conducted varies slightly from year to year, especially during the Covid-19 pandemic. Usually, the biannual surveys consist of a spring release (conducted around Mar-May, i.e. around 4 months after the turn of the year) and autumn release (conducted around Sep-Nov, around 2 months before the turn of the year). To harmonise the visualisation across countries, the x-axis in Chart 1 plots changes in relation to the survey count. The number of months in brackets in the chart is only indicative and may be higher/lower for specific countries. The latest observation is for Autumn 2024 (fifth survey after accession in Croatia). Since the question is first posed in Slovenia in the Autumn 2004 survey, the first change in support for the euro for Slovenia is from the fourth survey before accession. Confidence bands show the minimum and maximum values.

The increase can be observed across all eight accession countries, regardless of the initial level of support. For example, in Estonia and Slovenia, support rose by 8 percentage points, while in Latvia, it increased by 15 points. In Croatia – the latest country to join the euro area in 2023 – support for the euro increased by 11 percentage points between the last survey before introduction of the euro (July 2022) and the first survey after (February 2023). The positive shift can also be observed in all sociodemographic groups – young and old, men and women, different education levels and regardless of whether people live in towns or the countryside. And, importantly, as Chart 1 shows, support stays at the higher levels in the years after adoption.
Main concerns before euro adoption
Why are people sceptical of giving up their currency prior to adoption? Survey data reveal different underlying factors.
The most immediate and widespread concern is that prices will rise when the old currency is replaced by the euro. On average, about three out of four citizens fear that the changeover will lead to higher prices (Chart 2). This anxiety is often fuelled by uncertainty about how shops will convert prices and whether the transition will be used as an excuse for “rounding up” prices.[2]
Another concern is losing a symbol of national identity. Banknotes and coins carry history, images and collective memory. Replacing a national currency can feel like giving up a small part of people’s common identity, especially for older generations for whom the currency is entwined with pivotal moments in life. While this concern is less pronounced than fears about prices, about half of participants in pre-adoption surveys express worry about losing a symbol of their national identity (Chart 2).
A third worry is the perceived loss of national control over economic policy. The idea that interest rates and other key decisions will be set outside one’s own national borders can be unsettling. And so, on average, around four in ten citizens surveyed before adoption believe that switching to the euro will mean losing control over their country’s economic policy.
Beyond these specific concerns, people may also worry about the practical challenges of switching currencies. The benefits of euro adoption – such as easier travel, lower foreign exchange costs and smoother trade – can seem distant or abstract before the changeover. In contrast, the hassles of dual pricing, new notes and coins, and converting wages and pensions feel immediate and concrete. In an environment where information is incomplete or partisan, loss aversion can dominate the narrative and lead people to be more sceptical about euro adoption.

Chart 2
Concerns prior to euro adoption

(percentages)

Sources: European Commission Flash Eurobarometer.
Notes: The data include the results from the Flash Eurobarometer (“Introduction of the euro in the Member States that have not yet adopted the common currency”) in the latest available survey prior to adoption for each country as follows: Slovenia (March-April 2006), Cyprus (September 2007), Malta (September 2007), Slovakia (May 2008), Estonia (September 2010), Latvia (April 2013), Lithuania (April 2014) and Croatia (April 2022). The questions covered and answers in brackets include “What impact, if any, do you think the introduction of the euro will have on prices in (THIS COUNTRY)? – [Will increase prices]”, “Could you tell me for each of the following statements if you agree or disagree…? Adopting the euro will mean that (OUR COUNTRY) will lose control over its economic policy (%) – [Totally agree + Tend to agree]” and “Could you tell me for each of the following statements if you agree or disagree…? Adopting the euro will mean that (OUR COUNTRY) will lose a part of its identity (%) – [Totally agree + Tend to agree]”.

Why does support increase after adoption?
The first and most important factor driving the rise in public support after euro adoption could be that many of the initial fears simply do not materialise. EU institutions and national authorities carefully plan the transition. They provide clear information, dual price displays and consumer hotlines. Also, they facilitate voluntary “fair pricing” charters with retailers. As cash machines dispense euros, salaries arrive on time, and shops are open about how they set prices, trust in the new currency grows. Once the euro becomes the new status quo, people tend to warm to it through daily exposure – a psychological phenomenon called “mere exposure effect”. Fears of price spikes may also fade as consumers typically observe that the changeover has limited effects on inflation.[3]
At the same time, the benefits of adopting the euro become tangible and show up in survey data (Chart 3). Travellers experience the ease of paying in the same currency across much of the continent. Online shoppers compare and pay across borders without worrying about exchange fees. Firms experience fewer foreign-exchange risks. Banks begin to offer products on better terms. And investors treat the country as part of a larger currency area, which can boost trade and investment.[4] There is good reason to believe that these practical advantages reinforce positive attitudes towards the euro among the new currency users.
Meanwhile, survey data also indicate that identity adapts. The euro does not erase national identity. It adds a European layer on top of it (Chart 3, panel a). National symbols are minted on domestic euro coins, while cultural life and language remain unchanged. Over time, being part of the euro area can itself become a source of pride and a symbol of European integration and stability. Being a member of a club that issues a currency of global standing – and as a result wields political and economic influence – adds to the economic benefits and can outweigh concerns about ceding monetary autonomy.
Ultimately, public support (shown along the horizontal axes in Chart 3) remains high and rises further as the euro continues to deliver repeated, practical benefits that make life easier. Data also show that directly after adoption a large proportion of citizens already feel the benefits of the euro mentioned above (vertical axes of Chart 3, panels b and c). And, importantly, this sentiment increases over time in tandem with support for the euro.

Chart 3
Support for the euro and its perceived benefits after adoption

(x-axis: share of respondents expressing support for the euro; y-axis: share of respondents perceiving the respective benefit of the euro)

a) Does the euro make you personally feel more European than before?

b) Has the euro made travelling easier and less costly?

c) Has the euro made it easier to compare prices?

(percentages)

(percentages)

(percentages)

Sources: Standard Eurobarometer and Flash Eurobarometer.
Notes: The x-axis in each panel shows the share of respondents expressing support for the euro, as measured in the Standard Eurobarometer in the first survey after adoption for each country and in the latest survey (2025). The y-axis in each panel shows the share of respondents that perceive the respective benefit of the euro, as measured in the Flash Eurobarometer (“The euro area”) in the first survey after adoption for each country and in the latest survey (2024). For the question on the euro making people feel more European than before, the latest data point available is 2023. The dots represent each one of the eight countries that adopted the euro after 2002. The questions covered and answers in brackets include “Does the euro make you personally feel more European than before, or would you say that your feeling of being European has not changed? (%) – [Yes, more European]”, “Do you think that the euro has made travelling easier and less costly? (%) – [Yes]” and “Do you think that the euro has made it easier to compare prices and shop in different EU countries, including online? (%) – [Yes]”.

Looking ahead: lessons from euro adoption
The experience of the countries that have adopted the euro since 2002 offers a clear lesson: initial scepticism and concern often give way to broad public support once the currency is in use.
The euro area will always contain different histories, cultures and preferences. What keeps it together through recessions, pandemics and energy shocks is a shared sense that the common currency provides concrete benefits and therefore enjoys broad public support. In this sense, the euro is more than just a currency. It is a powerful symbol of unity, stability and shared prosperity. Countries that have adopted the euro since 2002 have seen fears give way to tangible benefits, from smoother trade and travel to a stronger sense of belonging in Europe.
As Bulgaria prepares to join the euro area in 2026, the experiences from past changeovers provide valuable insights on how to build strong foundations for public support for the euro after adoption. Transparent communication, careful planning, and measures to reassure the public are essential to ensuring a smooth transition and together lay the groundwork for long-term success.
The views expressed in each blog entry are those of the author(s) and do not necessarily represent the views of the European Central Bank and the Eurosystem.
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The euro was officially introduced in 1999 and entered into circulation in 12 countries in 2002. This analysis looks at the countries that joined after 2002, namely, Slovenia (2007), Cyprus and Malta (2008), Slovakia (2009), Estonia (2011), Latvia (2014), Lithuania (2015) and, most recently, Croatia (2023).
On average across the eight countries, 74% of respondents were concerned about abusive price setting during the changeover in the last survey prior to adoption, according to the Flash Eurobarometer.
See Falagiarda, M., Gartner, C., Mužić, I. and Pufnik, A. (2023), “Has the euro changeover really caused extra inflation in Croatia?”, The ECB Blog, 7 March.
See Falagiarda, M. and Gartner, C. (2022), “Croatia adopts the euro”, Economic Bulletin, Issue 8, ECB and Gunnela, V., Lebastard, L., Lopez-Garcia, P., Serafini, R. and Mattioli, A. (2021), “The impact of the euro on trade: two decades into monetary union”, ECB Occasional Paper No 283.

 
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Today, the European Commission adopted its annual Enlargement Package, presenting a comprehensive assessment of the progress made by the enlargement partners over the past twelve months. This year’s package reaffirms that the momentum for enlargement stands high on the priority agenda of the EU. It also confirms that the accession of new Member States is increasingly within reach.
Staying consistent and following a merit-based approach is key to successful EU accession. Montenegro, Albania, Ukraine, the Republic of Moldova, Serbia, North Macedonia, Bosnia and Herzegovina, Kosovo, Türkiye and Georgia continue their respective paths towards the EU. The pace of their reforms, in particular in the areas of democracy, the rule of law and fundamental rights, directly impacts the speed of accession. These advancements benefit both aspiring Member States and current EU Member States, fostering prosperity, democracy, security and stability while unlocking new opportunities for citizens and businesses, such as strategic investments and opening of the Single Market.
Ursula von der Leyen, President of the European Commission said: “We are more committed than ever to turning EU enlargement into a reality. Because a larger Union means a stronger and more influential Europe on the global stage. But enlargement is a merit-based process. Our package provides specific recommendations to all our partners. And to all of them we say: EU accession is a unique offer. A promise of peace, prosperity and solidarity. With the right reforms and a strong political will, our partners can seize this opportunity.”
The assessments, accompanied by recommendations and guidance on the reform priorities, provide a roadmap for enlargement partners toward EU membership. The Commission remains fully committed to supporting future Member States in this journey. Gradual integration of the aspiring Members into the Single Market strengthens ties with the Union already before their accession. Significant progress has been achieved over the past year. With enlargement as a clear policy goal in this mandate, the Commission is committed to ensuring both the readiness of aspiring members as well as the EU’s preparedness to welcome them. To this end, a Communication on in-depth policy reviews and reforms will be presented soon.
To ensure that new Member States continue to safeguard and maintain their track-record on the rule of law, democracy and fundamental rights, future Accession Treaties should contain stronger safeguards against backsliding on commitments made during the accession negotiations.
Effective communication, as well as countering foreign information manipulation and interference, including disinformation is a strategic imperative.
The Commission also stands ready to support Member States’ effort to further anchor public trust in the process and help enlargement move forward with the legitimacy it needs.
Main conclusions
Montenegro has marked significant progress toward EU accession, closing four negotiation chapters over the last year. Montenegro’s commitment to provisionally closing further chapters by the end of 2025 reflects its dedication to European integration. Maintaining steady progress on reforms and seeking continuous broad political consensus are crucial for achieving the country’s target to close accession negotiations by the end of 2026. Subject to maintaining the pace of reforms, Montenegro is on track to meet this ambitious objective.
Albania has made significant progress, with four clusters opened over the last year. Preparations for the opening of the last cluster this year are well advanced. Progress has been achieved on the fundamentals, particularly on justice reform and in the fight against organised crime and corruption. Continued efforts are now needed to meet the interim benchmarks under the fundamentals, which will pave the way to start closing negotiating chapters once the necessary sector reforms have been made. Achieving Albania’s goal of concluding negotiations by 2027 depends on maintaining reform momentum and fostering inclusive political dialogue. Subject to maintaining the pace of reforms, Albania is on track to meet this ambitious objective.
Despite Russia’s unrelenting war of aggression, Ukraine remains strongly committed to its EU accession path, having successfully completed the screening process and advanced on key reforms. Ukraine has adopted roadmaps on the rule of law, public administration, and the functioning of democratic institutions, as well as an action plan on national minorities, which the Commission assessed positively. Ukraine has met the conditions required to open clusters: one (fundamentals), six (external relations), and two (internal market). The Commission expects Ukraine to meet the conditions to open the remaining three clusters and works to ensure that the Council is in a position to take forward the opening of all clusters before the end of the year. The Ukrainian government has signalled its objective to provisionally close accession negotiations by the end of 2028. The Commission is committed to support this ambitious objective but considers that, to meet it an acceleration of the pace of reforms is required, notably with regards to the fundamentals, in particular rule of law.
In the face of continuous hybrid threats and attempts to destabilise the country, Moldova has significantly advanced on its accession path, successfully completing the screening process. The first EU-Moldova summit in July 2025 marked a new stage of cooperation and integration. Moldova has adopted roadmaps on the rule of law, public administration, and the functioning of democratic institutions, which the Commission assessed positively. The Commission’s assessment is that Moldova has met the conditions required to open clusters: one (fundamentals), six (external relations), and two (internal market). The Commission expects Moldova to also meet the conditions to open the remaining three clusters and works to ensure that the Council is in a position to take forward the opening of all clusters before the end of the year. The government of Moldova has signalled its objective to provisionally close accession negotiations by early 2028. The Commission is committed to supporting this objective, which is ambitious but achievable, provided Moldova accelerates the current pace of reforms. Sustaining reform momentum is crucial, reinforced by strong parliamentary support for the country’s European path following elections in September.
The polarisation in Serbian society has deepened against the background of mass protests taking place across Serbia since November 2024, reflecting disappointment of citizens over inter alia corruption and the perceived lack of accountability and transparency coupled with instances of excessive use of force against protestors and pressure on civil society. This has led to an increasingly difficult environment where divisive rhetoric has led to a serious erosion of trust amongst the stakeholders which, in turn, impacts the accession process. Reforms have significantly slowed down. While acknowledging some recent developments, such as the relaunch of the procedure of selection of the new Council of the regulatory body for electronic media (REM) and progress in the legislative process on the Law on a unified voter register, which now need to be completed and implemented, as well as a recent increase in alignment with the EU’s common foreign and security policy, which needs to be pursued, more needs to be done. Serbia is expected to overcome the standstill in the area of judiciary and fundamental rights overall and urgently reverse the backsliding on freedom of expression and the erosion of academic freedom. The Commission assessment from 2021 that Serbia had fulfilled the opening benchmarks for cluster 3 (competitiveness and inclusive growth) remains valid.
North Macedonia continued its work on the roadmaps for the rule of law, public administration reform, and the functioning of democratic institutions, as well as on the action plan on the protection of minorities. Further swift and decisive action is needed on the opening benchmarks, in line with the negotiating framework, with a view to opening the first cluster as soon as possible and when relevant conditions are met. North Macedonia should intensify efforts to uphold the rule of law, by safeguarding judicial independence and integrity, and strengthening the fight against corruption. The Country also needs to adopt the necessary constitutional changes with a view to including in the Constitution citizens who live within the borders of the state and who are part of other people, such as Bulgarians, as outlined in the Council Conclusions of July 2022, which the country committed to launch and achieve.
In Bosnia and Herzegovina, the political crisis in the Republika Srpska entity and the end of the ruling coalition have undermined EU accession progress, resulting in limited reforms, namely on data protection and border control, as well as the signature of the Frontex status agreement. On a positive note, Bosnia and Herzegovina submitted in September 2025 its Reform Agenda to the European Commission. Following recent institutional changes in the Republika Srpska entity, Bosnia and Herzegovina has the opportunity to deliver on reforms on the EU path. To effectively start accession negotiations, authorities must in the first place finalise and adopt judicial reform laws, in full alignment with European standards, and appoint a chief negotiator.
Kosovo has remained committed to its European path, with a high level of public support. The delay in forming the institutions following the February general elections slowed down EU-related reform progress. Forging cross-party cooperation and re-prioritising these reforms is necessary for Kosovo to get back on track of its EU path. Normalisation of relations with Serbia and implementation of Dialogue commitments remain an integral part of Kosovo’s European perspective. The Commission stands ready to prepare an Opinion on Kosovo’s membership application, if requested by the Council. The Commission has taken the first steps to gradually lift measures against Kosovo in place from May 2025. The next steps remain conditional on sustained de-escalation in the north. The Commission intends to further lift these measures provided an orderly transfer of local governance in the north is achieved following the second round of the local elections and de-escalation is sustained.
Türkiye remains a candidate country and key partner for the EU. In line with the European Council conclusions of April 2024, the EU has advanced relations with Türkiye in a phased, proportionate and reversible manner, engaging on shared priorities. The resumption of Cyprus settlement talks is a key element of cooperation. At the same time, the increasing legal actions against opposition figures and parties, alongside multiple other arrests, raise serious concerns about Türkiye’s adherence to democratic values. While dialogue on the rule of law remains central to EU-Türkiye relations, the deterioration of democratic standards, judicial independence, and fundamental rights has yet to be addressed. Accession negotiations with Türkiye remain at a standstill since 2018.
In 2024, the European Council concluded that Georgia‘s EU accession process was de facto halted. Since then, the situation has sharply deteriorated, with serious democratic backsliding marked by a rapid erosion of the rule of law and severe restrictions on fundamental rights. This includes legislation severely limiting civic space, undermining freedom of expression and assembly, and violating the principle of non-discrimination. Georgian authorities need to urgently reverse their democratic backsliding and undertake comprehensive and tangible efforts to address outstanding concerns and key reforms supported by cross-party cooperation and civic engagement, in line with EU values. Following the December 2024 European Council Conclusions and in light of Georgia’s continued backsliding, the Commission considers Georgia a candidate country in name only. The Georgian authorities must demonstrate resolute commitment to reverse course and return to the EU accession path.
Next steps
It is now for the Council to consider today’s recommendations of the Commission and take decisions on the steps ahead in the enlargement process.
Background
Enlargement is a strict, fair and merit-based process, based on the objective progress of each enlargement country. The EU supports the strengthening of institutions, democratic governance and public administration reforms across these countries.
By fostering gradual integration, the EU brings benefits even before the accession. Initiatives such as the €6 billion Growth Plan for the Western Balkans, the €1.9 billion Moldova Growth Plan, and the €50 billion Ukraine Facility allow countries advance in their reforms, as well establish stronger connection with the EU, such as through gradual integration and the participation in SEPA and “Roam Like at Home”.
Each enlargement has made our Union stronger. When ten countries joined the EU in 2004, it marked the Union’s largest ever expansion. In the two decades since, newcomers have seen living standards double, unemployment fall by nearly half, life expectancy rise from 75 to 79 years, poverty and social exclusion drop sharply, and 6 million new jobs created. For the existing members, trade has multiplied more than fivefold ever since, while 20 million jobs have also been created. For the EU as a whole, the Single Market gained 74 million new consumers at the time and the EU economy has expanded by 27% despite global crises.
For more information
2025 Communication on EU Enlargement Policy – Enlargement and Eastern Neighbourhood
Factsheet on the EU accession process
Factsheet on the accession negotiations state of play
For detailed findings and recommendations, see:
Montenegro: Report; Factsheet
Albania: Report; Factsheet
Ukraine: Report; Factsheet
Moldova: Report; Factsheet
Serbia: Report; Factsheet
North Macedonia: Report; Factsheet
Bosnia and Herzegovina: Report; Factsheet
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Speech by Christine Lagarde, President of the ECB, at the high-level conference on “Bulgaria on the Doorstep of the Eurozone”, jointly organised by the Bulgarian Ministry of Finance and Българска народна банка (Bulgarian National Bank)

On 1 January 2026 Bulgaria will adopt the euro as its currency. The change will happen in a single night, but it is the outcome of a much longer journey. Bulgaria has long been part of Europe’s monetary story. From the lev’s peg to the French franc in the late 19th century to its anchor to the Deutsche Mark in the late 20th century, the country has always looked towards Europe whenever it has had the freedom to choose its destiny.
Now, with the adoption of the euro, Bulgaria is taking the final step towards – and its rightful place at the heart of – Europe’s monetary union. Yet every historic step brings questions, and sometimes fears. Paìsiy Hilendàrski – soon to grace Bulgaria’s €2 coin – once urged “Bulgarian, do not forget yourself; know your kin and language.”
Some naturally worry that adopting the euro might mean giving up a part of that hard-won independence. But Bulgaria’s motto – “United we stand strong” – is engraved not only on its coat of arms, but also in its very spirit. By joining the euro area, Bulgaria is not losing itself. It is reaffirming that it is proud, sovereign and European.
The benefits of the euro for Bulgaria
Adopting the euro brings two key benefits for Bulgaria: prosperity and security.
First, prosperity.
Bulgaria’s journey to the heart of Europe has already delivered remarkable gains. Over the past decade, GDP per capita has risen from one-third of the euro area average to almost two-thirds today. This success has been built on deep integration into the European economy – and even more so, into the euro area economy. Today, 65% of Bulgaria’s exports go to other EU countries, and 45% go to euro area countries. Under its currency board, Bulgaria has already enjoyed much of the exchange rate stability that euro area membership provides. But adopting the euro will take this integration one step further by removing the last currency barriers within the Single Market.
For Bulgarian firms, that means zero conversion costs when exporting to their primary European customers. Small and medium-sized enterprises will save around one billion levs every year in conversion costs alone.[1] Take Bulgaria’s automotive industry, which supplies around 80% of electronic components used in European vehicles.[2] Instead of spending time and money on currency conversion, these companies can reinvest in growth. Adopting the euro will also open the door wider to European capital markets. It will lower funding costs and provide a more stable basis for long-term investment.
These advantages are already visible in Bulgaria’s improved credit ratings and narrower sovereign spreads, which will translate into lower borrowing costs for everyone. With these foundations, Bulgarian firms can continue to invest, innovate and move up the value chain – as they have done so impressively already. The second benefit is security. We are living in a far more volatile world, marked by constant external shocks. For a small and open economy like Bulgaria, where nearly one in every two jobs depends on foreign demand, that exposure can be particularly acute.[3]
The currency board has long insulated Bulgaria by eliminating euro-lev fluctuations. While it is a strong shield, such protection cannot be assumed to be watertight. History shows that fixed exchange rate regimes are vulnerable under stress: the currency “snake” of the 1970s and, later, the European Monetary System were repeatedly realigned amid speculative pressures. In this environment, the institutional credibility of euro area membership is the strongest safeguard. It provides complete protection against exchange rate volatility with Bulgaria’s main trading partners in Europe and it shields Bulgarian firms from sharp currency swings that can erode competitiveness globally.
As a large currency area with much deeper financial markets, the euro area is far less vulnerable to sudden shifts in global capital flows than smaller economies. To put it into perspective: turnover in the US dollar-euro market is around 20 times higher than in euro-franc or euro-yen markets. This scale brings lower volatility.[4] At the same time, because the euro is the world’s second most important currency, the euro area pays for more than half of its imports in its own currency. In Bulgaria’s case, the share is even higher: around 83% of imports are invoiced in what will soon be its own currency. This cushions households and businesses from rising import prices when exchange rates move.
Finally, when global demand becomes less predictable, regional integration matters even more – and the single currency cements that integration. It prevents our internal market from being weakened by competitive devaluations. During the great financial crisis, for instance, the euro depreciated by about 20% against the US dollar. But according to ECB staff analysis, some countries might have seen their currencies fall by up to 14% more if they had stood alone. Such moves could have threatened the cohesion we have built. But thanks to the euro, Europe’s Single Market remained solid and united.
In short, the euro strengthens Bulgaria’s prosperity and reinforces Europe’s collective security in an increasingly fragmented world.
Managing the challenges of adopting the euro
Despite these benefits, the decision to join the euro area has not been universally welcomed. Surveys show that around half of Bulgarians currently oppose introducing the euro, while a small share remain undecided.[5] I take the concerns of the Bulgarian people very seriously – and I would like to address them clearly. Let me speak to two of the most pressing. The first is the fear of losing sovereignty – the fear that national monetary policy will be subordinated to European decisions. Given the lev’s long history as a symbol of Bulgaria’s independence, this feeling is entirely understandable. But joining the euro is not a loss of sovereignty – it is a gain.
For decades, Bulgaria has operated under a currency board. In practice, this has meant importing the monetary policy of larger economies, but with no seat at the table where those policy decisions are made. That will now change. The Governor of the Bulgarian National Bank will sit on the ECB’s Governing Council, with the same say, the same vote and the same responsibility as every other member. Bulgaria will no longer passively follow others – it will help shape decisions in the world’s third-largest economy.
At the same time, Bulgaria’s economy has become deeply integrated into European supply chains. Its business cycle now moves closely in step with that of the euro area. When the euro area grows, Bulgaria grows; when it slows, Bulgaria slows. In this context, a common monetary policy is not a restraint – it is a natural fit. The second concern is that adopting the euro will lead to higher prices. This concern is entirely legitimate. Currency changeovers can produce a temporary uptick in measured inflation, often when firms round up prices during conversion. People may also feel that inflation has risen, even when official data do not show it. This perception often stems from the prices we notice most – those of everyday items such as food and basic services – which can rise faster than the overall price level. But when strong safeguards are in place, the evidence is reassuring.
When authorities display prices in both currencies for a sufficiently long period of time, monitor actively and enforce penalties – as those in Bulgaria plan to do – the impact on consumer prices is modest and short-lived. In earlier euro changeovers, the impact was between 0.2 and 0.4 percentage points. Even in Croatia – which joined the euro area at a time when inflation was already high – the changeover effect was about 0.4 percentage points, and it quickly faded. Public perceptions show a repeating sequence. Before adoption, uncertainty is natural. But once households and firms begin using the new currency in their daily lives – and see that a credible central bank is safeguarding price stability – confidence grows.
In every country that has joined the euro area in the recent past, public support increased markedly within six months of the changeover. Today, support for the euro stands at 83% across the euro area.[6] In fact, when we look back at previous waves of euro adoption, the greatest risk countries faced was not losing sovereignty or seeing an increase in prices. It was losing reform momentum once inside the euro area and thus missing out on the full benefits of the single currency. But this lies entirely in Bulgaria’s hands.
If the country continues to align its institutions with the highest European standards and helps its firms integrate even more deeply into EU value chains, the gains will keep growing. During previous enlargement waves, EU countries that became more tightly integrated into cross-border production networks saw their GDP per person rise nearly 10 percentage points more than their less-integrated peers.[7] Reform momentum in Bulgaria has already delivered impressive results. The task now is to lock in that progress to ensure that it doesn’t fade as financing conditions improve and external pressures ease after adoption. By doing so, Bulgaria can go beyond reaping the benefits of its current strengths – such as competitive labour and land costs – and move towards becoming a hub for higher-value, innovation-driven growth.
Conclusion
Let me conclude.
Vasil Levski, Bulgaria’s most revered national hero, once said that “the people’s cause stands above all.” The decision to adopt the euro embodies that cause. It bolsters Bulgaria’s economic foundations, builds its resilience against global shocks and amplifies its voice in euro area decision-making, thereby strengthening its sovereignty. Given Bulgaria’s long-standing currency peg, the costs of forgoing an independent monetary policy are minimal, yet the gains are substantial: smoother trade, lower financing costs and more stable prices.
These advantages will particularly empower small and medium-sized enterprises as they expand within Europe’s integrated economy.
But gains are never automatic.
By ensuring a transparent changeover and sustained reform momentum, Bulgaria can turn convergence into lasting competitiveness, and translate that into higher living standards for all Bulgarians. In adopting the euro, Bulgaria is honouring Levski’s vision. It shows that through unity and shared strength, the country stands not only with Europe, but at the heart of Europe.
Thank you.

Bulgarian Ministry of Finance and Българска народна банка (Bulgarian NationalBank) (2025), “Minister Dilov: All Sectors Will Benefit from the Adoption of the Euro, and People’s Purchasing Power Will Increase”, 7 June.
InvestBulgaria Agency, Automotive industry.
Magistretti, G. and Vassileva, I. (2024), “Bulgaria in Global Value Chains: Leveraging Integration with the EU”, Selected Issues Papers, Vol. 2024, No 23, International Monetary Fund, 24 June.
Since 1999 the Swiss franc-US dollar rate has been about 2.6% more volatile than the euro-US dollar, and the yen-US dollar rate has been about 5.5% more volatile.
European Commission (2025), “Introduction of the euro in the Member States that have not yet adopted the common currency – Spring 2025”, Eurobarometer.
European Commission (2025), “Eurobarometer shows record high trust in the EU, and strong support for the euro and a common defence and security policy”, press release, 28 May.
Beyer, R., Li, C.Y. and Weber, S. (2024), “The 2004 EU Enlargement Was a Success Story Built on Deep Reform Efforts”, IMF Blog, International Monetary Fund, 3 December.

 
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