The European Commission on Friday forecasted modest economic growth and continued declines in inflation for the eurozone in 2025 but cautioned about increasing risks stemming from geopolitical tensions.

The executive arm of the European Union that runs the affairs of the 27-nation bloc particularly warned a protectionist U.S. trade policy under the Trump administration could be "extremely harmful."

U.S. President-elect Donald Trump, who will take office on Jan 20, has floated the idea of a tariff of 10% or more on all goods imported into the U.S, which is Europe's main trading partner.

"The level of integration between our economies is such that EU-U.S. trade relations are a stabilizing economic and political force," European Economic Commissioner Paolo Gentiloni told a press conference.

"And in this context, a possible protectionist turn in U.S. trade policy would be extremely harmful for both economies," he said.

Forecasts by the Commission showed eurozone growth accelerating slightly to 1.3% in 2025, up from 0.8% this year, while inflation in the 20-country single currency area was seen easing to 2.1%, down from 2.4% expected in 2024.

It is seen slowing further to 1.9% in 2026, the Commission said.

"With the EU economy steadily recovering, growth should pick up more speed next year," European Commission Vice President Valdis Dombrovskis said.

"Still, given today's high geopolitical uncertainty and many risks, we cannot afford to be complacent. We need to deal with longstanding structural challenges."

The growth figure was virtually unchanged from the last forecast the EU executive body published in June, when it envisaged economic activity would increase by 1.4% in 2025.

On Friday, it said domestic demand was projected to drive future growth, expected to reach 1.6% in the eurozone in 2026.

"As the purchasing power of wages gradually recovers and interest rates decline, consumption is set to expand further," it said. "Investment is expected to rebound on the back of strong corporate balance sheets, recovering profits and improving credit conditions."

Inflation has dropped significantly over the past two years after reaching 8.4% in 2022, following Russia's invasion of Ukraine, and 5.4% in 2023.

The expected further slowdown would bring it very close to the European Central Bank's (ECB) 2% target in 2025.

Eurozone unemployment was projected to stand at 6.5% in 2024, then edge further down to 6.3% in 2025 and 2026, the commission said.

But it also warned its outlook was subjected to growing "uncertainty and downside risks" linked to an ever-tenser geopolitical context, with Russia's war in Ukraine and conflicts in the Middle East continuing to imperil stability and energy security.

'Narrow path'

Trump's imminent return to the White House has loomed large on the EU's economic prospects.

"A further increase in protectionist measures by trading partners could upend global trade, weighing on the EU's highly open economy," the Commission said.

Trump repeatedly professed his love for tariffs on the campaign trail, threatening to target the European Union in particular.

"The commission will engage with the new administration with a great spirit of cooperation, but also with the idea that we have to defend our strength as an economy which is open to trade," said Gentiloni.

He said Germany and Italy would be the most affected by a potential increase in U.S. tariffs because they exported the most to the United States and tariffs would compound the problems manufacturers there were already facing.

But tariffs could also have a negative impact on the U.S. economy itself by stoking inflation, Gentiloni said.

Europe's biggest economy Germany, which the Commission expects to contract for a second consecutive year in 2024, is forecast to grow 0.7% in 2025 and 1.3% in 2026.

Germany is to hold early elections in February after a political crisis, as manufacturers, particularly in the automotive sector, have been hit hard by rising competition in key market China, especially on electric cars.

Growth in France is set to slow to 0.8% in 2025 from 1.1% seen in 2024 before rebounding to 1.4% in 2026.

The aggregated eurozone budget deficit, which under EU rules every country should keep below 3% of GDP, is projected to shrink to that threshold level for the whole eurozone this year and then continue down to 2.9% in 2025 and 2.8% in 2026.

Aggregated eurozone public debt, however, will continue to rise from 89.1% of GDP expected this year to 89.6% next year and 90.0% in 2026, the Commission forecast.

On the domestic front, the Commission warned that "policy uncertainty and structural challenges" in the manufacturing sector could further weigh on competitiveness, growth and the labor market.

"Member states will have to walk a narrow path of bringing down debt levels while supporting growth," Gentiloni said.

"Strengthening our competitiveness through investments and structural reforms is crucial to lift potential growth and navigate rising geopolitical risks."

A landmark report by former Italian prime minister Mario Draghi this year raised the alarm over Europe's failure to keep up with the United States, underlining the EU's low productivity and economic slowdown.

It said Europe must invest up to 800 billion euros ($863 billion) more a year to avoid falling further behind.