Cooling Inflation Meets Hot Defense Budgets in Europe

On June 18th, Eurostat released the latest inflation numbers for the EU and its 27 member states:

The euro area annual inflation rate was 1.9% in May 2025, down from 2.2% in April. A year earlier, the rate was 2.6%. European Union annual inflation was 2.2% in May 2025, down from 2.4% in April. A year earlier, the rate was 2.7%. 

These are good numbers, continuing the trend of slowly declining inflation rates after the 10+% that plagued the euro zone three years ago. However, by historical comparison the inflation rate is still on the high side. Figure 1 reports the inflation of the current 20 euro states all the way back to December 2000. The dashed light-blue line represents the 1.9% inflation rate in May this year.

We have to go back to the first decade of the euro’s existence, 2000-2009, to find an inflation rate consistently higher than what it is today. Economic activity was generally higher across the EU, including the current 20 euro zone members; with higher GDP growth rates and lower unemployment, Europe’s economies had a natural inclination toward higher inflation.