The eurozone's economic performance in early 2026 has been underwhelming, with GDP expanding just 0.1% quarter-on-quarter and 0.8% year-on-year in the first quarter, according to Eurostat's second estimate. The wider European Union fared slightly better at 0.2% and 1.0%, respectively, but both lag well behind the United States, which grew 2.7% annually over the same period.
Yet beneath the bloc-wide slowdown, three EU member states are growing at more than triple the eurozone average: Cyprus, Bulgaria, and Spain. Each is navigating a distinct set of risks, from energy-driven inflation to tourism shocks and fiscal imbalances.
Cyprus: 3.0% Growth but Tourism Under Pressure
Cyprus recorded the highest year-on-year growth among EU members with available first-quarter data, at 3.0%. This marks a slowdown from 4.3% in the fourth quarter of 2025, which had been the second-fastest in the EU at the time. The European Commission's autumn 2025 forecast attributes the expansion to robust private consumption, EU Recovery and Resilience Facility (RRF) investments, and a record-breaking tourism season. Full-year GDP growth is projected at 2.6% in 2026 and 2.4% in 2027.
However, the external environment is deteriorating. Eurobank Research economist Michail Vassileiadis notes that renewed energy pressures linked to the Middle East conflict are testing inflation, labour markets, and fiscal policy. Headline inflation accelerated from 0.9% year-on-year in February to 3.0% in April, with energy prices jumping 8.7% in April alone. Tourism, which accounts for roughly 14% of Cypriot GDP, is the most exposed channel: FocusEconomics reports that tourist arrivals fell 30% in March following Iran's drone attacks on UK air bases on the island, producing the first quarterly contraction in tourism since the pandemic-hit first quarter of 2021. Unemployment in the accommodation sector rose 2.6% in the first four months of 2026 compared with the same period in 2025.
On the positive side, Cyprus's public finances remain strong. The general government recorded a surplus of €573.3 million in the first quarter, equivalent to 1.5% of GDP, giving Nicosia room to maintain supportive policy without compromising sustainability, according to Vassileiadis.
Bulgaria: 2.9% Growth as Euro Adoption Brings Scrutiny
Bulgaria posted year-on-year growth of 2.9% in the first quarter, unchanged from the previous quarter, making it the second-fastest in the EU. The result carries added significance because Bulgaria adopted the euro on 1 January 2026, becoming the 21st member of the single currency area. European Central Bank President Christine Lagarde, speaking in Sofia ahead of the changeover, described the move as the natural endpoint of a long convergence process, noting that 65% of Bulgarian exports go to other EU countries and 45% to euro area economies. The European Commission projects full-year GDP growth of 2.7% in 2026 and 2.1% in 2027, driven by RRF funds, defence investment, and resilient private consumption.
Yet warnings about overheating are mounting. International Monetary Fund Managing Director Kristalina Georgieva, herself Bulgarian, flagged in a November speech that the economy is operating hot, with wage growth outpacing productivity, credit booming, and housing prices rising fast. Euro adoption could lift Bulgaria's per capita income to the EU average within a decade, but only if paired with fiscal and structural reforms.
Fiscal discipline is now in question. The 2025 fiscal deficit widened to 3.5% of GDP, breaching the 3.0% threshold that triggers a European Commission assessment for a potential Excessive Deficit Procedure. National primary expenditure grew an estimated 13% to 14% year-on-year, well above the 6.2% ceiling set in the Medium-Term Fiscal Plan. Eurobank warns that a meaningful share of the increase appears structural, particularly in personnel costs, raising the likelihood of an Excessive Deficit Procedure from 2027 onward. The general government deficit jumped 55.2% year-on-year in the first quarter of 2026 alone, before accounting for any measures related to the war in Iran. The political backdrop has also shifted: Progressive Bulgaria (PB), the party associated with former president Rumen Radev, secured an outright parliamentary majority, potentially altering fiscal priorities.
Spain: 2.6% Growth with Inflation and Fiscal Risks
Spain recorded year-on-year growth of 2.6% in the first quarter, the third-fastest in the EU. The expansion is driven by strong services exports, particularly tourism, and RRF-funded investments. However, Spain faces similar headwinds: headline inflation rose to 3.2% in April, driven by energy costs, and the government's fiscal deficit remains above the 3% threshold, at 3.4% of GDP in 2025. The European Commission projects full-year growth of 2.4% in 2026, but risks are tilted to the downside due to external energy shocks and potential tourism disruptions from the Iran conflict.
The broader eurozone context remains challenging. The ECB held rates at 2% in its latest meeting, as stagflation fears mount. Eurozone inflation hit 3% in April, driven by oil price spikes, while growth stalls. The divergence between the fastest-growing economies and the bloc's sluggish core underscores the uneven nature of the recovery and the varied policy challenges ahead.
