European economic growth may be at risk of stagnation if urgent action is not taken to address slowing growth, weak investment and rising geopolitical threats, the International Monetary Fund (IMF) warned.

Trade tensions and sluggish demand are curbing growth momentum, and risks are clearly tilted to the downside, the Washington-based institution said in a statement on Thursday. The eurozone economy is expected to grow by only 0.8% in 2025, despite record low unemployment and inflation close to target.

To revive productivity, the IMF called on the European Union to take "decisive action" to promote long-delayed deepening reforms of the single market, saying cross-border fragmentation is stifling innovation and corporate growth.

The IMF said existing barriers within the EU are equivalent to a 44% tariff on goods and a 110% tariff on services. The IMF added that closing these gaps through regulatory coordination, capital market reforms and labor mobility could increase gross domestic product (GDP) by 3% within a decade.

The IMF said countries with fiscal space should invest as defense, aging and climate costs push spending sharply higher, but heavily indebted members face painful consolidation. The organization called for a 50% increase in the EU budget to achieve common goals.

The IMF believes that the business environment for companies exposed to the United States may deteriorate, which may put pressure on banks' balance sheets. However, the fund believes that the European banking system is currently "well capitalized and liquid."