The European Commission has pushed up its estimate for economic growth in the eurozone this year to 2.1% from 1.9%.
Eurozone growth is picking up
Investment, sustained world growth and consumer demand in Germany will help to boost the economy of the 12-nation bloc, the commission predicts.
It also said the economy of the EU as a whole would grow by 2.3% this year from 1.6% in 2005.
But it warned that potential supply disruptions made volatile oil markets the EU's "biggest near-term risk".
The economy of the eurozone grew by just 1.3% last year. However, although it is expected to speed up this year, eurozone growth is forecast to decline to 1.8% in 2007.
Growth in the EU's economy is also expected to slow next year to 2.2%.
"Both the EU and the euro area are expected to grow markedly strongly this year," EU Economic and Monetary Affairs Commissioner Joaquin Almunia said.
"But growing at, or slightly above, is not enough and some countries are far from exploiting their full potential."
The commission said European economies were benefiting from foreign and domestic demand, which had encouraged companies to invest despite interest rate worries.
This investment was "set to continue growing at a rapid pace underpinned by optimistic business sentiment, a favourable profit outlook and the increased need for replacement investment," it added.
Growth in Germany, the EU's largest economy, is expected to be 1.7% this year, compared with 0.8% in 2005.
The country has benefited from a flurry of spending on consumer goods ahead of an increase in value added tax next year, the commission said.
But budgetary measures mean German economic growth is expected to drop to 1% in 2007 - partly explaining the slip in eurozone growth.
Warning that oil prices posed a risk to European economies, the commission added: "The very low spare capacities make markets extremely vulnerable to actual and potential supply disruptions."