"What we've agreed with the commission today is that there'll be scoping work undertaken, which would be a precursor potentially to a free trade agreement.
"That's of great significance to New Zealand because essentially there's $16 billion of trade currently taking place between Europe and New Zealand. Put that in context - China is $18.2 billion as we sit here today."
The trade talks took place alongside the Nuclear Security Summit in The Hague.
A press release issued by the Prime Minister's office said it was the first time the EU had agreed to consider a Free Trade Agreement "as one such option" for refreshing the trade and economic relationship over the next 12 months.
"The EU is our third largest trading partner with over $16 billion in two-way trade of goods and services. It is also a long-standing close friend and partner. We share common interests, values and history," said Key.
"However, we can't afford to be complacent, especially given the shift in economic gravity to Asia. We've agreed to consider our options for refreshing our trade and economic relationship over the next 12 months."
Key said the news was "a significant development. We've always said a Free Trade Agreement is the obvious next step. We're not there yet, but the issue is now on the agenda - and that's a step forward. We're going to come back to this in 2015 to take decisions on what to do next," he said.
"Our relationship is broader than just trade. We're also working to conclude a new Partnership Agreement which will provide a blueprint for all aspects of our relationship well into the 21st century."
"The EU's decision to upgrade its diplomatic mission in Wellington is a positive demonstration of its commitment to the relationship. I look forward to welcoming the EU's first resident Ambassador in Wellington." said Key.