The first quarter of 2025 has seen the reversal of several long-term market trends, notably the outperformance of US assets over Europe. This rotation has been mirrored by ETF flows, which also reflect an increased appetite for European assets.
So, is this renewed interest in Europe merely a short-term reaction to uncertainty about the US’s economic future under President Trump, or are there more durable drivers spurring Europe’s renaissance?
Encouraging growth prospects in 2026 and 2027
On examining 2025 expectations for European economic growth, there are a few reasons to support investors’ newfound interest in the region’s assets. Although estimates for 2025 are modest, inflation pressures continue to abate, giving scope for the European Central Bank (ECB) to lower interest rates further.
Therefore, we feel the excitement around Europe’s prospects is not centred on this year but looks ahead to 2026 and beyond.
While the region may well face economic headwinds from President Trump’s tariff threats, the less friendly stance of the new US administration has prompted European governments to radically rethink the region’s strategic autonomy and resilience.
In particular, the incoming German government has acted swiftly to implement two major fiscal measures that should provide a major economic stimulus to its own economy and the wider region.
Is Germany at the helm of Europe again?
Firstly, German chancellor-in-waiting, Friedrich Merz’s pledge to increase infrastructure investment by EUR 500 billion over the next ten years should bring spending up to around 2.7% of GDP, a significant jump from the current level of around 1.5%. This unprecedented level of expenditure should have an extremely positive fiscal multiplier effect on the German economy, spanning improvements to its transport and energy systems, among other infrastructure projects. It should also present a halo effect on the wider European economy through supply chain spending.
The second strand of Germany’s fiscal expansion is targeted at defence. The US is putting significant pressure on European nations to raise their defence spending and meet NATO requirements. However, the new German plan will surpass this level by climbing to 3.5% of GDP, representing another EUR 100 billion of expenditure per annum (twice the level of its infrastructure pledge). Again, this commitment should have a galvanising effect on European growth, although the impact will be highly dependent on how and where it is spent. In the past, 60% of German defence spending has gone to the US, but there are doubts that this will continue. European manufacturers producing drones, batteries, and other crossover technologies could take advantage of the region’s new focus on defence and broaden their capabilities in this area.
Germany’s fiscal shift could be truly game-changing for the region’s economic prospects over the medium term and provides a compelling reason for investors to consider European assets.
Read our article about investment opportunities in Europe
Unless otherwise stated, all information contained in this document is from Amundi Asset Management S.A.S. and is as of 31 March 2025. Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are those of the author and not necessarily Amundi Asset Management S.A.S. and are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not a guarantee or indicative of future results.
Date of first use: 31 March 2025
Doc ID: 4364917