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The author is a financial journalist and writes the Wealth of Nations newsletter.
As 2024 draws to a close, it is difficult to be optimistic about Europe. Its politics are increasingly fragmented and polarized. Germany may not have a stable government in place until at least after elections in late February, and France may have to wait until 2027, when President Emmanuel Macron ends his term.
Growth is expected to stall and unemployment to rise. The economy has been held back by onerous regulations, high energy prices, declining demographics, increased competition in manufacturing, and an inability to keep up with technological advances in China and the United States. Much of the continent is struggling with excessive debt, even as governments are under pressure to significantly increase defense spending.
The consensus forecast is for next year’s growth rate to be just 1.1%. There are also darker views. Bank of America expects growth to be just 0.9% in 2025. This still assumes that Donald Trump imposes only mild tariffs on Europe when he returns to the White House. Risks to growth are overwhelmingly to the downside, according to the European Central Bank’s latest survey of independent economists.
This pessimism is also reflected in the market. European stocks may be trading near record highs, but they are trading well below U.S. stocks. The Euro Stoxx 600 index is currently trading at a record 40% discount to the S&P 500 index based on next year’s expected returns. Bank of America’s latest investor survey shows that U.S. households are more optimistic about stocks than ever before, and while U.S. fund managers are holding less cash, global fund managers are We are underweight European stocks, and no one expects European stocks to outperform the rest of the market in 2025.
But such pessimism also sets the bar very low for unexpected upside. What will work and be uplifting for Europe in 2025? A few things come to mind.
The most immediate thing would be for the ECB to stop worrying about inflation and move decisively to support growth. Jill Moek, group chief economist at AXA, said lowering the benchmark interest rate from the current 3.0% to below 1.5% could help restore confidence in struggling sectors such as real estate and construction. I predict that. It would also support long-term decarbonization projects and relieve some of the fiscal pressure on governments.
Second, an early end to the Ukraine war on terms acceptable to Kiev would remove one of the darkest clouds that has hung over the continent’s economy over the past two and a half years, especially if it led to lower energy prices. It will be. Ukraine’s reconstruction and integration into the EU single market will stimulate economic activity. It’s a gradual process, but your confidence will increase quickly. Although such an agreement may seem unlikely now, recent events in Syria are a reminder of how quickly the wheels of geopolitical fortune turn. .
A further boost could come from the easing of Germany’s debt brake. Friedrich Merz, the front-runner to become the next chancellor, may be ruling out this possibility for now, at least until the election. But his Christian Democratic Union Party’s pledge to increase defense spending and cut taxes without further borrowing will be difficult to fulfill. Everyone from Chancellor Angela Merkel to the current head of the Bundesbank is currently focusing on debt brake reform, so it seems likely that fiscal policy will be loosened. Meanwhile, Holger Schmieding, chief economist at Berenberg Bank, predicts that a determined supply-side reform program could boost Germany’s growth rate by up to 0.5 percentage points next year.
A further upside surprise could be progress in implementing Mario Draghi’s recent recommendations on how to make the EU more competitive. Expectations are currently low, especially given the opposition to new issuance of straight bonds. But many of the former Italian prime minister’s deregulatory policies do not require additional funding or even legislation. There are also signs that resistance to issuing new debt to pay for defense spending is waning as Europe scrambles to ensure its security and avoid the threat of President Trump’s tariffs.
Some argue that the lack of strong leadership in Europe, particularly France and Germany, makes progress on reform unlikely. Still others are filling the void. For example, Ursula von der Leyen’s decision to fly to Brazil in the first week of her new mandate to sign the EU-Mercosur trade agreement was clearly taken by the European Commission President to pursue the terms of the agreement. He showed he is not afraid to take political risks. economic and geopolitical interests of the bloc; She at least seems aware of the gravity of this moment and is ready to face it. Perhaps 2025 will be the year in which Europe surprises us positively.
