“Making Europe Great Again”?

“Making Europe Great Again”? implications of changes in EU politics and policy for investors 
The tectonic plates of the world’s geopolitical landscape are shifting. While much focus this year has been on US politics, recent shifts in Europe could be considered equally important. This week we review the dramatic developments in transatlantic relations, European politics, and some of its implications for investors and impact on markets.

US pivot on Ukraine support and EU security policy  
This week saw news that the US has suspended military aid to Ukraine, in order to further pressure President Zelenskyy to make concessions for a peace deal. The abrupt pivot from the US administration raised broader security concerns for Europe as a whole, prompting the EU to propose a €150bn loan package for defence loans to governments. Following suit, the UK announced plans to raise its defence budget to 2.5% of GDP by 2027.

As a matter of urgency, EU leaders gathered for a summit in Brussels this week focused on ways to increase the continent’s defence capabilities and how best to support Ukraine — both militarily and diplomatically. With this in mind, relations between the US and European countries have further been strained by the ongoing threat of trade tariffs being imposed on the EU by the US.

German elections and “whatever it takes” fiscal stimulus 
Within this wider narrative, Germany has just had its recent elections with the conservatives (CDU/CSU) taking the most votes but now needing to form a coalition government to make a majority. The chart below shows the breakdown of votes between parties. We expect government formation to be slow, but a coalition between CDU/CSU and the social democrats, SPD, looks most likely.

One of the reforms from the new German government which we think is likely, is the review of the debt brake which limits federal borrowing to 0.35% of gross domestic product (GDP). If they amend the constitution, Germany has proposed to borrow €900 billion, to be spent on two funds covering defence and infrastructure. Changing this rule to allow more borrowing would need a two-thirds majority in parliament, which may be difficult to achieve at the moment with a coalition forming. While the expectation and anticipation of this fiscal stimulus has already had a material impact on European equity and debt markets as well as the EU defence sector, in terms of its economic impacts, we expect any potential loosening of the debt brake will be more impactful on GDP next year, rather than in the short term.

While the new parliament isn’t convened until 23 March, on 4 March the heads of the CDU and SPD already announced they want to implement a significant spending plan. If this is passed in the next two weeks, it would be a significant boost to German real GDP growth, e.g., it could add 0.2% to 0.5% to growth this year, and more in 2026. This could end up an important positive growth factor to help offset downside risks to growth from likely US tariffs.

German bonds fall, EU yields rise…  

In terms of market reactions, the recent spending plans announced by Europe’s largest economy have notably impacted debt markets. On Wednesday, German 10-year bonds had their worst day since March 1990 as markets digested the implications of a big increase in future borrowing. This shift in German fiscal policy represents a historic change, reminiscent of the period of German reunification, but this time driven by different geopolitical factors. At the time of writing, European equity markets have been far more positive in reaction to the pending spending boost and have been performing relatively strongly on anticipation of the impact of further spending and stimulus.  Unsurprisingly, the EU aerospace and defence sector has seen exceptional recent performance. 

A break from the past  

If carried out, the proposed changes to the tradition of German “fiscal prudence” represent a significant shift in long standing fiscal policy.  Fortunately, thanks to this traditional aversion to high debt levels, Germany now has significant headroom relative to other economies to expand its debt and provide stimulus for defence and infrastructure.  We note that even after its historical selloff, the ‘10-year bund’ (Germany’s government bond) yield remains significantly lower than equivalents in the US, the UK, or any other country in the EU.  For better or for worse, significant policy shifts in the US have now resulted in significant policy shifts in Germany, who are now convinced that Europe must fund and provide for its own defence in the 21st century.

While the immediate short-term reaction of markets to shifting policy is clear (EU bonds down / bond yields up, EU equity markets up), the longer-term impacts are far less so, particularly as the proposed measures still require parliamentary approval.  While we will keep a watchful eye to see if the government spending plan is passed, in particular, the abrupt break in long standing policy and shift in the landscape once again underlines the importance of investment diversification in an environment of significant geopolitical and macroeconomic uncertainty. 

The Noise

• The European Central Bank (ECB) cut interest rates by 0.25%, leaving the main refinancing rate at 2.65%, in line with market expectations. Traders scaled back their bets on future rate cuts, as there was a change of tone that signals a more hawkish stance going forward, with the chance of the second cut fell from around 85% to roughly 60%. This cautious outlook on interest rate cuts can be attributed to the ECB also raising its forecast for inflation this year from its December estimate of 2.1% to 2.3% on the back of higher energy prices. The euro rose against the dollar after the ECB decision, up 0.2% at $1.081.

• ​Fixed income markets saw a global bond sell-off this week. Germany led the way, jolting the global sovereign debt markets, driving bond prices down and yields (borrowing costs) up, while Japan’s 10-year borrowing costs hit a 16-year high. The yield on the 10-year Japanese government bond was up 0.07 percentage points at 1.51%, its highest level since 2009. 

• Oil prices fell nearly 3% this week to their lowest levels in three years. This decline was spurred by rising US crude oil stocks and fears that US trade tariffs, imposed by President Trump on Canada, Mexico, and China, will slow economic growth and reduce crude demand. Additionally, OPEC+’s (a group of oil-producing countries) decision to increase production added to the bearish sentiment, further pressuring prices lower amid broader economic concerns.

The Numbers

GBP Performance to 06/03/2025

Source: Bloomberg, data as at 06/03/2025

The Nuance

This Saturday, March 8th, marks International Women’s Day. This is a poignant moment to recognise the incredible achievements of women and celebrate the global social progress towards gender equality. This week we will explore and celebrate international women’s day through the lens of financial and economic empowerment of women.

To set the scene, we note that in the UK this year marks 50 years since women in the UK could open a bank account in their own name, under the Sex Discrimination Act. Also, it’s only been since 1982 that women were allowed to spend their money in English pubs without being refused service!

In terms of gender quality and its economic impact, research suggests that when gender equality is achieved, the entire economy can thrive. A report by McKinsey found that “if women were to participate in the economy identically to men, they could add as much as $28 trillion (or 26%) to annual global GDP in 2025”.

Looking ahead, Allianz’s 2024 Global Wealth Report highlights we are in the midst of the greatest transfer of wealth, with £5.5 trillion in assets set to transfer to the Baby Boomer’s children and grandchildren by 2050. In terms of economic and financial empowerment of women, as early as this year, it’s projected that ownership of 60% of the UK’s wealth will have passed to women.

Though significant progress has been made, there is still some room to go in terms of financial and economic empowerment of women. In this great wealth transfer, it is important that everyone is equipped with the financial knowledge. Aegon’s financial wellbeing index found that while 61% of men report being on top of their long-term finances, only 36% of women feel the same.  

At atomos, we are committed to supporting women’s financial well-being and empowerment, a point worth highlighting as we approach International Woman’s Day.

The Niche

A fun financial Markets fact

Sticking with the International Women’s Day theme, whilst women do face financial barriers, once overcome, there is every reason to believe women can be capable and savvy investors. A 2018 study by Warwick Business School found that women’s portfolio returns in the sample were, on average, 1.8% higher than men’s!  The study found that women generally trade less frequently and tended to choose less speculative investments – traits that helped generate superior performance relative to men’s portfolios in the study.