Managing Director, Head of Investment Strategy
RBC Europe Limited\n <\/p>\n
Coming in \u201cthick and fast\u201d<\/p>\n
\n A key pillar of the euro area growth recovery over the next few years is
\n Germany\u2019s renewed fiscal drive. According to RBC Capital Markets, recent
\n announcements point to not only very sizeable, but also front-loaded,
\n spending, in its words, \u201cthick and fast.\u201d\n <\/p>\n
\n In a radical shift from many years of fiscal prudence, the German
\n government announced in March that it would:\n <\/p>\n
- \n
- \n Create a 10-year \u20ac500 billion infrastructure fund which would not count
\n towards the government\u2019s borrowing limit and\n <\/li>\n - \n Stop counting any defense spending above one percent of GDP towards that
\n limit.\n <\/li>\n<\/ul>\n\n The Federal Ministry of Finance announced concrete figures behind these
\n pledges in late June.\n <\/p>\n\n The German government is front-loading its special infrastructure fund,
\n with around \u20ac58 billion by 2026, alongside some \u20ac25 billion in annual
\n defense spending. Peak stimulus and the deepest fiscal deficit are
\n penciled in for 2026.\n <\/p>\n\n Moreover, the details released by the Finance Ministry show that a high
\n share of the spending is going to areas which should boost economic
\n growth. In 2025 alone, \u20ac22 billion, or about 0.5 percent of German GDP, is
\n going to rail sector improvements. Furthermore, there is \u20ac4 billion per
\n year for housing projections, \u20ac4 billion for digitalization, and
\n \u20ac6.5 billion for education and childcare.\n <\/p>\n\n RBC Capital Markets expects this spending to be a substantial stimulus for
\n German and, therefore, euro area growth in 2025 and 2026, though the
\n stimulus should fade beyond that point. This increases RBC Capital
\n Markets\u2019 confidence in its slightly above-consensus growth estimates of
\n 1.3 percent and 1.5 percent, respectively, for this year and next for the
\n bloc as a whole.\n <\/p>\nFront-loaded spending will deepen Germany\u2019s deficit
\n German Finance Ministry\u2019s deficit expectations (% GDP)<\/p>\n![\"German](\"https:\/\/www.europesays.com\/uk\/wp-content\/uploads\/2025\/08\/europe-summer-2025-headlines-en-chart-1.png\")
<\/p>\n\n The graph shows the German Finance Ministry\u2019s expectations for the
\n country\u2019s deficit as a percentage of GDP at the beginning of the year
\n and after the spending announcement. While the ministry previously
\n expected the deficit to be 1.5% of GDP for 2025 and 1.2% for 2026 and
\n 2027, it now expects the deficit to hover between 3% and 4% of GDP for
\n the next five years.\n <\/p>\n- \n
- \n
Deficit expectations before spending announcement\n <\/li>\n
- \n
Deficit expectations after spending announcement\n <\/li>\n<\/ul>\n
\n Source \u2013 German Finance Ministry, Bundesbank, RBC Capital Markets, RBC
\n Wealth Management\n <\/p>\nThe trade deal beyond the headlines<\/p>\n
\n The U.S. and the European Union (EU) reached a deal in late July that
\n introduces 15 percent tariffs on most EU exports, including automobiles,
\n pharmaceuticals, and semiconductors. Tariffs on steel and aluminum remain
\n subject to global tariffs of 50 percent, though discussions are ongoing
\n regarding possible reductions.\n <\/p>\n\n Furthermore, the European Commission, which negotiated the terms of the
\n deal on behalf of member states, committed to the EU investing
\n $600 billion in the U.S. economy and purchasing $750 billion in U.S.
\n energy exports over the next three years.\n <\/p>\n\n Initially, the deal was poorly received in Europe. The 15 percent tariffs
\n were higher than the 10 percent tariffs which had been in place since
\n April 2025, so it seemed the EU had capitulated. This disappointed many
\n observers given the EU market of 450 million people with high per-capita
\n spending power is a geo-economic force.\n <\/p>\n\n We note, however, that the agreed-upon tariff is lower than the 30 percent
\n U.S. President Donald Trump threatened in June. And while the 15 percent
\n rate doesn\u2019t compare as favorably with the UK\u2019s 10 percent tariff, the
\n torrent of trade deals with other trading partners announced since then
\n feature tariffs that are at or above 15 percent, suggesting to us that the
\n EU is not in a weaker competitive position after all.\n <\/p>\n\n The concessions made\u2014the promise of higher European investment and energy
\n purchases\u2014cannot be fulfilled by the European Commission. While it has the
\n authority to negotiate trade deals, it has no power over private
\n investment, nor does it have the authority to tell companies where to buy
\n energy. The RBC Capital Markets Commodity Strategy team is skeptical that
\n $750 billion in U.S. energy can be delivered to the EU in the next three
\n years.\n <\/p>\n\n Finally, the EU has not given up regulating U.S. multinationals on
\n European soil, nor its power to impose a digital services tax (it still
\n holds those valuable cards).\n <\/p>\n\n Meanwhile, it appears that Trump has abandoned the idea of treating the
\n value-added tax\u2014a sales tax typically over 20 percent\u2014levied by EU member
\n states as an unfair tax barrier to U.S. exports.\n <\/p>\n\n Overall, we believe this deal is not as disadvantageous to Europe as early
\n reactions have suggested.\n <\/p>\nBuoyed sentiment?<\/p>\n
\n After a strong start to the year, and a swift recovery from the April 2
\n reciprocal tariff announcement correction, European equities have stalled
\n this summer, their performance overshadowed by that of the U.S. tech
\n sector and currency moves. But overall, the STOXX Europe ex UK Index has
\n still returned over 13 percent year to date in local currency terms
\n (including dividends), ahead of the S&P 500\u2019s 9.5 percent return in dollar terms. Thanks to the significant U.S. dollar weakening versus the
\n euro this year, returns of the STOXX Europe ex\u00a0UK are around 28 percent in
\n U.S. dollar terms.\n <\/p>\n\n Performance has been driven by value stocks including banks (up almost
\n 60 percent in local currency), with construction and materials, insurance,
\n and utilities all gaining more than 20 percent. Most quality stocks have
\n underperformed, partly reflecting the market rotation into value but also
\n a range of idiosyncratic factors resulting in earnings downgrades.\n <\/p>\n\n Looking forward, we believe a diplomatic resolution to the Ukraine
\n conflict could act as a positive catalyst for European equities. Hope of
\n reconstruction efforts could arise though this would require hostilities
\n to come to a sustainable end. If that were to be the case, banks,
\n particularly those with Central and Eastern Europe exposure, would likely
\n benefit, in our opinion, as would construction and aggregate firms. Lower
\n energy prices, thanks to reduced transport and insurance costs, could also
\n benefit the region but the price improvement is likely to be marginal as
\n EU sanctions on Russia will likely persist, even with an eventual
\n ceasefire.\n <\/p>\n\n Overall, while sentiment could improve in the short term for European risk
\n assets on the back of seemingly successful diplomatic efforts, we caution
\n against being overly optimistic about an immediate, lasting end to the
\n hostilities as the issues associated with this are complex.\n <\/p>\n\n Regardless, in our view, the investment case for Europe remains, based on
\n an economic recovery thanks to lower interest rates, the German fiscal
\n program, and the EU\u2019s commitment to investing in its defense industry.
\n The STOXX Europe ex UK Index trades at 16.2x the next-12-months consensus
\n earnings forecast, slightly above its long-term average, a premium we
\n believe is warranted given the region\u2019s improved medium-term growth
\n outlook.\n <\/p>\n\n We continue to prefer sectors we think are likely to benefit from the
\n fiscal stimulus, such as select industrials, including defense, and
\n materials. In our view, banks should benefit from the region\u2019s improved
\n medium-term growth outlook, while continuing to offer attractive dividends
\n and share buybacks opportunities.\n <\/p>\nWith contributions from Thomas McGarrity, CFA<\/p>\n
RBC Wealth Management, a division of RBC Capital Markets, LLC, registered investment adviser and Member NYSE\/FINRA\/SIPC.<\/p>\n
\t\t\t\t\t\t\t\t\tManaging Director, Head of Investment Strategy
RBC Europe Limited<\/p>\n","protected":false},"excerpt":{"rendered":"August 21, 2025 Fr\u00e9d\u00e9rique Carrier Managing Director, Head of Investment StrategyRBC Europe Limited Coming in \u201cthick and fast\u201d…\n","protected":false},"author":2,"featured_media":363074,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5174],"tags":[1212,2000,299,5187,127355,127356],"class_list":{"0":"post-363245","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-eu","8":"tag-aluminum","9":"tag-eu","10":"tag-europe","11":"tag-european","12":"tag-european-equity-market","13":"tag-insurance-costs"},"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@uk\/115069303267065645","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts\/363245","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/comments?post=363245"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts\/363245\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/media\/363074"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/media?parent=363245"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/categories?post=363245"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/tags?post=363245"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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