Europe: A new growth trajectory powered by reform and investment
Europe is undergoing one of the most significant economic shifts in its modern history. Faced with geopolitical pressures, persistent security risks and competitive challenges from global peers, the region has begun to reshape its economic model. The emerging picture is one of a continent moving away from the constraints of past austerity and towards a more proactive strategy grounded in investment, industrial renewal and enhanced economic security.
At the heart of Europe’s transformation is a clear pivot in policy direction. EU‑wide initiatives like the Clean Industrial Deal, along with the introduction of greater fiscal flexibility, mark a decisive shift towards expansion. For more than a decade, many member states adhered to strict fiscal consolidation, but current policies increasingly support investment in energy systems, industrial capacity and defence. This change is supported by adaptations to fiscal governance that allow higher strategic spending without triggering excessive deficit procedures. Several countries, notably Germany, are now planning increased outlays across infrastructure, digitalisation and clean technologies in order to strengthen long‑term competitiveness.
Germany’s policy shift is perhaps the most significant in Europe’s new economic strategy. After years of maintaining a cautious fiscal stance, the country has outlined an investment programme totalling nearly one trillion euros. Funds are earmarked for rail modernisation, road upgrades and the digital transformation of key industries. Further measures, including corporate tax incentives and lower energy costs, are designed to support households and businesses while encouraging private capital to participate in national renewal. If effectively implemented, the combined measures could generate meaningful multiplier effects, raising Germany’s growth potential and creating positive spillovers for the wider region.
Across Europe, structural reforms are accompanied by a cyclical backdrop that is gradually improving. Growth has begun to pick up, aided by lower interest rates, a stabilising labour market and a modest recovery in business sentiment. Countries such as Spain and Italy are expected to see increased disbursements from the European Recovery Fund, while draft national budgets for 2026 imply a net fiscal loosening for the first time since 2021. This shift from fiscal drag to fiscal support may provide an important tailwind for the region’s expansion.
The global context matters too. Europe’s new approach is a response to intensified geopolitical risk and global competition. Tariffs and trade tensions have created uncertainty, and the EU has responded by pursuing de‑risking strategies aimed at reducing supply chain vulnerabilities. Yet Europe’s internal market remains a significant strength. The region is the world’s largest importer, which gives it considerable leverage in trade negotiations and allows it to rely more heavily on domestic demand. Moreover, intra‑EU trade still far exceeds trade with the United States or China, which helps cushion the impact of external shocks.
