In case you hadn’t noticed, Europe is quietly experiencing a moment. In fact, the eurozone’s macroeconomic and investment narrative has taken a decided turn for the better over the past year. Here, we examine five key forces behind this nascent shift, why we think it has legs, and what it could imply for investors.

1 Structural reform: resetting Europe through pro-growth policies

In late 2024, former Italian Prime Minister Mario Draghi released "The Draghi report: A Competitiveness Strategy for Europe,” which outlined how he believes the European Union (EU) can seek to regain competitiveness in a changing global economy, requiring an estimated €750 billion to €800 billion per year across the EU. The report candidly acknowledges the structural economic headwinds that have restrained Europe’s growth rate in recent years, as well as the corresponding need for structural reforms—bold, large-scale policy responses—and greater coordination at the EU level.

In the first quarter of 2025, the European Commission followed up by unveiling the competitiveness compass, a comprehensive five-year strategic road map that translates many of the Draghi report’s recommendations into actionable initiatives, legislative agendas, and investment plans (including a savings and investments union that will help mobilize capital). With any eye toward restoring the region’s economic competitiveness and overcoming its fragmented nature, the competitiveness compass highlights three transformational priorities for Europe:

1 Closing the innovation gap
2 Deregulation
3 Decarbonization

These ambitious goals are both pro-growth and pro-business and, if achieved, could provide a powerful catalyst for the eurozone economy going forward.

2 Germany: early-stage recovery of Europe’s sick man?

For the past decade, Europe’s growth has been dragged down by its most populous nation, Germany. The outcome of Germany’s 2025 national election, however, marked a pivot point toward fiscal expansion and a pro-business focus, which bodes well for policies aimed at driving economic growth and creating investment opportunities.

One reason Germany’s growth has lagged is its extreme fiscal austerity. While most countries globally have been growing their deficits over the past two decades, Germany has not. However, President Friedrich Merz has relaxed fiscal constraints (the debt brake reform) to allow for higher levels of borrowing, notably excluding defense spending from the nation’s debt limit. Germany is also investing heavily in infrastructure and digitalization—fiscal efforts that often have a high economic multiplier—and is well positioned to benefit from the EU’s desire to ratchet up regional defense spending.

Aside from fiscal stimuli, a 2025 tax relief package that includes corporate tax reductions should further support the German economy and business environment in the period ahead.

3 Mounting evidence of cyclical economic resilience

The eurozone economy has demonstrated cyclical resilience, at least in the short term. This is crucial because, for investors not domiciled in Europe, the relative growth gap between it and other global economies may influence many portfolio decisions. Critically, we believe this cyclical economic resilience should persist into 2026.

The evidence is clear: The manufacturing and industrial segments of the regional economy have shown considerable improvement since troughing in late 2023, while service activity has remained in expansionary territory. Moreover, there are domestic green shoots building in early-cycle parts of the economy, such as construction and new business intentions, which tend to lead the broader growth picture. Tailwinds from stepped-up EU defense spending have also stoked the region’s growth impulse. At the same time, the export side of the global economy has so far held up better than expected in the face of U.S.-imposed tariffs, as seen in both the soft and hard data.

Although the European periphery (e.g., Spain and Italy) has proven resilient this cycle, underpinned by structural macro developments, a possible fly in the ointment for the eurozone’s macro outlook is France, where political volatility and fiscal consolidation could weigh on growth in the coming quarters. 

4 The ECB: a more accommodative monetary policy backdrop

We believe the European Central Bank (ECB) can maintain its current hold phase for the foreseeable future, with its benchmark interest rate at neutral, thanks to the somewhat soft economic landing it engineered and regional growth having rebounded to outperform expectations in 2025.

Clarity around the ECB’s path, together with a policy stance that’s no longer restrictive, is to some degree supportive of both the eurozone economy and European risk assets. While other major central banks such as the U.S. Federal Reserve and the Bank of England have struggled to deliver rate cuts over the past 12 months, the ECB has slashed its rate from 4% to 2% since June 2024. Meanwhile, eurozone inflation seems to be in check for now, hovering near the ECB’s target, while the labor market appears firm. The ongoing strength of the euro has been disinflationary, helping to counter the likely inflationary impact of U.S. tariffs.

Importantly, easier monetary policy has spurred credit growth across the region and should continue to do so.

5 Global portfolio reallocations: Europe’s big moment?

As we previously wrote, the unwinding of hyper-globalization and an evolving global order may present new opportunities for non-U.S.-based investors. Christine Lagarde, president of the ECB, views this transition as a chance for Europe to take more control of its future and raise the euro’s global standing. Enhancing the currency’s status could offer tangible advantages, such as lower borrowing costs, less currency fluctuation exposure, and perhaps an impetus for eurozone nations to supply fiscal aid.

Given the region’s accelerating economic momentum, we suspect investors based in the eurozone—the world’s largest foreign owner of U.S. securities—might be inclined to deploy more capital into their home markets in 2026 and beyond. Along with repatriating some overseas dollars back home, we expect many European allocators to revisit their currency-hedging strategies for existing U.S. investments, especially equities. While international investors overall have continued to purchase U.S. equities and bonds this year, they’re increasingly allocating to non-U.S. geographies, as indicated by the recent solid performance and brisker investment flow data for some European assets.

Investment implications

• Equities—We believe the more positive macro setting should exert upward pressure on both company earnings and stock valuations, with the defense, digitalization, and German infrastructure sectors poised to be the biggest winners. Financial services may get a boost from an uptick in lending fueled by brighter business prospects, the deregulation trend, and healthier corporate demand for loans.
• Fixed income—Similarly, Europe’s corporate credit market stands to benefit from more favorable business conditions and additional fiscal measures. We’re more cautious on European government bonds given our forecast for gradually rising yields, as the ECB outlook should put a floor on the front end of the yield curve, while fiscal expansion should keep long-end rates elevated.
• Currency—Widening interest rate differentials (the ECB on hold while other central banks cut rates), the potential for more robust eurozone growth, and currency-hedging dynamics all suggest that the euro may remain strong relative to the U.S. dollar.