RESEARCH — Jan 6, 2025
Europe: Key themes to watch in 2025
Here is how we see our key themes for 2025 shaping Europe's operational and investment environment.
Economic angst
In 2025, Europe is expected to experience weak economic growth due to tighter fiscal policies and trade barriers. Consumer spending is likely to accelerate, helped by lower inflation and robust nominal wage growth. Gradually easing monetary policy across the region is also likely to support economic activity. Still-weak activity in the industrial sector will limit the recovery.
Fiscal policy will be tightened, but weaker nominal GDP growth will complicate fiscal consolidation efforts. The reimplementation of EU fiscal rules suspended since the onset of the COVID-19 pandemic in 2020, alongside persistently elevated fiscal deficits in several member states, has led to most European countries tightening their fiscal stance for 2025. This tightening will counteract some of the support for economic activity provided by lower policy interest rates.
The prospect of higher US tariffs, and potential retaliatory measures, will continue to inject uncertainty, weighing down on domestic demand while also dampening the contribution to GDP growth from net trade. S&P Global Market Intelligence expects the geographical disparity in economic performance among countries in the region to persist in 2025.
Domestic discontent
We expect significant political volatility in key economies like France and Germany impacting economic reforms and infrastructure investments.
On Dec. 4, French Prime Minister Michel Barnier lost a confidence vote in parliament after his government used a constitutional provision to pass a social security budget bill without a parliamentary vote. French President Emmanual Macron on Dec. 13 appointed François Bayrou as new prime minister, in a likely attempt to reduce political uncertainty and allow work on the 2025 draft budget to resume. The formation and stability of a new government will be conditional on significant compromises between the main parliamentary blocs. These will affect the budget, but also defense and social security.
Germany will hold an early parliamentary election on Feb. 23, 2025: the next government is likely to prioritize economic reforms and accelerate infrastructure and defense investments by suspending the debt brake. Opinion polls indicate that Germany’s upcoming general election is highly likely to result in a government change, most probably a two- or three-party alliance. The coalition-building process is likely to take several months.
The main economic objective for the new German government will be to accelerate tackling structural issues currently weighing on German growth potential. These issues include transforming energy infrastructure to contain climate change risks; the diminishing attractiveness of German goods, especially automobiles in China; regulatory barriers; skills shortages; and rising nonwage labor costs. These goals will be constrained by the need to avoid the undue expansion of fiscal deficits, choking off domestic demand, or neglecting Germany’s enhanced security requirements following Russia’s invasion of Ukraine.
Elusive alliances
The reappointment of Ursula von der Leyen as president of the European Commission will likely emphasize climate and competitiveness policies. The implementation of new EU fiscal rules will probably limit funding for climate initiatives, creating trade-offs, particularly regarding the US-China competition and the Russia-Ukraine conflict.
The incoming US presidency is very likely to shift the dynamics of the Russia–Ukraine conflict, with a higher likelihood of a settlement involving terms more favorable to Russia, for instance allowing Russia to retain territory it has occupied in eastern Ukraine.
Closer EU alignment to the US on its China policy (although not total alignment, given some member states’ sensitivity to China as an end market or foreign direct investment source) could help the EU to deescalate trade disputes with the new US government. However, Europe also remains more dependent on China as a supplier of manufactured goods than the US and is increasingly reliant on it for the rare-earth elements needed for the EU’s digital and green energy transition.
Trade troubles
EU trade policy will be increasingly shaped by US–China competition. The EU will aim to navigate the US-China rivalry while avoiding fully fledged trade conflicts. This will prompt the Commission to place essential production and critical resource procurement at the center of its industrial and security policy. Additional drivers behind the pursuit of these goals include high EU energy costs and overall rising global protectionism, which will continue to limit manufacturing production.
Attempts to shorten supply chains via reshoring and supply diversification, for example focusing further on cobalt and lithium development in Central and Eastern Europe, will continue. e. The Commission will also try to deepen ties with India on green and digital technology, and manufacturing.
The implementation of green regulations such as the Corporate Sustainability Due Diligence Directive (CSDDD), which requires large firms operating in the bloc to ensure full supply chain visibility and compliance with human and labor rights, or the Carbon Border Adjustment Mechanism (CBAM) is likely to face resistance, including from the United States, China and India. This, and domestic factors (notably the difficulty of compliance along full supply chains), increases the likelihood of dilution, such as exemptions from the CBAM being used as a negotiating tool with the incoming US administration.
Click here for our global report on 2025 themes
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.