Europe 2025: don’t waste a crisis

On Valentine’s Day, US Vice President J. D Vance delivered a message of tough love to the European establishment, …”it’s important in the coming years for Europe to step up in a big way to provide for its own defense,” he said.¹

The speech – along with ongoing debates about tariffs and the extraordinary White House fracas between Vance and Presidents Trump and Zelensky  – seem to question the economic and security settlement that sustained the US/European alliance since 1946. It’s created a sense of crisis in European capitals.
 
Yet, as often happens, these disruptive events may have a positive outcome, drawing European government responses that coalesce with forces already at play to strengthen European economies, markets and businesses.

More government spending

European nations are often typecast as high taxing and high spending. Yet, writing in the Financial Times, Mario Draghi,² pointed out that the US government used deficit financing to inject five times more money into the US economy than Europe did between 2009-2024. That’s meant relatively weak consumer confidence and lower economic activity in Europe.

The sense of crisis occasioned by shifting geopolitics – and the recent election of a more stable German government – means European governments are ready to open the cash spigots. In recent weeks Germany’s new government has discussed relaxed lending rules and both the European Union and Germany have committed to large spending plans.

In our Platinum European Fund we’ve structured our portfolio to respond to these forces. Our preferred sectors include retail, through our holdings in companies like Dino Polska in Poland and Jeronimo Martins in Portugal. We also have positions in UK homebuilders like Persimmon and Barratt Developments. All these companies benefit from more money sloshing around the economy if fiscal policy is loosened. And because they’re domestically focused they’re less likely to be affected by future tariffs.

Stepping up in defence

Underlying the harsh US rhetoric of the past few months is US pressure for European governments to increase defence spending. NATO has targeted annual defence spending of 2% of GDP since 2014 but actual spending has averaged only 1.6%. Russia’s invasion of Ukraine forced a rapid increase in defence outlays from countries like Poland but in 2024, the big three of France, Germany and the UK had still only just tipped over the 2% mark.³

The US is not alone in thinking Europe could do more in the cause of its own defence, Polish Prime Minister Donald Tusk recently said, “Right now, 500 million Europeans are begging 300 million Americans for protection from 140 million Russians who have been unable to overcome 50 million Ukrainians for three years.”⁴

McKinsey calculates that lifting defence spending from 2.2% to 3% of GDP could effectively increase a country’s defence spending by 47%. The beneficiaries of that spending include EU arms manufacturers like Thales (France), Saab (Sweden) and Rheinmetall (Germany).

Peace in Europe?

There’s no certainty it will happen but a negotiated peace between Russia and Ukraine could save countless lives and boost Europe’s economies. Rebuilding Ukraine’s battered infrastructure could cost around EU500 billion with some of that likely to flow to European businesses (albeit President Trump is seeking first dibs – especially via mineral rights).

Peace in the East could also shift the global energy market. Even if countries like Germany don’t return to Putin’s Russia for their energy, an easing of sanctions against Russia could lower global energy costs. Given Europe is a net importer of energy that’s an important boost.

A more stable geopolitical environment would be good for Eastern Europe and would benefit companies like Banca Transilvania, a high-quality Romanian bank we hold in the Fund. It would also support companies like Wizz – a low cost airline in our European portfolio. Wizz had to cut nearly 10% of capacity when war broke out.  Indeed all carriers would benefit if flying over Russian airspace was again possible.

First, fix yourself

For Mario Draghi, a man at the heart of the European project, a systemic recovery in Europe is less about managing Presidents Trump or Putin and more about deep reform.

In the article we mentioned: Forget the US — Europe has successfully put tariffs on itself. Draghi tells FT readers that high internal trading barriers and overregulation are “far more damaging for growth than anything America might impose.” Despite the much vaunted ‘single market’, trade across European states is half that between American states.

Happily the push for deregulation is strengthening. One area of focus is capital markets and finance. Whilst the Euro economy is roughly as big as the US, their capital markets are thinner. Today, for example. most Germans still keep their money in bank deposits.

The “28th Framework” (Europe has 27 states) is an attempt to create a more liberal legal framework that applies across Europe and incentivises starts-ups and more innovative businesses. Mario Draghi’s recent productivity report to the European Commission pushes measures designed to deepen European capital markets.

Underestimating Europe?

As I wrote in Platinum's December quarterly report, Europe has underwhelmed investors over the past few years. Partly that’s a result of the AI boom sucking capital towards the Magnificent Seven.

The vicious war on the Eastern periphery has added to Europe’s woes, created geopolitical uncertainty, hiked energy costs and undone many business strategies. As a result some US$145 billion has been withdrawn from European markets over the past three years.

But as I also wrote in December, “neglected areas are fertile hunting ground for bottom-up stock pickers.” Some top quality European companies are trading at attractive valuations and we have seen a bounce in European markets in 2025. This year, the STOXX Europe 600 Index is up 9% versus the S&P500’s negative 2% return (to end February, Source: Factset).

If European leaders – and CEOs – can reform their economies and businesses to respond positively to the changed geopolitical landscape it could underpin a further recovery in European markets which could reward Australian investors.

• For more on the strategy, holdings and performance of the Platinum European Fund please visit our Fund page.
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