European investments to rise by 1 percent of GDP

• European investments are set to rise following the German fiscal package, rising defence spending, Draghi report, and asset rotation out of the US.

• Private investments are expected to increase by around 6% (EUR 160 bn, 0.9% of GDP) by 2030. Real private investments to increase supported by the political emphasis on competitiveness, deregulation, lower energy prices, and investors seeking alternatives to the US.

• Public investments are expected to increase by 0.4 percentage points of GDP from increased defence spending and the German infrastructure spending but the end of the EU pandemic recovery fund from 2027 will counter this by 0.3 points, leaving a 0.1% of GDP (EUR 20 bn) increase in public investments by 2030.

• The total impact is EUR 180 bn (1.0% of GDP) in extra real annual investments in Europe in 2030. In other words, barely 20% of Draghi’s EUR 800 bn investment target will be reached.

• Increased investments to boost euro area growth by 0.25 percentage points in 2026, given spare capacity in the German economy. Beyond 2028, additional growth depends on productivity gains, as production is determined by supply. The effect is uncertain, and we expect limited increases.

• A tight labour market increases inflationary risks from additional investments and public deficits, which should increase the ECB’s neutral policy rate by around 25bp from 2027. Asset rotation out of US into Europe supports a higher EUR/USD, we target 1.23 in 12M.

Europe has been concerned about slowing growth since the start of this century. Although various strategies to boost growth have been implemented and phased out, the trend has persisted. The question is now whether the trend will turn, and Europe will live up to its full growth potential? One year ago, the Draghi report outlaid a strategy to increase investments in Europe by EUR 800 bn per year (5% of GDP) and the new EU Commission centred its five-year term around raising competitiveness and increasing investments. At the same time Germany has announced a historically large fiscal package and countries are rapidly increasing defence spending. Finally, investors are increasingly looking for investment opportunities in Europe as an alternative to the United States. In this piece we assess how much we can expect investments in EU to increase over the coming five years. First, we outlay why Europe needs higher investments, before we analyse the EU measures to increases private investments and the public measures. Finally, we assess the impact.

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