• Germany announces a $500bn infrastructure and climate fund¹
• The ECB continue to cut interest rates, currently at 2.65% ²
• Government spending on defence has declined both as a share of overall government spending and as a share of GDP since the early 1960s¹

The first quarter of this year has been pivotal for Europe, who now look set on a path toward lower interest rates, fiscal expansion and deregulation – with prospects so bright that their equity market managed to attract the bulk of flows year to date, returning some 9.48% to investors at the time of writing.

Pressure from the US and the prospect of a lasting peace deal between Ukraine and Russia has enthused a focus on defence spending in the region, especially in Germany. Having lagged NATO’s 2% of GDP for many years, fiscal rules will now be refreshed to accommodate the additional funding required to meet and exceed the target, as well as opening a $500bn infrastructure and climate fund. With Germany’s industrial sector being in decline for over a decade and auto production weak, plans to re-purpose plants and warehousing are said to be already underway, pivoting to manufacture military equipment¹.

What’s more, the newly proposed infrastructure fund could finance additional investment worth 1.2% of GDP annually for the next decade to improve Germany’s notoriously poor infrastructure. Other European countries have been given the green light to spend more on defence too, with EU leaders agreeing a package that they say could unlock €800bn of financing (4.5% of GDP). Higher defence spending could give a significant boost to the productive potential of economies in the long run ¹.

Global governments spending on defence (% of GDP)

Source: Capital Economics

Though there is no certainty yet that governments will indeed spend as much as hoped and bearing in mind it’ll take time for investment and capacity to ramp up, Europe’s defence sector has benefited from such optimism and share prices for example BAE Systems have surged over 40% year to date.

February’s Euro-zone inflation figures came in below January’s at 2.3%, and the ECB again chose to cut interest rates by 0.25% at their latest meeting in March. Within inflation retreating towards its target, we believe the trajectory of interest rates within the region continues to be downwards and we expect at least one more cut this year – helping to support business growth and make spending more attractive to consumers in the region.

Bowmore portfolios

Earlier this year (January) we took the decision to adjust our European equity allocation to a blended approach given their vulnerability to tariffs and weakness in economic data. While we haven’t yet seen the implementation of tariffs directly on European goods, the alcohol sector has been flagged as particularly vulnerable, and this week Trump has threatened a 200% tariff widespread on the good.

We have been hopeful that peace will be restored in Ukraine, and as we have discussed in previous notes, this is positive for the regions stability but also spending on defence and fiscal expansion. This has been reflected in positive year to date performance in Weverton’s Capital Growth fund, returning 13.8% thus far.

The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a guide to future performance.

Source: LSEG Datastream as at 27 March 2025

Sources:

¹ Capital Economics, 2025

² Trading Economics, 2025