Any neutral-minded observer, even one with connections to the continent, would admit that Europe faces some big economic problems right now. Growth is slow or even stagnant, business investment remains low, trade barriers affect its international competitiveness, and looming macroeconomic challenges cloud even the short-term forecast.
Yet many experts based in Europe are optimistic about the outlook, even bullish.
“Despite the very real challenges that lie ahead, we see signs of renewed dynamism on the continent and remain optimistic about the medium-term outlook,” says Shmuel Chafets, co-founder of European venture capital firm Target Global.
Here’s why Target Global and other “euro-bulls” feel good about the next 12 to 24 months.
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New, Growth-Oriented Leadership
European political leaders have long come in for criticism that they’re too risk-averse to keep their economies competitive in an increasingly cutthroat world. Witness the continent’s uninspired response to the United States’ pandemic-era economic stimulus packages and their seeming inability to stand up an industrial economy capable of competing with China’s.
Voters are beginning to make their displeasure heard by resoundingly defeating ruling parties in the United Kingdom, France, Germany and other countries this year.
Just this December, German Chancellor Olaf Scholz lost a parliamentary vote of no-confidence, possibly paving the way for a more growth-minded government following February general elections.
“It is now up to voters to determine the political course of our country,” Scholz said after the vote.
Time will tell how they respond. But the shakeup is an opportunity to try something other than the stagnant status quo.
Potential Progress on Russia-Ukraine Peace
The ongoing war in Ukraine has been a human and economic tragedy. Although fighting continues to rage, both sides have indicated that they are open to a negotiated truce, at least in principle.
Even a temporary cessation of hostilities in Ukraine would relieve pressure on other European countries, allowing the continent to return to something approaching normalcy after years of unrest.
Continued Growth in the European Tech Sector
Despite the political uncertainty and armed conflict to the east, the European tech sector remains remarkably resilient. The consumer-facing app scene, in particular, shows considerable promise thanks to homegrown companies and investors.
Indeed, for all its failings elsewhere, Europe is showing its ability to compete globally on tech innovation and AI. As the continental economy, look for more of this in 2025 and beyond.
“Cultural Diplomacy” and Lower Living Costs Could Be Poised to Pay Dividends
Europe is an appealing destination for highly educated immigrants from other developed countries, especially the United States. Some of this is down to durable “cultural diplomacy,” as many Americans prefer romantic cities like Paris and Rome to their hometowns.
But more and more, it’s an issue of cost and quality of life. The cost of living is 44% lower in Paris compared with New York City, and a whopping 81% after factoring in New York’s sky-high housing costs. Even with lower wages on the continent, money goes farther here than in North America.
Dollar Strength Could Benefit European Manufacturing and Consumption
Europe may benefit from macroeconomic tailwinds in 2025 as central bank policy on both sides of the Atlantic results in a stronger U.S. dollar.
“If the European Central Bank cuts interest rates sooner than the Federal Reserve, this will widen the rate gap between the U.S. and the Eurozone, putting downward pressure on the euro against the dollar,” JPMorgan said in an April 2024 research note.
That could hurt U.S. exporters while benefiting their European counterparts. Meanwhile, Europe’s inflation rate has declined to 1.7% as of late 2024, according to the European Central Bank, which could boost consumer and business spending in the coming months.
New Year, New Outlook for Europe
The “smart money” — some of it, at least — is more optimistic about Europe than it has been in many years. Perhaps it’s time for the rest of us to reassess our priors.
To be sure, many challenges remain. The European Union and peripheral economies in the EEA and UK continue to experience growth rates below their North American and Asian peers. A “hot war” continues to rage in eastern Europe. Stagnant population and ongoing deindustrialization would seem to present long-term threats to the region’s competitiveness.
But as we’ve seen, some of these longer-term trends could slow or reverse in the relatively near future, and more acute issues like the war in Ukraine may resolve themselves sooner than conventional wisdom believes. Caution is still prudent, as long as we avoid out-and-out fatalism.
