When our economist and market specialists last put pen to paper on the Year Ahead, they characterised 2024 as the ‘Year of the Ballot Box’. Over half the world population hit the polls in more than 70 elections. While those elections have come and gone for much of the world, Europe seems set to continue grappling with political uncertainty in 2025.

In France, the lack of a solid parliamentary majority is making it hard for the government to tackle big issues, especially the growing budget deficit – which is topping 6% of GDP. Political gridlock in the legislative branches of government may lead to more elections in the summer of 2025, adding to the uncertainty. Markets are certainly paying close attention; indeed, the gap between French government bonds and German bunds could widen in the first half of the year.

Germany, meanwhile, is gearing up for elections in 2025, which could bring more political instability as German businesses and families grapple with fears of economic stagnation and geopolitical tensions.

But it’s not just domestic politics swaying the outlook for Germany – or Europe more generally – in the year ahead. The 2024 US Presidential election victory of Donald Trump, whose promise of tariffs and notoriously critical view of NATO are cornerstones of his trade and foreign policy platform, could play a big role in shaping European economic policies and investor sentiment.

Italy, by comparison, has a relatively stable political environment. The government led by Giorgia Meloni has maintained a steady consensus, creating a more predictable environment for investors. This stability is likely to attract more foreign investments, making Italy a safer bet amid the broader European uncertainties.

Sweden is also stable, and with additional room for public spending, could prove a safe, well-functioning market for foreign investment. 

The outlook for economic growth in Europe is mixed, with fiscal headroom largely in the driving seat. In France, the "pay as we go" retirement system is facing significant challenges due to an aging population and limited fiscal capacity. This has led to one of the highest saving rates globally, as families and businesses prepare for an uncertain future. Meanwhile, cash inflows into the asset management and insurance sectors are expected to stay strong, supporting a healthy market for new bond issues.

Germany’s economy is at a turning point, as it deals with the impacts of globalisation and the shift to local trading zones. At 63.7%, the country’s debt-to-GDP ratio is healthy but there are concerns about maintaining its competitive edge amid structural changes and increased defence spending. But upcoming elections are likely to bring more short-term economic policy shifts, adding to investor uncertainty.

Italy, on the other hand, is experiencing growth that surpasses even its pre-covid performance, boosted by the Next Generation EU (NGEU) plan and the National Recovery and Resilience Plan (PNRR). The country has benefited from a strong export sector and a positive net international investment position. Italian bonds, despite elevated yields, is considered attractive due to stable demand and recent successful auctions. And the banking system is in a strong position, with well-capitalized balance sheets and steady growth. 

Sweden, too, is a potential bright spot amongst the region’s economies. GDP is expected to rise as consumers gain renewed confidence on the back of slowing inflation and stabilised energy prices, and labour demand is also expected to rise, over the course of next year.

Global economic conditions and trade relations will also play a big role in shaping Europe’s economic landscape in 2025.

The potential for new tariffs from a new US administration poses a risk to key sectors, such as French food exports. The economic slowdown in China could impact the French luxury sector, a significant contributor to the country’s economy, and weigh heavily across a range of sectors elsewhere on the continent.

In Germany, the implications of the US elections are far-reaching, with potential effects on military security and economic stability in Europe. The country’s real money investors heading into 2025 on cautious footing.

Italy remains cautiously optimistic, leveraging its stable political environment to attract investment and bolster growth. The country’s focus on exports and current account surpluses positions it well against the backdrop of global economic uncertainty.

In Sweden, the recent NATO membership (March 2024), coupled with a changing geopolitical landscape, is driving an increase in defence spending. While the green transition and electrification continues to drive infrastructure and energy sector investment. However, the recent decision by the Government to reject a number of proposed offshore wind projects in the Baltic Sea, due to “military security concerns”, could have some adverse effects on the sector.

The year ahead for Europe is full of challenges and opportunities. Political stability, fiscal policies, and global trade dynamics will be crucial in shaping the economic and market outlook for 2025. As each country navigates its unique set of circumstances, the broader European economy will continue to evolve, driven by these key themes.

Our European teams provide support across Europe and are consequently mindful of developments across all European locations. If you’d like to know more about what our specialists expect from other countries in 2025, reach out to: Michael Strafuss.

To access more of our Year Ahead content, check-out our dedicated Year Ahead hub.