\n The euro area delivered an encouraging surprise in Q4 2025, with\n 0.3 percent quarterly GDP growth outpacing consensus expectations and\n driving full-year growth to a solid 1.4 percent despite persistent trade\n tensions and heightened global uncertainty. Germany, Italy and Spain\n accelerated, suggesting underlying resilience across the bloc\u2019s largest\n economies.\n <\/p>\n \n
\n The European Central Bank\u2019s (ECB) substantial 200 basis points (bps) of\n rate cuts since June 2024 have been instrumental in supporting growth.\n With inflation hovering around the ECB\u2019s two-percent target, we believe\n the deposit rate is likely to remain steady at two percent throughout\n 2026, though a persistently strong euro could pose a downside risk to\n price pressures.\n <\/p>\n
\n Lower interest rates have spurred a recovery in bank lending, and banks\n are in a markedly stronger position to meet loan demand following a decade\n of heightened regulation and private sector deleveraging after the 2012\n sovereign debt crisis. The continent\u2019s top 18 banks are better\n capitalised, with a Tier 1 capital ratio averaging 13.7 percent, according\n to RBC Capital Markets.\n <\/p>\n
\n Economic resilience was further supported by a narrowing of most sovereign\n bond spreads \u2013 the yield premium over German Bunds \u2013 which eased financial\n conditions. The widest major eurozone sovereign bond spread has compressed\n from over 150 bps two years ago to closer to 60 bps today, despite heavy\n sovereign issuance and the ECB\u2019s balance sheet reductions. This spread\n compression reflects fiscal improvements in previously vulnerable\n economies, as well as increased investor confidence in the ECB\u2019s role as a\n backstop and its institutional framework, which seems to be less\n susceptible to political interference than its U.S. counterpart.\n <\/p>\n
\n Looking ahead, we think the momentum could well be maintained. The\n European Commission\u2019s economic sentiment indicator reached its highest\n level in three years in Jan. 2026. While most euro area economies will\n undertake fiscal consolidation in 2026, Germany\u2019s \u20ac500 billion\n infrastructure program announced in April 2025 is likely to support\n regional sentiment. The German government is projecting the federal budget\n deficit to widen from 1.1 percent of GDP in 2024 to a still enviably low\n 3.7 percent from 2026 onwards.\n <\/p>\n
\n Overall, we expect a modest cyclical upturn in 2026, with RBC Global Asset\n Management recently increasing its 2026 GDP growth forecast for the\n eurozone to 1.8 percent, above the consensus level of 1.2 percent.\n <\/p>\n \n
\n U.S. President Donald Trump\u2019s recent threats to annex Greenland, a Danish\n territory, and to impose punitive tariffs on European countries opposing\n the plan rattled Europe. As RBC Global Asset Management Inc. Chief\n Economist Eric Lascelles wrote, the Greenland saga \u201cemphasizes that, in\n addition to being an unreliable trade partner, the U.S. is now an\n unreliable military partner \u2026 There is even the previously unfathomable\n risk that, as with Venezuela and Greenland, the U.S. could be the next\n adversary.\u201d\n <\/p>\n
\n Although the threats were withdrawn, they inflicted lasting damage on\n EU-U.S. relations. In response, European Commission President Ursula\n von der Leyen underscored the need for European strategic autonomy by\n deepening the single market, expanding the network of free trade\n agreements (FTAs), and bolstering security capabilities.\n <\/p>\n
\n Europe\u2019s predicament may reinvigorate momentum behind the measures\n proposed by former ECB President Mario Draghi in 2024 urging EU leaders to\n address the bloc\u2019s persistent productivity shortfall by deepening the\n single market, boosting innovation and diversifying supply chains. While\n implementation has been slow, there has been some progress, with\n 15 percent of Draghi\u2019s 383 reform proposals now fully implemented, up from\n 11 percent last September.\n <\/p>\n
\n Against this backdrop, the EU has stepped up work on several targeted\n initiatives to strengthen the single market in practice. Issues to be\n discussed at a Feb. 12 summit include the proposed Industrial Accelerator\n Act, which would streamline regulations and boost investment across key\n industrial sectors, and modifying the regional emissions trading system to\n reduce the cost of doing business.\n <\/p>\n
\n On the financial side, German Chancellor Friedrich Merz recently\n reiterated the need for progress on a capital markets union. In Oct.\n 2025, Germany indicated its willingness to cede certain supervisory powers\n to the European Securities and Markets Authority \u2013 a significant departure\n from its longstanding opposition to EU-level regulatory centralisation.\n <\/p>\n
\n Von der Leyen sees expanded FTAs as critical to strengthening Europe\u2019s\n economic power. The EU recently concluded two landmark agreements after\n decades of negotiations, securing access to critical products, resources\n and markets.\n <\/p>\n
\n The pact with the Mercosur nations (Brazil, Argentina, Uruguay and\n Paraguay) enhances access to critical minerals, diversifying Europe\u2019s\n supply base. The FTA with India reduces tariffs on European cars from\n around 110 percent to just 10 percent for up to 250,000 vehicles annually.\n This could turn India, which imported just 10,000 cars from the EU in\n 2024, into a major auto export market.\n <\/p>\n
\n Lascelles notes that both agreements represent meaningful steps towards\n trade diversification, though bilateral trade with Mercosur and India\n combined remains just one-quarter of EU-U.S. trade.\n <\/p>\n
\n Lascelles believes the Greenland episode has accelerated the military\n spending theme, with a pronounced pivot from within Europe that we\n anticipate will positively impact the EU economy. As Lascelles does not\n expect higher defence expenditures to be offset by cuts elsewhere, he\n anticipates a significant fiscal expansion ahead that could exceed\n consensus estimates. We note that eurozone public debt has returned to\n near pre-pandemic levels of some 85 percent of GDP.\n <\/p>\n \n
\n Last year\u2019s optimism following the announcement of the German stimulus has\n faded \u2013 perhaps overly so, in our view. We believe the impact of the German\n investment program is now underestimated, as investors focus on\n structural challenges.\n <\/p>\n
\n The MSCI Eurozone Index is trading at 16.3x 2026 consensus earnings\n estimates, a premium to its median valuation since 2003, though we view\n this as justified given the region\u2019s improved economic momentum and\n earnings growth prospects.\n <\/p>\n
\n Political risk remains in France but is likely contained until the 2027\n presidential election. A strong euro poses a headwind to European\n exporters\u2019 earnings, but this is likely to be offset by more buoyant\n economic activity.\n <\/p>\n
\n Europe merits a Market Weight allocation within global portfolios, in our\n view. Beyond geographic diversification, we believe the continent presents\n compelling investment opportunities. We expect companies exposed to the\n German spending plan \u2013 particularly select Industrials, defence and\n Materials \u2013 to do well. Banks are also attractive, in our view, supported by\n a steepening yield curve and improving loan demand, while trading at a\n valuation discount to their U.S. peers.\n <\/p>\n","protected":false},"excerpt":{"rendered":"
The euro area defied expectations in 2025, delivering growth amid a challenging environment. Yet beneath this resilience, Europe has started to redraw its economic and strategic maps.<\/p>\n","protected":false},"author":22,"featured_media":15366,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"rbcwm_post_date":"2026-02-12T16:26:30","editor_notices":[],"rbc_url_alias":"","rbcwm_featured_desktop_image_position":"","rbcwm_featured_mobile_image_position":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[42],"tags":[627,612,628],"rbcwm_content_owner":[390],"rbcwm_need":[],"rbcwm_segment":[],"rbcwm_solution":[],"rbcwm_topic":[212],"rbcwm_channel":[],"rbcwm_format":[],"class_list":["post-15365","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-analysis","tag-euro","tag-europe-economy","tag-european-economy","rbcwm_content_owner-pag","rbcwm_topic-global-insights"],"acf":{"rbcwm_subtitle":"The euro area defied expectations in 2025, delivering growth amid a challenging environment. Yet beneath this resilience, Europe has started to redraw its economic and strategic maps.","rbcwm_post_author":[89],"rbcwm_custom_breadcrumb_text":"","rbcwm_custom_breadcrumb_link_url":"","rbcwm_disclaimers":{"add_disclosures":["Yes"],"perspective_disclaimer":"","expandable":"","omit_from_pages":"","disclaimer_footnote":""},"rbcwm_insight_cta_id":[8376],"rbcwm_pagination":{"next_link":"","next_link_text":"Next article","previous_link":"","previous_link_text":"Previous article"},"rbcwm_video_duration":"","article_time":"","rbcwm_enable_toc":false,"rbcwm_toc_selector":"h2"},"yoast_head":"\n