Can Europe overcome political turmoil in 2025?

Last year was a challenge for Europe but the region was one of the first to cut interest rates on the back of a weak economy. France and Germany, the dominant economies of the region, faced significant political issues as the year ended.

French stock market investors sold off in response, although Germany’s market shrugged off the political uncertainty to help European indices post a positive return in 2024.

What is in store for Europe in 2025?

US President, Donald Trump, plans to introduce tariffs when he takes office this month. Concerns over the impact of these tariffs, particularly for the European car manufacturers, have weighed on investor sentiment. As we head into 2025, investors have tried to factor in their potential impact but as we have little detail on what the actual rates will be (a flat 10% has been mentioned) and which industries will ultimately be affected, only time will tell what the ramifications will be. 

The political uncertainty which came to dominate European headlines in 2024 is likely to carry on in the early part of 2025.  French President Emmanuel Macron has appointed Francois Bayrou as the country’s new Prime Minister, but we have yet to see if he is able to resolve the country’s issues, particularly its budget deficit.

In Germany an election is scheduled in February after Chancellor Olaf Scholz lost a vote of confidence in December. The coalition government, which Scholz led, has fallen apart following the sacking of Finance Minister Christian Lindner, leader of the Free Democratic Party (FDP) and coalition member.

The Eurozone barely grew in 2024. and the forecast is for some improvement in 2025, but the region is expected to lag the US and the global economy. In December, the European Central Bank (ECB) downgraded their growth forecast to 1.1% (from 1.3% in September) for 2025, verses 2.7% for the world.¹

Germany, Europe’s biggest economy, contracted in 2023 and is likely to have done so in 2024 due weakness in its manufacturing sector. The Ukraine-Russia war has taken its toll on its industrial heartland through higher energy prices coming at the same time as a slowdown in demand from China. A recovery in Germany’s manufacturing sector would be a necessary ingredient to a wider Eurozone recovery.

Interest rates across the Eurozone are forecast to fall to 1.75% from the current rate of 3%.² This should be supportive of consumer spending as lower interest rates provide a boost to real incomes, while business profitability should improve.

Performance of the European stock markets was positive although it was the worst performing geographical area in 2024.² The French stock market was the main drag on performance as political upheaval weighed on the country. As we enter 2025, European stock market valuations sit below their long-term average with a price earnings ratio of 13.6 versus the ten-year average of 14.3 for the region.²

Investor sentiment towards Europe is currently very low. The market is reflecting the political uncertainty, threat of tariffs and slow economic growth. An improvement in the outlook for any of these could bring some opportunities.

It is much cheaper than the US market, which is partly a reflection of the lack of exposure to the artificial intelligence (AI) theme that dominates the US market and slower growth in Europe. While growth might be subdued for the region, there are plenty of international businesses which investors can access at attractive valuations.

If you have any questions about Europe and the role it could play in your portfolio, please contact your usual Evelyn Partners adviser, book a complimentary consultation online or call us 0207 189 2400.