Preparations intensify among European nations as they brace for a forthcoming period of international turmoil

Germany, under the leadership of Friedrich Merz, is aiming to drive European growth in the coming years. The country plans to establish a €500bn infrastructure fund over a period of 12 years and borrow €850bn by 2029. This bold investment agenda is part of a constitutional debt brake reform, which also includes a targeted increase in defense spending to 5% of GDP by 2029 and a minimum wage increase of 8.4% in 2026.

However, the European economic landscape is not without its challenges. Inflation remains subdued at 1%, promoting private consumption, but this stability is tempered by political uncertainties and economic downturns. For instance, France faces near-term challenges, including a projected 5.8% deficit in 2024 and rising unemployment, expected to reach 7.8% by year-end.

The UK's economic momentum may have stagnated in Q2 2025, with a 0.1% contraction in May. The UK government faces challenges in enacting reforms due to internal struggles and a rise in National Insurance contributions for employers.

Meanwhile, several European governments have expressed ambitions to increase their defense budgets, notably Germany, which is emphasizing support for Ukraine including air defense and ammunition supply. This reflects broader NATO alignment and increased military spending trends in the EU related to the Ukraine conflict.

Economic growth across Europe is projected to be modest, with an average growth rate of 0.6% for 2025, rising to 1.1% in 2026. However, international tensions, particularly those stemming from aggressive U.S. trade policies, have already dented European growth. Effective tariffs on EU imports now approach close to 50%, and each additional 10% tariff tranche slices approximately 0.2% off EU GDP growth.

Poland's defense spending stood at 4.2% of GDP in 2024, Europe's highest, and is expected to rise to 4.7% this year. Yet, Poland's population has been declining, and anti-immigration sentiment is strengthening, posing challenges for long-term military personnel expansion.

Despite these challenges, there are positive indicators. The UK-US trade deal is one such example. Furthermore, a European reconsolidation is taking place, with 68% of surveyed firms planning to increase intra-European trade over the next two years. The EU has 79 active trade agreements, 26 in validation, and 8 under negotiation, helping Europe reinforce its role in the global economy.

In conclusion, Europe is navigating a complex economic landscape marked by both opportunities and challenges. The continent is witnessing a shift towards increased defense spending, infrastructure investment, and trade consolidation. However, political uncertainties, inflation, and global trade tensions pose significant hurdles. As Europe moves forward, it will be crucial for governments and businesses to adapt and respond to these changing circumstances.

Preparations intensify among European nations as they brace for a forthcoming period of international turmoil