7. An EU revival: Restructuring and reform

Defence security
Global geopolitical tensions have revived the issue of the extent to which Europe can be strategically autonomous. One aspect of that could be a truly unified military and defence capability but this remains politically sensitive and may take decades to achieve. However, there is clear progress on increasing European countries’ defence spending. 23 of the 27 EU member states are in NATO and 16 of these had defence spending above 2% of GDP in 2024 (Figure 9). All members are expected to reach or exceed the 2% target in 2025 according to commitments made to NATO, with all members targeting a level of 5% by 2035. This extra spending is being tolerated, even with other pressures on government spending.

Green transition
Another key catalyst for renewed optimism in European equities is the revival of green-energy and carbon-reduction spending. Policy momentum remains supportive: the EU’s Clean Industrial Deal, introduced in early 2025, and its Affordable Energy Action Plan aim to lower energy costs, stimulate transition-related investment, and support demand for low-carbon products shifting the focus from regulation to industrial competitiveness. According to European Commission estimates, faster electrification and efficiency improvements could reduce the EU’s fossil-fuel import bill by around EUR130bn per year by 2030, and up to EUR260bn by 2040, improving resilience and lowering long-term energy dependence.

Progress is already visible, with renewables providing close to half of EU electricity in 2024, while the Carbon Border Adjustment Mechanism (CBAM), to be fully implemented in 2026, reinforces incentives for cleaner production. In our view, these developments provide a constructive medium-term backdrop for Europe as it deepens its green transition creating opportunities across industrials, utilities and companies linked to electrification and energy efficiency.

Innovation
In this knowledge-based economy we live in, intangible assets such as intellectual property – combined with inventions, patents and technological know-how – have become central sources of value creation on a country level and on a company level. One such example is Klarna, which was the first European company and the first fintech firm globally to launch a ChatGPT plugin. Klarna’s AI assistant has had over 2.3 million conversations, accounting for two-thirds of Klarna’s customer service chats, and is doing the equivalent work of 700 full-time agents while also leading to faster and more accurate errand resolutions. ¹³

Of course, in an era increasingly shaped by artificial intelligence, where many forms of intellectual work risk being automated or displaced, the value of uniquely human capabilities – talent, creativity and adaptive thinking – become even more critical ingredients of innovation. According to the Global Innovation Index, 16 of the 25 top-ranked innovative economies are in Europe. Switzerland exemplifies this dynamic (Figure 10). As recent INSEAD research highlights, the country continues to lead in both talent competitiveness and in innovation, ranked number 1 globally for 15 years in a row. Having one of the most skilled labour forces underpins Switzerland’s leadership across key industries, including finance, medical technology, pharmaceutical and precision manufacturing. In a world where innovation is the key to future growth, this means Europe is well placed.

¹³ Source: https://openai.com/index/klarna