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2/7/2025
Progress on the energy transition and political commitments give cause for cautious optimism on Europe’s transformation.
Some commentators believe that Europe is in a downward spiral, particularly with the significant and uncertain risks of tariffs from the new U.S. Administration under Donald Trump. However, examining the energy transition and aspects of the EU’s political direction, gives cause for some cautious optimism that Europe is starting to act decisively to transform itself.
Two years ago, DWS published a major report on the challenges that Europe faces. Europe’s debt levels, demographics, strategic dependencies, and risks from climate disasters such as flooding, are amongst the key macro challenges. At a micro level, we concluded that companies were yet to recognize the structural challenges which lie ahead.
Europeans, the economy and politics were also strongly impacted by spiking energy prices and inflation after Russia invaded Ukraine. However, Europe quickly took numerous actions[1] to mitigate negative impacts and quickly worked to wean itself from Russian energy imports.
* Assuming 50% efficiency for gas plant and 40% efficiency for coal. Uses Title Transfer Facility (TTF) gas price where a country exchange is not available, and API2 for coal.
Sources: Ember (January 2025) European Electricity Review. Ember hourly generation data, Solar Power Europe, Wind Europe, Montel, DWS Investment GmbH; As of 01/23/2025
Our Chart of the Week shows one of the headline results of the many actions taken: for the EU as a whole, a reduction, so far, in the total cumulative cost for fuel imports due to expanded wind and solar generation. Without the wind and solar power installed in 2023, the EU’s fossil gas and coal use would have been 11% higher.
Progress on the energy transition is an important leading indicator for Europe’s prospects, particularly when combined with the growing political willingness to act on its challenges. Before the EU elections, former Italian Prime Ministers Mario Draghi and Enrico Letta were tasked to write separate reports on European competitiveness[2] and the Single market.[3] Readers might be skeptical of reports by elder statesmen, but their recommendations were hard wired into the new Commissioners’ job description or ‘Mission Letters.'[4]A Declaration from all EU heads of state also signals political willingness for change.[5] And the Commission’s work plan[6] sets priorities for innovation, decarbonization, and security, pledging to strengthen Europe’s workforce, capital, savings and the Single Market.
These priorities strongly align with DWS’s recommendations in our report on Europe’s investment appeal.[7] Many geopolitical developments could blow politicians off course, but the U.S. government’s bonfire of energy policies and subsidies, strengthens Europe’s attractiveness. Private market investors should look again: Europe is transforming itself, creating potential opportunities.
“REPowerEU - 2 years on”, May 2024, European Commission
“The future of European competitiveness”, September 2024, European Commission
“Enrico Letta; More than just a market”, April 2024, European Commission
“Commissioners-designate”, July 2024, European Commission
“Budapest Declaration on the New European Competitiveness Deal”, November 2024, European Council
“Competitiveness Compass”, January 2025, European Commission
DWS (November 2024) Europe’s Investment Appeal https://www.dws.com/insights/global-research-institute/europe-investment-appeal/
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