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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is publisher of the Wealth of Nations newsletter
Investors went into 2025 in a mood of deep gloom about the outlook for the European economy. Almost all fund managers started the year underweight European equities and few expected them to outperform. That proved a mixed call. The Eurostoxx 600 rose 15.5 per cent, only slightly underperforming the S&P 500, which was up 17.5 per cent. But for euro-based investors, a fall in the dollar meant they would have barely broken even on an investment mirroring the US blue-chip index.
Going into 2026, the mood is quite different. Bank of America’s latest European Fund Manager Survey shows that a net 78 per cent of investors expect stronger European growth in the next year, the highest since mid-2021. At the same time, 92 per cent project gains for European equities — a record high. Cash levels among European fund managers have dropped to a 12-year low of 2.8 per cent.
This optimism is mostly fuelled by expectations of stronger global growth, aided by Germany’s fiscal stimulus. But that was 2025’s surprise and one might think it was now largely priced in. In theory, the next year’s best chance of an upside lies in a swift end to the Ukraine-Russia war. But as Washington pushes both sides to agree a peace deal, investors would be wise to temper their expectations for a significant economic dividend.
The most obvious channel would be lower energy prices. The new US National Security Strategy claims that the return of “strategic stability” with Russia is essential to reviving the European economy. The implication is that a peace deal would lead to a swift lifting of sanctions and the resumption of European imports of Russian oil and gas.
That is, of course, hard to square with the Trump administration’s previous demands that Europeans accelerate their elimination of imports of Russian hydrocarbons and buy $250bn per year of US liquefied natural gas. On the other hand, it is less hard to square with reports that Donald Trump’s donors have been in negotiations to buy stakes in Russian Arctic gas projects and the Nord Stream 2 gas pipeline.
A reasonable bet is that Europeans will not rush to resume their dependency on Russian gas and that imports will rise slowly. The European economy would benefit from improved consumer sentiment, as well as the resumption of some bilateral trade as a result of reconstruction spending. But this would be offset by the hit to domestic consumption as refugees return home.
A peace deal is therefore unlikely to alter Europe’s near-term economic trajectory. Indeed, Goldman Sachs estimates that even a comprehensive peace deal would add merely 0.5 percentage points to Eurozone growth. A more fragile ceasefire would deliver a boost of 0.2 points.
What would actually move the dial on longer-term growth is meaningful progress on delivering the reforms recommended in 2024 by former Italian prime ministers Mario Draghi and Enrico Letta. Analysis by the European Policy Innovation Council found that so far, just 11 per cent of Draghi’s recommendations have been implemented. But will an end to the Ukraine war open up the political space for swifter action?
The danger is that political conditions are about to become more challenging, not least because the EU’s efforts to deepen the single market may run into active US opposition. According to the NSS, the US stands against the “sovereignty-sapping incursions of the most intrusive transnational organizations, and for reforming those institutions so that they . . . further American interests”.
The EU’s efforts to redirect savings towards domestic investment risk clashing with US demands that Europeans invest more in America. European plans to deepen the defence single market and boost domestic weapons production have already drawn complaints about discrimination against US suppliers. The NSS condemned plans to boost energy independence through the build-out of renewables as tantamount to “subsidising” China.
Meanwhile, the NSS frames support for far-right “patriotic” parties that oppose European integration as a US national security priority. The administration has already demonstrated with Argentina’s President Javier Milei how far it will go to back aligned foreign actors.
The splits seen among European governments in recent weeks over the proposed reparations loan for Ukraine could be a precursor of what is to come. A peace deal in Ukraine will force Europeans to confront new challenges, including whether and when to admit Ukraine as an EU member.
Menaced by Russia and bullied by America, Europeans must tread an extraordinarily narrow path — particularly with competition from China intensifying. Investors should brace for the prospect of a Ukraine peace deal that, far from ushering in renewed prosperity, leads to even greater political instability.
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