Germany’s fiscal easing could reshape European investment strategies, driving capital toward high-growth, undervalued markets.
With the German economy struggling, trade tensions with the US, and the need to increase defense spending in Europe, the prospect of a radical shift in German fiscal management is generating significant interest.
European stocks have already reached all-time highs, outperforming traditionally expensive Wall Street indices. According to the latest global investment surveys, a transatlantic capital reallocation is already underway.
While Germany remains the backbone of Europe’s economic recovery, many economies on the periphery of the continent could benefit just as much—if not more—from a shift in Berlin’s fiscal stance. These markets have lower direct exposure to US trade tensions and offer more attractive equity valuations.
For instance, Spain’s economy, with a GDP of $1.8 trillion, posted an annualized growth of 3.5% last year, outpacing even the "exceptional" performance of the United States by a full percentage point. The Netherlands, with a GDP of $1.3 trillion, was not far behind, expanding by 2%.
Italy, with a GDP of $2.1 trillion, saw more modest growth, but key sectors—including manufacturing, energy, and finance—showed clear signs of recovery. Meanwhile, Portugal, despite having a smaller economy, delivered impressive growth of 2.7% in 2023.
Moreover, the stock markets of these nations remain undervalued relative to both Wall Street indices and the German DAX, leaving more room for potential upside if European capital flows back into the region.
According to analysts at Société Générale, investors should look beyond the cheaper segments of the German equity market—such as the MDAX mid-cap index—and consider the peripheral markets of the eurozone. Their model, based on the Equity Risk Premium (ERP), which measures the expected return on equities relative to ten-year government bonds, suggests a compelling opportunity. While the US ERP hovers around 3%, the equity risk premium in Europe is nearly double that.
The gap between US and European equity risk premiums has reached historically extreme levels. Counterintuitively, however, the best response to increased German government spending may be to invest in peripheral markets rather than in Germany itself. The ERP for Germany and France is estimated between 5% and 6%, whereas for Portugal, Italy, and Spain, it exceeds 8%, reaching as high as 11% in Ireland.
A potential reform of Germany’s “debt brake,” introduced in 2011, could help narrow the valuation gap with US assets. While this could drive German bond yields higher, peripheral yield spreads may tighten further. In fact, the spread between 10-year Italian and German government bonds recently dropped to its lowest level in three and a half years.
Another advantage of peripheral markets is their lower vulnerability to a potential trade war with the United States.
Germany’s DAX shows a high correlation with the S&P 500, whereas stocks in peripheral markets—particularly in Italy and Spain—have less direct exposure to US trade and are more tied to domestic European sectors such as financials, utilities, and energy.
A Bloomberg analysis highlights that, on average, Italian and Spanish companies derive less than 10% of their revenues from the US, compared to 30% for many major German multinationals.
While past narratives of a European recovery have often fallen short, today’s environment presents an extraordinary confluence of factors. With historically low valuations, potential fiscal policy shifts, and major geopolitical dynamics at play, the continent may be on the verge of a substantial capital inflows.
Original article published on Money.it Italy 2025-03-16 06:35:00. Original title: Il gran ritorno degli investitori in Europa favorirà questi paesi
