By BNP Paribas Asset Management, Chief Market Strategist Daniel Morris
- Europe faces mounting challenges, including fossil fuel dependency, tepid trade relations with the US, and increased competition from Chinese manufacturing
- As a result, Europe is shifting toward strategic autonomy, directing significant investment towards several sectors to foster a localised industrial renaissance
- This is creating potential long-term investment opportunities, particularly across the defence, energy, and technology industries
The number of challenges facing Europe only seems to grow. The Middle East conflict highlights Europe’s continued dependency on fossil fuel imports from the region, while the pace of its drive to expand renewable energy use has slackened.
Trade relations with the US are at best tepid, while China makes up for the reduction in access to the US market by shipping more to Europe.
China’s manufacturing expertise is posing a significant threat to Europe’s automobile industry (among others), as stricter regulation and higher wages undermine the continent’s competitiveness.
Additionally, geopolitical tensions have pushed European governments to increase their budgets devoted to defence, amid US pressure as Russia probes the region for weak spots and the ongoing Middle East situation.
Of course, little of this is new. Former European Central Bank President Mario Draghi lays most of it out alongside recommended solutions in his 2024 report, The future of European competitiveness.
The European Union has determined that it needs to forge its own path, one more independent from the US, while seeking out new allies. Canada seems keen. And the region is putting significant amounts of money behind its efforts.
A new era of investment
Based on our estimates, more than €1.5 trillion – roughly 10% of eurozone GDP – has been proposed for investments in the defence sector, infrastructure (particularly in Germany), renewable energy, replacing Russian energy imports, improving access to raw materials, and semiconductor manufacturing over the next 10 years.
The diversity of the initiatives, and the multitude of funding sources and agencies that are directing their disbursement, mean the impact across industries and countries will be varied. This will create potential opportunities for investors who can target those companies best placed to take advantage of the new largess.
In the realm of defence, Europe is moving away from a prolonged period of underinvestment toward an unprecedented surge in spending. Defence expenditure among the EU’s 27 Member States reached €418 billion in 2025 and is projected to rise to €454 billion in 2026.1
This growth is not merely about procurement but involves a deep integration of advanced technologies such as artificial intelligence, cyber defence, drones, and radar.
This shift is creating a long-term investment case for the defence industry and its broader supply chains in advanced manufacturing, with some analyses suggesting the market for European defence companies could grow by 29% annually until 2030.2
Bolstering sovereignty
Simultaneously, Europe is redesigning its energy architecture to transform energy security from a supply chain concern into a cornerstone of geopolitical sovereignty.
The region has already demonstrated agility by drastically reducing its reliance on Russian oil imports. This transition is guided by a structured regulatory ecosystem, most notably the 2019 European Green Deal and the 2026 Electrification Action Plan, which aims to double the electrification rate of final energy consumption by 2040.
By investing heavily in renewable energy, grid modernisation, and the electric vehicle battery supply chain, the EU seeks to reduce fossil fuel import costs by approximately €260 billion annually and foster a localised industrial renaissance.3
Digital infrastructure and technology form the third pillar of this autonomy strategy. Recognising a gap between its ecosystem and those of the US and China, Europe is deploying targeted initiatives like the European Technological Sovereignty Package and the Chips Act 2.0 to bolster its semiconductor industry.
The EU also aims to triple its data centre capacity within the next seven years through the Cloud and AI Development Act. Furthermore, the 2024 Critical Raw Materials Act addresses the vulnerability of supply chains by promoting the localisation of essential minerals production and processing, such as lithium mining in Finland, Germany, and France.
These schemes are creating potential equity investment opportunities across companies high-growth sectors, while for fixed income investors, this transition also presents significant opportunities.
Much of the funding for these initiatives will likely be facilitated through bond issuances from government agencies, supranational entities, and corporate issuers. Sectors such as infrastructure, green energy, and defence manufacturing are expected to benefit from stable, regulated cash flows and long-term government contracts, which may enhance the creditworthiness of these issuers.
Europe’s pursuit of strategic autonomy is creating a comprehensive and stable long-term framework for growth, positioning the region to be more competitive and resilient on a global scale.
[1] EU defence spending: €418 billion in 2025, projected to €454 billion in 2026
