In June, our credit teams look under the bonnet of the European industry’s growth engine.
Read this article to understand:
- Why policy decisions in Europe could jumpstart the region’s industrial engine
- How the EU’s easing of emissions rules is helping automakers
- The opportunities – and risks – for credit investors in Europe
Welcome to the June edition of Bond Voyage. This month, discussions among our credit teams have been focused on Europe.
The continent has been displaying glimmers of an industrial recovery, supported by political and policy shifts. And despite the ongoing trade tensions with the US, corporate sentiment is growing more positive. That could create tailwinds for both investment-grade and high-yield credit, and our teams are watching keenly for potential opportunities.
Credit: Is Germany’s engine about to roar?
After years of subdued growth, the European economy has been showing signs of a nascent industrial recovery since late 2024. In particular, automotive order books in western Europe have been resilient, and orders for construction equipment have been rising.
Political events in Germany have also been supportive, and in March 2025, the country marked one of its biggest fiscal policy shifts in decades. That decision could reinvigorate the German industrial base over the medium term and provide a meaningful tailwind for European companies across investment-grade and high-yield credit.
Germany’s €500 billion fund could serve as a powerful growth driver
Germany’s announcement of a €500 billion fund dedicated to infrastructure projects, digitalisation, power grids and education could serve as a powerful growth driver. The German parliament also voted to exempt defence spending beyond one per cent of GDP from the debt-brake rule (which places limits on borrowing at federal and state level) and created an additional €100 billion fund for defence.1
But Germany is not alone. Across Europe, governments are ramping up defence and industrial investment. France and the UK are aiming to raise defence spending to at least three per cent of GDP, though without clear dates.2,3 France will focus on aerospace, cyber defence and dual-use infrastructure, while the UK has also announced plans for broader capital investment in infrastructure and logistics. Meanwhile, Spain is on a path to spending two per cent of GDP on defence in 2025, with increased funding for regional manufacturing hubs, although it is holding out on NATO allies’ plan to increase spending to five per cent of GDP by 2032.4 And at EU level, the “ReArm Europe” initiative is mobilising over €800 billion in defence-related funding.5
These developments suggest a structural shift in European industrial policy, with implications for credit markets that extend well beyond Germany. We expect a variety of sectors to benefit, from trucking to construction equipment, building materials, defence, chemicals and digital/smart infrastructure. Of course, individual company strengths will also matter, and we will be looking out for opportunities.
Shifting gears for automotive?
European sentiment received an additional boost from the European Commission’s (EC) easing of CO2 emissions requirements for the European automotive sector. Manufacturers that were risking significant financial penalties for failing to comply with the requirements by 2025 will now have three years to fall into line.6
That reduces the need for automakers to build more electric vehicles (EVs) at a time when consumer adoption is slowing. It also avoids slapping many with punitive fines when they are already facing global trade uncertainty, intense competition and challenging demand conditions in China. And giving companies three years gives them more leeway to confirm their product strategy, which also gives their European suppliers better visibility and less volatile production schedules.
Excess capacity does remain an issue in Europe
Excess capacity does remain an issue in Europe. Germany is no exception, but its shift in defence policy means some of its excess capacity could be repurposed to support defence production. In our view as credit investors, that would support corporate profits and improve operating leverage dynamics.
And broader policy and investment trends are supporting Europe’s industrial outlook too. For instance, the EU’s REPowerEU and Green Deal Industrial Plan are channelling nearly €300 billion into clean energy, grid upgrades and industrial decarbonisation.7
Positive sentiment
It’s too soon to tell whether the recent policy announcements are having positive financial effects on European industry, given infrastructure and government programmes take time. But conversations we have been having with corporates across Europe have pointed to growing positive sentiment in the region, underpinned by those developments.
However, ongoing trade tensions with the US are creating uncertainty for the European economy. The impact remains unclear given the level of volatility in US tariff policy, so the extent to which it might offset the recent positive developments remains to be seen. But it is a big risk to watch, and we are bracing for further ups and downs on the rollercoaster of market expectations in Europe.
