The global financial landscape is undergoing a transformation as European markets adjust to an era of increased government spending, driven by geopolitical shifts and policy changes under former U.S. President Donald Trump. The longstanding transatlantic alliance is showing signs of strain, leading to significant economic repercussions.
Rising Defense Expenditures in Europe
One of the most immediate impacts of this shift is a surge in European defense spending, the largest since the Cold War. As European nations prepare for increased military investments, bond markets are reacting accordingly. Government bonds across the Eurozone are underperforming compared to their U.S. counterparts, with investors anticipating heightened debt issuance. European defense stocks have also reached record highs, reflecting market optimism about the sector’s growth.
Union Bancaire Privée projects that the yield on Germany’s 10-year bund may rise to 3% within the next three to six months, up from 2.4% last week. Meanwhile, Deutsche Bank AG has revised its euro forecast, acknowledging the significance of Europe’s fiscal transformation.
Shifting Global Investment Strategies
Beyond government bonds, shifts in defense spending and geopolitical realignments are expected to influence asset allocations for years. Portfolio managers are reevaluating their strategies in light of a fundamental shift in Europe’s economic landscape.
Gabriele Foa, portfolio manager at Algebris Investments, remarked, “It’s a new world. The U.S. is signaling an appetite to change things from a geopolitical perspective for good.”
EU’s Response to Geopolitical Changes
Recent geopolitical events, such as Trump’s recent confrontation with Ukrainian President Volodymyr Zelenskiy, have heightened attention on European defense policy. This week’s EU defense summit is expected to drive legislative changes aimed at unlocking billions in additional military funding.
While some of this spending may rely on borrowing, the EU faces challenges in attracting bond buyers at a time when global government debt issuance is already at record levels.
Peter Kinsella, global head for FX strategy at Union Bancaire Privée, emphasized, “Germany needs to raise a lot of money — they’re not going to have any choice. The EU now has to view the United States as an adversary.” This signals a fundamental shift in assumptions surrounding global security, trade, and economic cooperation.
European Defense and Economic Markets
Many EU nations have historically underinvested in their defense sectors. However, France and Italy already carry substantial debt burdens, raising concerns about bond market reactions. The discussion around joint EU bond issuance—previously implemented during the COVID-19 pandemic—has resurfaced as a potential solution.
Prior to Trump’s return to the White House, former European Central Bank President Mario Draghi urged the EU to invest an additional €800 billion annually to bolster technological advancements, security, and defense. This call for strategic investment underscores the EU’s recognition of its changing economic and security environment.
Market Reactions: Stocks, Currency, and Gold
The effects of transatlantic tensions are visible in stock markets. A Goldman Sachs index tracking European military contractors has surged over 60% this year, reaching record highs. Notably, Germany’s Rheinmetall AG has seen exceptional growth, resembling the performance of tech stocks.
Edmund Shing, Chief Investment Officer at BNP Paribas Wealth Management, noted, “You just have to look at the performance of Rheinmetall in Germany; it looks like a tech stock. That’s been strong and will continue to be like that.”
While European stock indices have outperformed their U.S. counterparts in 2025, higher bond yields and a stronger euro could dampen future growth. The euro, which was trading near parity with the U.S. dollar a month ago, has now climbed to approximately $1.05. Sweden’s krona has also surged, reflecting investor bets on European military expansion.
Gold has emerged as another beneficiary of global uncertainty, with investors seeking a safe-haven asset. Amundi, Europe’s largest asset manager, has been increasing its gold holdings and now considers the metal a “permanent component” of asset allocation strategies.
Conclusion
The weakening transatlantic relationship and shifting global alliances are reshaping financial markets. With increased European defense spending, changing investment strategies, and evolving geopolitical risks, investors are navigating a landscape filled with new challenges and opportunities. As tensions continue to rise, the economic consequences will likely persist, affecting global trade, investment flows, and market stability in the years ahead.
