<div id="readability-page-1"><img width="1536" height="1024" src="https://imageproxy.pbkrs.com/https://invezz.com/wp-content/uploads/2025/12/ChatGPT-Image-Dec-23-2025-03_42_39-PM.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" original-src="https://imageproxy.pbkrs.com/https://invezz.com/wp-content/uploads/2025/12/ChatGPT-Image-Dec-23-2025-03_42_39-PM.png"/>Europe enters 2026 with a positive ending to the year. Inflation is under control, interest rates have stopped moving, and the worst fears of recession have faded. But growth remains thin, uneven, and heavily dependent on where money actually gets spent rather than on any macro lever being pulled.The easy explanations are gone. With monetary policy being less restrictive and energy prices coming under control, Europe now has to focus on what could really help it rise in the global rankings.<h2>A stable ECB but no safety net</h2>The ECB has indicated that the cycle of rate cuts is most likely over. The deposit rate sits at 2% after eight cuts from the peak. Officials are clear that hikes are not on the table, but further easing would require a clear and persistent undershoot of inflation. Markets expect rates to stay broadly unchanged well into 2027.This changes the nature of growth. Monetary policy is no longer pushing demand forward. It is no longer pulling it back either. The ECB has parked policy in neutral and stepped aside.Inflation supports this stance. Headline euro area inflation is expected to sit close to 2% through 2026 and 2027, mainly because energy prices are no longer driving big swings.<figure><img width="638" height="378" src="https://imageproxy.pbkrs.com/https://invezz.com/wp-content/uploads/2025/12/image-218.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" original-src="https://imageproxy.pbkrs.com/https://invezz.com/wp-content/uploads/2025/12/image-218.png"/><figcaption>Source: Bloomberg</figcaption></figure>The remaining pressure sits in services and wages, and even there, momentum is easing. The ECB’s own projections show inflation dipping slightly below target before returning to 2% later in the decade.The result is a rare condition for Europe. Stable prices and stable rates. That sounds dull, but it removes excuses. Weak growth can no longer be blamed on restrictive policy.<h2>Growth is modest but not fragile</h2>Most forecasts point to euro area growth around 1.1-1.2% in 2026 and closer to 1.4% in 2027. That is not impressive, but it is durable.Spain remains the standout among large economies. Growth above 2% in 2026 is supported by job creation, real wage gains and EU-backed investment.Germany is improving, having been at a low base for a while. After three years of stagnation, growth is expected to approach 1% in 2026 and pick up further in 2027. France and Italy lag with growth closer to 1% and below.Strip out Ireland’s volatile national accounts, and the euro area looks slower but steadier. Consumption is no longer shrinking. Credit growth is stabilising. Investment has started to recover.The key point is that Europe is not short of demand, but short of momentum. That momentum now depends on where capital goes and how fast projects move from approval to reality.<h2>Investment is the real story for next year</h2>The most important factor in the EU outlook is the return of investment as a growth driver. This is visible in both public and private data.ECB officials have openly said that recent upside surprises came from investment rather than consumption. OECD surveys show a sharp rise in spending linked to artificial intelligence. Corporate guidance across Europe points in the same direction.But Europe’s AI story does not look like America’s. The EU is not capturing most of the software rents. It is supplying the physical backbone instead. Those are data centres, power systems, cables, automation, and buildings that can handle higher loads.That is why industrial companies linked to electrification and power infrastructure are seeing strong order books. It is also why earnings expectations for European industrials jump sharply in 2026, even though GDP growth barely moves.<figure><img width="611" height="182" src="https://imageproxy.pbkrs.com/https://invezz.com/wp-content/uploads/2025/12/image-219.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" original-src="https://imageproxy.pbkrs.com/https://invezz.com/wp-content/uploads/2025/12/image-219.png"/><figcaption>Source: Bloomberg</figcaption></figure>This investment cycle is less flashy than consumer tech but more persistent. Data centres do not run without electricity. Grids do not expand overnight. Once started, these projects run for years.<h2>Fiscal policy will decide who wins and who stalls</h2>With the ECB on hold, fiscal policy has become the main lever. Here, Europe looks fragmented.Germany has the biggest potential impact. A 500 billion euro infrastructure package and rising defence spending could lift growth across the region. But speed is the constraint. Slow permitting, weak project pipelines and labour shortages dilute the effect. Germany’s rebound will be real but gradual.Southern Europe shows a different pattern. Spain benefits from earlier reforms and strong labour market dynamics. Italy has absorbed EU recovery funds faster than many peers, but actual spending still lags allocations. France faces tighter budget constraints and political noise, which caps upside.At the EU level, recovery funds remain supportive,e but their peak impact is approaching. The question for 2027 and beyond is what replaces them. Countries that treat EU money as a bridge to private investment will outperform. Those who treat it as a substitute will slow once the funds fade.<h2>The hidden constraint</h2>Trade risks still exist, but they are no longer the dominant factor. Companies have adapted. Rerouting and inventory buffers have softened the blow from tariffs. Europe is not booming but it is coping.The tighter constraint is energy and infrastructure. AI investment is turning into an electricity race. Grid capacity permitting, timelines and power prices now shape growth more than export volumes.This is where Europe’s structural issues matter. Fragmented energy markets slow approvals and uneven grid investment limit scale. Countries that fix this bottleneck will gain a quiet advantage. Those that do not will see investment stall despite healthy demand.<h2>Where investors should actually look</h2>The EU outlook for 2026 rewards attention to plumbing rather than headlines. The biggest macro gains will not come from surprise growth, but from areas where capital meets constraint.That means following the balance sheets instead of sentiment. Sectors and countries that can deploy capital quickly into grids, power generation, logistics, defence supply chains and digital infrastructure are positioned to outperform even in a low-growth environment. Where approvals drag, returns fade fast.It also means that valuation matters again. With earnings growth limited at the aggregate level, returns will increasingly come from cash generation, balance sheet strength and pricing discipline. Europe’s equity market is full of companies that are compounding value without ever lifting GDP statistics. In 2026, those firms will likely get more attention than the macro story around them.Utilities earn regulated returns on rising power investment. Defence suppliers are booking multi-year orders without immediate output spikes. Infrastructure and services firms are monetising maintenance, upgrades and bottlenecks rather than new demand.The EU economy is entering a phase where outcomes depend less on forecasts and more on friction. How fast projects move. How cheaply energy is delivered. How effectively capital is recycled.The post EU economy after rate cuts: what investors need to know in 2026 appeared first on Invezz</div>

In 2026, the EU economy sees stable inflation and interest rates, with growth dependent on investment rather than monetary policy. The ECB has halted rate cuts, maintaining a neutral stance. Growth is modest, driven by investment, particularly in AI and infrastructure. Fiscal policy varies across countries, with Germany's infrastructure spending and Southern Europe's reforms impacting growth. The EU's recovery funds are supportive, but their peak impact is nearing, raising questions about future growth drivers.