The much-anticipated ‘Make Europe Great Again’ (MEGA) trade momentum faces critical tests as investors await concrete evidence of Germany’s fiscal stimulus effectiveness and potential Ukraine peace developments. Despite recording substantial inflows exceeding $86 billion into European equities throughout 2025, investment patterns have significantly moderated with merely $23 billion entering markets during the past six months according to Barclays-tracked EPFR data.
European markets initially outperformed U.S. counterparts during early 2025, fueled by collective defense spending increases, Germany’s groundbreaking borrowing rule revisions, and dampened confidence in American assets following Trump administration tariffs. This convergence created the ideal conditions for the MEGA phenomenon that investors had long anticipated.
However, as tariff concerns gradually diminished, European equities resumed their traditional pattern of underperformance relative to U.S. markets. The euro similarly retreated from its September peak near $1.20, remaining below this four-year high watermark.
Market analysts identify Germany’s March fiscal policy overhaul as a potential game-changer for the European economy. The nation, representing approximately one-quarter of the EU’s collective GDP, significantly relaxed spending constraints to accelerate infrastructure and defense investments. Yet concerns emerge regarding allocation priorities, with current expenditures favoring social spending over transformative infrastructure projects that would generate more durable economic benefits.
Zurich Insurance Group’s euro zone market strategy head Ross Hutchison noted budgetary plans appear ‘not as ambitious as we would have liked,’ reflecting widespread investor caution. Execution risks remain substantial given Germany’s historical underdelivery on investment commitments, recently prompting three leading economic institutes to downgrade 2026 growth forecasts citing limited spending momentum and sluggish structural reforms.
Valuation metrics reveal pervasive pessimism, with German stocks showing zero gains during the second half of 2025 despite a 20% annual advance. European equities currently trade at approximately 35% discount to U.S. counterparts based on forward earnings—hovering near record disparity levels.
Schroders fund manager Dominique Braeuninger acknowledges this creates substantial upside potential, noting ‘the bar is very low’ for positive surprises. Additional momentum could emerge from projected STOXX 600 earnings recovery following 2025 contractions, based on LSEG I/B/E/S estimates.
Geopolitical factors including potential Ukraine conflict resolution present another catalyst. Citi data indicates European equity funds remain 14% below pre-war asset levels, with recent inflows recovering merely one-tenth of departed capital. Peace negotiations or ceasefire agreements could trigger sentiment improvements, though initial impacts would likely concentrate in energy-sensitive sectors benefiting from lower prices. Reconstruction opportunities exceeding $500 billion over the next decade present additional long-term potential.
Currency markets reflect similar uncertainties, with the euro registering its strongest annual gain since 2017 at 13% appreciation against the dollar throughout 2025 before plateauing since June. Goldman Sachs projects further advancement to $1.25 primarily driven by dollar weakness, while UBS anticipates retreat to $1.14 citing insufficient reasons for dollar sell-offs.
Amundi’s global FX head Andreas Koenig emphasizes the enduring dominance of U.S. monetary policy, stating ‘Most of the time FX is more dominated by what happens in the U.S. and what the Fed does.’ The European Central Bank’s policy trajectory, German stimulus implementation, and Ukraine developments will collectively influence euro dynamics, though dollar strength remains the predominant factor.