Europe’s car sector future; The yield curve sweet spot, France’s late budget & the geopolitics of minerals

This week’s report on the automotive industry marks the inaugural issue of our series on the European re-industrialization process. This series, which spans over the remainder of 2025, addresses the multiple challenges and opportunities the region faces. In our first edition, we delve into the triple transition confronting the automotive sector—environmental, technological, and competitive market dynamics—and propose strategies at both business and political levels to navigate these challenges in the future.

In our What to Watch section, we explore the yield curve evolution against the backdrop of the back-and-forth tariff announcements and where we see attractive entry points for a long duration sweet spot. We go to France where the Bayrou government has managed to push through a watered-down budget bill avoiding further repercussions but future spending cuts remain key. More globally, minerals and resources have become a key battleground of war economics —our take on where speculation is creeping up for some metals. An updated view on various country risk profiles in Europe rounds off today’s edition.

How Europe can take back the wheel in the global auto sector

The complete deep-dive for you here.

The year 2024 served as a reality check for the global automotive market, with 2025 not offering much promise. Following a robust growth of nearly 10% in 2023, the automotive sector experienced a modest 1.7% increase in new registrations in 2024. This slowdown was driven by diminished demand, elevated interest rates leading to higher loan costs, stricter lending conditions, and a product lineup from some manufacturers that fell short of consumer expectations, despite legacy automakers announcing hundreds of new models between 2023 and 2024. We anticipate the global car market to grow by approximately 2%, with China (+4%) and the US (+2.5%) leading the way. In contrast, Europe is expected to lag behind with a growth rate of 1.5%, as tariff tensions may pose a significant challenge, particularly for the German industry.

The European automotive industry, in particular, faces three structural impediments:

• Auto makers need to make up for the missed innovation shift towards electrification: European automakers have been slow to shift towards electrification, clinging to legacy assets rather than embracing electric technologies, including onboard digital advancements. Over the past decade, European carmakers have invested significantly less in capital expenditure (~6% of revenue on average in Germany) compared to major Chinese manufacturers like BYD and Geely, or Tesla. As a result, European vehicles remain costly and lag in innovation, with sedans and SUVs priced 15-30% higher than their Chinese counterparts, even after the fall 2024 tariffs.
• Reliance on China is now a weak spot: China's dominance in the battery market, supplying around two-thirds of the global industry, has exposed a vulnerability. Attempts to bridge the technological gap have been unsuccessful (e.g., the Northvolt setback), and Chinese brands are gaining market share in Europe (~7-8% in 2024) with affordable, reliable, and technologically advanced EVs. Engaging in a trade conflict with China is untenable for Europe, as retaliatory measures would further erode European brands' market share in China, which dropped to 18% in 2024 from 25% in 2019.
• There is a disconnect between policy ambitions and policy making in Europe: There is a disconnect between Europe's policy goals and their execution. Just as the EV market is decelerating, the EU is poised to enforce stringent CO2 targets that could adversely impact the sector, with potential fines exceeding EUR10 billion. Concurrently, Europe must address its energy crisis: with gasoline prices at EUR1.5 per liter, charging an EV becomes economically unviable when electricity prices exceed 37 cents per kWh.

To restore Europe's competitive edge in the automotive sector, we propose a comprehensive 10-step plan:

• For Industry Leaders: (i) Streamline product offerings to five or six models, half of which should be available in both hybrid and electric versions, while minimizing the range of options that inflate prices and maintaining a robust pipeline of new models. (ii) Enhance vertical integration and invest in tailored charging solutions. (iii) Allocate at least 10% of capital expenditure to technology, R&D, and customer services. (iv) Explore emerging markets such as India, Vietnam, Indonesia, and South America, where car ownership is low (5-20%) and international competition remains weak. (v) Foster intra- and extra-sector cooperation through joint ventures and collective projects to achieve economies of scale and accelerate the learning curve.
• For Policymakers: (i) Implement a 40-50% tariff on vehicles with a European sourcing ratio below 75% for components and manufacturing costs (excluding batteries), potentially generating EUR2 billion in EU revenue by 2025. (ii) Reduce land tax rates and offer a 5% subsidy (of total investment) for new joint ventures involving non-European companies with plans to establish new production capacities in Europe, allocating EUR20 billion for this initiative (5% of available NGEU funds). (iii) Introduce a 15% trade-in rebate on EV purchases below EUR45,000 for consumers, contingent on a 75% European sourcing ratio, partially funded by tariff revenues and an incremental target for corporate fleet renewal (increasing from 50% to 100% EVs by 2035). (iv) Invest EUR150-200 billion in charging infrastructure to support the anticipated rise of the EV fleet to 15-20% by 2030. (v) Dedicate 5% of the EU Horizon program (EUR5 billion) to projects focused on battery technology, autonomous driving, AI-driven software, and recycling.

The complete deep-dive for you here.

What to Watch this week

Click here to view the complete set of stories.

• Yield curve: The long duration sweet spot. Rising uncertainty due to back-and-forth tariff announcements sets the stage for lower economic growth, reinforcing our medium-term outlook for lower government bond yields. But the volatility presents attractive entry points for a long-duration strategy while the risk-return trade-off looks increasingly favorable. While US and German yields could rise modestly (+50bps) amid tariff-induced inflation fears, recession risks could drive them sharply lower (-200bps). Unlike the 2010s, investors benefit from high carry and a low equity risk premium, while bond-equity correlations are expected to become negative again, making bonds an attractive hedge. The optimal positioning lies in the 7-20Y segment for US Treasuries and 10Y for German Bunds, both from a carry and roll perspective as well as from an expected risk-return profile. A good entry point for a long duration position, given current volatility, would be 4.8% for the US 10y yield and 2.8% for Germany from today’s perspective.
• Better late than never: France finally gets a budget. The Bayrou government managed to push through a watered-down 2025 draft budget bill and escape a no-confidence motion. But the surviving budget leaves out several spending cuts and skews heavily towards tax hikes (EUR18bn) – including the surtax on domestic turnovers of companies (albeit only for 2025) and a minimum income tax rate of 20% for high-income households. The former should have a limited impact on traded French corporates (-2.1% median decline in income growth) as most large companies generate 70% of their turnover abroad. Volatility in French bond markets may rise in Q4 2025 as political deadlock may resurface during the preparation of the 2026 budget. New legislative elections are likely by then. To consolidate its finances while preserving medium-term growth, France should focus on targeted spending cuts and significantly lower taxation on labor, besides tackling excessive state pension spending.
• Rare earth and no peace? The new frontline of minerals. Minerals and resources have become a key battleground of war economics, as seen in President Trump's claim on mineral-rich Greenland and the rare earth deal with Ukraine, besides the intensification of conflict in the Democratic Republic of the Congo, home to the world’s largest coltan, cobalt and tantalum reserves. Against this backdrop, speculation is creeping up for some metals (lithium, copper, gold). Meanwhile, record-high prices have not deterred investors from buying up gold. China recently allowed local insurance companies to invest up to 1% of their assets in gold, which could increase further upward pressures on gold prices by about 15%. Central banks have also been buying gold as countries try to build resilience against direct or indirect tariffs or sanctions from the US. We estimate that if China was to sell 10% of its US Treasuries holdings to pivot to gold, it could increase US yields by close to 10bps.

Click here to view the complete set of stories.

Revised country risk assessments

• Austria: Rated AA1 (low risk for enterprises), yet in distress as recession risks loom large
• Belgium: Rated AA1 (low risk for enterprises), with a steady activity picking up only slightly in 2025-2026, challenged by fiscal woes.
• Denmark: Rated AA1 (low risk for enterprises), and calm waters amid heightened geopolitical uncertainty.
• Finland: Rated AA1 (low risk for enterprises), having reached the end of the economic slide.
• Germany: Rated AA1 (low risk for enterprises), but at a make-it-or-break-it moment.
• Greece: Rated BB2 (medium risk for enterprises), a still-favorable growth outlook.
• Netherland: Rated AA1 (low risk for enterprises), with a return to positive but below-trend growth.
• Norway: Rated AA1 (low risk for enterprises), with a revitalized optimism and a brighter economic outlook on growth and lower inflation.
• Portugal: Rated A1 (low risk for enterprises), its economy marked by a moderating but resilient growth.
• Spain: Rated A1 (low risk for enterprises), and a growth overperformance that is likely to stay.
• Sweden: Rated AA1 (low risk for enterprises), and a long-awaited reversal materializing.
• Switzerland: Rated AA1 (low risk for enterprises), with solid economic fundamentals helping to cushion the growth headwinds.