Europe’s electricity market; The Fed facing stagflation risks, The five stages of (tariff) grief, and the climate cost of defense spending

Nothing in life is to be feared, it’s only to be understood; now is the time to understand more so that we may fear less (Marie Curie), so we’ll try our best to steer you through some of the recent global twists & turns. Our deep dive explores how to unlock the potential of Europe’s electricity market as a driver of growth and green transition. Our What to Watch publication spans from the expectations for next week’s Fed and our view on a stagflationary trap of the US economy to the tariff roller-coaster and adaptation strategies, to conclude with our analysis on what we call the climate taboo – the defense sector accounting already for 5.5% of global emissions and with increased military spending, climate consequences are bound to increase. And meet Aria, the AI host of our Tomorrow podcast – on Germany and the challenges lying ahead (‘Germany – quo vadis’). Curious to have your feedback here, experimenting.

Plug, baby, plug: Unlocking Europe’s electricity market

The complete deep-dive for you here.

How can Europe’s unlock the potential of its electricity market as a driver of growth and the green transition? We have assessed the current state of the electricity market for you, outlined critical investment needs, examined the cost of inaction, and explored options on how to achieve and finance an efficient transition of Europe’s electricity infrastructure:

Europe’s electricity infrastructure and market design disparities have become major obstacles to the green transition. Delays in grid development have created a backlog of over 800 GW of wind and solar capacity awaiting connection, nearly double the current supply. Meanwhile, persistently high electricity prices are undermining industrial competitiveness and burdening consumers. Without urgent grid investments and modernization, Europe risks falling short of its 2050 net-zero target, which requires intermittent renewables to supply 82% of the continent’s electricity.

The lack of grid flexibility exacerbates intraday price volatility, with high electricity prices during peak demand and negative prices during off-peak hours. In Germany alone, compensation for renewables reached EUR20.9bn in 2024. Grid congestion costs are still lower (EUR2.5bn in 2019) but are projected to surge to EUR12.3bn by 2030 and EUR56.7bn by 2040 without upgrades. These costs ultimately impact electricity prices, with potential increases of +22% by 2030 and up to +103% by 2040 under a business-as-usual (BAU) scenario. However, the economic fallout extends beyond electricity prices, threatening GDP growth and sectoral competitiveness. Germany could face EUR1.6trn in GDP losses by 2050, with public services (EUR585bn in losses), finance (EUR495bn) and retail and wholesale trade (EUR266bn) being most affected.

Transitioning the EU’s electricity sector could lower final prices by -11% as soon as 2035 and by -30% in 2040. But this will require EUR2.3trn in grid infrastructure investments by 2050, with annual funding averaging EUR90.8bn. To meet the EU’s 90% emissions reduction target by 2040, front-loaded investments could push annual investment needs beyond EUR100bn. The distribution network will absorb 56% of total investments, requiring EUR220bn by 2030, with Germany, France, and Italy accounting for 50% of the spending. Meanwhile, transmission infrastructure, set to expand by +28% by 2030, will require EUR694bn by 2050. Beyond domestic grids, interconnector and storage capacity must double by 2030, adding EUR10bn annually but delivering EUR23bn in long-term savings by 2050.

To reduce grid investment costs and enhance efficiency, Europe must make demand more flexible, leverage sector coupling and electric vehicle (EV) integration and improve its market design. Expanding smart meter use can reduce peak loads and storage needs while lowering household energy consumption by 2-10%. Power-to-X technologies can utilize surplus renewable electricity to power downstream industries. In Germany alone, the 10 TWh of curtailed renewables in 2023 could have been used to produce green hydrogen, covering 12% of national demand without additional generation. EVs equipped with bi-directional charging can further enhance grid stability, reduce congestion and cut EU emissions by -7%. Finally, aligning electricity pricing zones with grid conditions would lower congestion costs and improve renewable integration, ensuring a more flexible and cost-efficient energy transition.

While greater integration of European electricity markets through expanded interconnector capacity can enhance system resilience and lower costs, it also raises challenges related to energy autonomy, market competition and regional price disparities. Countries with lower electricity prices may see costs rise, creating political tensions, as seen in Sweden’s cancellation of the Hansa Power Bridge over local price concerns. A surcharge-and-subsidy mechanism on electricity exports could help ensure a fair distribution of benefits, mitigating price disparities while supporting investment in interconnectors. Our analysis of the Sweden-Germany interconnection shows that implementing the 0.7 GW Hansa Power Bridge interconnector could generate EUR30bn in annual savings, vastly outweighing the EUR0.6bn investment cost. Implementing tailored pricing mechanisms and better market coordination will be key to maximizing the benefits of deeper integration while addressing distributional concerns.

With Europe facing fiscal constraints and rising military spending, relying solely on public financing to meet grid investment needs is not feasible. To bridge the EUR30-50bn annual funding gap, regulatory harmonization, private sector mobilization and new financing instruments will be essential. Structural reforms, such as advancing the Capital Markets Union (CMU) and establishing an Independent System Operator (ISO) would further improve capital flows, optimize grid planning and enhance cross-border electricity trade. Strengthening the Connecting Europe Facility (CEF) and other EU-level funding mechanisms will also be crucial to ensuring efficient deployment of capital. Expanding green bonds, transition funds and adjusting capital requirements can help attract institutional investors while targeted fiscal incentives, such as amortization accounts and tax credits, can ease financial pressures. By diversifying funding sources and streamlining infrastructure approvals, Europe can accelerate its grid expansion while maintaining economic sustainability.

The complete deep-dive for you here.

What to Watch this week

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• Fed: Stuck in a stagflation trap. With inflation still stubbornly above target (+2.8% y/y in February), the Fed is likely to remain on pause next week, even as steep tariff hikes, soaring policy uncertainty and deteriorating consumer sentiment are raising risks for US economic growth. We do not expect US GDP to grow at all in the first half of 2025. With tariffs set to push inflation further above target for most of the year (peaking at 3.5% in Q3), we expect the Fed to prioritize bringing inflation back under control over supporting economic growth, with one 25bps cut likely in November, followed by back-to-back 25bps cuts in Q1 2026. However, it could be forced to act earlier if trade tensions do not wane by mid-year as recession risks intensify. Markets are positioned for three rate cuts by the end of this year, discounting inflation risks for now.
• The five stages of (tariff) grief. The US global tariff rate is expected to land at around 8% – the highest since the 1940s. Markets and policymakers are going from denial and anger to acceptance and adapting to the new economic reality. However, the cost of uncertainty is already extremely high and retaliations create escalation risks. US businesses are also in the acceptance stage and frontloading: US imports jumped by an impressive +11.9% in January, increasing for the third consecutive month, and we expect this trend to continue as long as tariff talks worsen. Beyond tariffs, currency markets are also under unprecedented risks from the US administration’s unorthodox ideas to depreciate the USD in exchange for security guarantees (the “Mar-a-Lago” Accord). Other governments may resort to bargaining by purchasing more US goods (e.g., agrifood, natural gas, military products, transport equipment), lowering trade barriers, negotiating deals on critical topics (e.g., minerals, sustainability regulation or data). Europe could leverage services trade as a bargaining chips as the US has sizable trade surplus in services.
• The climate taboo: the silent cost of war. Increasing military spending could have major climate consequences as the defense sector already accounts for 5.5% of global emissions, and wars often generates as much emissions as entire nations. In this context, ramping up defense spending to 3.5% of GDP could send France’s and Germany’s emissions surging by 38 MtCO?e and 65 MtCO?e within a year. This would set France and Germany back by five and three years, respectively, in their paths to reaching net-zero by 2050. To offset this, Europe will need to increase the defense sector’s reliance on renewable energy while improving efficiency in military infrastructure and vehicles, besides developing a comprehensive strategy that integrates defense and climate considerations, upgrading military buildings and facilities to be more sustainable and embedding sustainability principles in procurement and research.

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