Out With the Old?

Following a banner year for elections, in which more people cast a ballot than ever before in human history,² at least one trend is dominating headlines: a rejection of the status quo. Among developed countries, every governing party facing election lost vote share,³ regardless of their political ideologies. Europe, where voters headed to the polls in nine parliamentary elections,⁴ was no exception: Voters signaled support for new political parties and left mainstream parties struggling to hold onto power. And with recent developments in Germany and France, we continue to see changes in Europe—growing polarization has made it difficult to form coalitions, and the rise of far-right parties has scrambled the balance of power.

Economic strain helped set the stage for Europe’s shifting political picture. Inflation put pressure on European citizens, corporations and governments alike. Although interest rates are normalizing and providing certainty to investors—the European Central Bank (ECB) now expects to hit its inflation target of 2% in 2025—years of inflation have effectively “baked in” higher prices for consumer goods and energy. Indeed, wages and purchasing power have not kept pace with cumulative 20%-30% inflation over recent years. European governments are also feeling the strain in their budgets, especially as they face additional pressure to ramp up defense spending amid conflicts in Ukraine and the Middle East.

Despite recession concerns after the rapid rate hikes, the financing environment in Europe has remained strong, as the worst-case economic scenario has not materialized. Of course, new trade policies also have the potential to reignite inflation or dampen growth, which could spur changes to ECB policy and interest rates.

While voters chose to shake up their governments, investors in the private markets should not have to make drastic changes to their portfolios—if they’ve focused on investment themes with staying power. The need for investment in critical assets—including those enabling renewable energy generation and transmission and domestic manufacturing—remains firmly in place. A new emphasis on defense spending could mean cuts to government investments in education, health care, transportation, energy transitions and more—further bolstering the need for private investment in essential assets and services. Given Europe’s widespread aging infrastructure, substantial investments in sectors like water, toll roads and power generation/transmission are needed. The funding gap presents both a challenge and a unique opportunity to deploy capital effectively.

Building Out Digitalization

Across Europe and the world, the artificial intelligence (AI) revolution is here. AI is already changing the way we live and work, and it’s opening new opportunities for investment in the technology—and, critically, the infrastructure—that supports it. AI also comes with the potential to place enormous strains on the existing grid and water resources (for cooling), and a need to mobilize finance at a level that the data center construction, renewable power, utility, fiber-optic and tower sectors have never seen.

Data centers are key to Europe’s digital future and competitiveness, and we see no signs of this trend slowing down. Average European data center demand is expected to grow by around 25% between 2024 and 2026 (see Figure 1).⁵

The energy it takes to power these data centers is equally critical to the AI boom. Knowing that these data centers will require greater transmission capacity, we believe that investment in grid capacity across Europe will need to mirror large-scale investments in Latin America, Australia and the U.S. Companies like TDF, our leading independent communication infrastructure operator, are well positioned to provide essential data services and critical support to media broadcasting and telecom operators in France.

Likewise, Microsoft agreed to invest $10 billion in renewable energy projects to be developed by Brookfield, a commitment to bringing 10.5 gigawatts of generating capacity online in the U.S. and Europe. This agreement will advance Microsoft’s goal of having 100% of its electricity consumption, 100% of the time, matched by zero-carbon energy purchases by 2030. Importantly, this framework represents a never-before-seen approach to a longer-term commitment to securing clean energy.

Demand for AI infrastructure is here to stay, and investment at scale is needed at every stage of the value chain for data centers.

Powering Decarbonization

Essential to the infrastructure powering the AI revolution, clean energy continues to be a key focus for investors and an area of increasing demand (see Figure 3). European demand for clean energy is increasingly more a corporate pull rather than a government push. Corporations are increasingly demanding renewable energy simply because it is the cheapest form of power in most countries. Individuals are also signaling their support for cleaner energy sources for their homes and vehicles.

Delivering these new forms of energy requires greater collaboration among corporations, private capital and governments. Despite some governments in Europe being less able to contribute to clean energy projects—either due to budgetary pressures or political ideologies—private capital is filling in the gap. And many projects continue apace even when election results seem to threaten the status quo.  

Supporting Deglobalization  

Domestic manufacturing and innovation continue to be top priorities for governments and businesses around the world, both for economic growth and geopolitical stability. Accordingly, the EU has advanced the Carbon Border Adjustment Mechanism, which seeks to fairly price the carbon emitted during the production of goods like steel, cement and some electricity, when imported to the European Union.

Europe is already a large manufacturing hub, especially in Germany. However, there is still room for many countries to focus on manufacturing critical, high-value items like semiconductors—often with government subsidies. World leaders in semiconductors such as TSMC, Samsung and Intel have announced or are considering major new investments in European semiconductor facilities. We see opportunities to partner with companies like these to assist in the buildout of domestic chip manufacturing as we are already doing with Intel in the U.S.

When it comes to the science & innovation industry, however, standing up domestic manufacturing and advanced research centers is easier in some countries than others. In the U.K., the Harwell Science and Innovation Campus (part of Brookfield’s Advanced Research Clusters, or ARC, business) is a joint venture of public and private investors where breakthroughs in physics and the life sciences are made. By contrast, in Germany, most research is done with public funding, and governments tend to finance facilities. There has been little room for private investors to participate.

Businesses and corporations count on enhanced supply chains to get manufactured goods where they need to go. Functioning supply chains provide predictability and stability, which can become more complex during times of geopolitical turmoil. Take the tariffs and protectionist policies that were proposed on campaign trails across Europe and the U.S. in 2024: Inconsistent tariffs around the world may yield multi-jurisdictional supply chains, in which goods make one or two stops before reaching their final destinations. Supply chains may also be further lengthened by global efforts to diversify away from China and into nations like Vietnam and India.

Thus, shifting supply chains also provide an opportunity for investment in transport infrastructure such as ports, rail and shipping. We expect transport infrastructure companies like Triton, the world’s largest owner and lessor of intermodal shipping containers and a Brookfield portfolio company, to benefit no matter where and how supply chains move.

More ‘Ds’ Ahead? Defense and Demographics

With a major war happening in Europe for the first time in 30 years, it is worth considering another potential D: defense.⁹ The changing geopolitical conditions could present opportunities in critical industrial supply chains that private investment can support—though not without risk.

Consider how the conflict in Ukraine affected supply chains and energy sources throughout the continent. In 2022, dwindling supplies of natural gas from Russia sent prices to record highs, forcing European countries to pivot to other sources. These included piped gas from Norway, liquid nuclear gas from Qatar and the U.S., renewable energy—and nuclear. Today, as the flow of gas through the Russian pipeline has halted, prices are expected to remain stable in the European Union.

Overall, with the conflict in Ukraine in the East, the NATO alliance requires higher defense spending in the West (see Figure 4). As a result, the traditional level of spending by European nations on defense likely will not suffice in the years to come. A shift in European spending on defense may draw funds from other domestic priorities like infrastructure and research and innovation. As European governments look to raise new funding, they will likely turn increasingly to private investment to make up the difference—as they are already doing in the transition to clean energy.