Europe’s push for strategic autonomy is being held back by its own governance model, according to Daniel Avigad, lead manager of the TM Lansdowne European Special Situations fund, who said mounting political, market and geopolitical pressures could finally force reforms with meaningful implications for investors.
Europe’s fragmented regulatory landscape means that industries such as telecoms, energy and capital markets operate under dozens of national frameworks rather than a unified system, which ultimately slows investment, dilutes scale and weakens competitiveness at a time when establishing sovereignty is becoming increasingly important.
“We have gone past the point of ignoring the fact change is required in Europe,” Avigad said, adding “pressure from external factors is beginning to get things moving”.
That pressure is coming from three places: bond markets, internal politics and exogenous politics.
“With bond markets, at some point we are going to reach a level where marginal lending for deficit spending won’t be easily accessible,” Avigad said, with bond investors potentially refusing to fund Europe’s trajectory unless reforms occur.
He pointed to the recent volatility in Japanese government bonds, the UK gilt crisis in 2022 and periodic sell-offs of US treasuries as reminders that when bond markets push back, governments are forced to listen.
In addition, Avigad said Europe’s internal politics are now a major catalyst for reform, as support for less mainstream political parties is forcing centrist governments to prioritise competitiveness, with “voters signalling they will back those who act to create change”.
The third and increasingly emergent source of pressure comes from geopolitics, Avigad said, as tensions with major trading partners such as the US are pushing Europe toward autonomy.
“Europe has to become more self-sufficient as a consequence, which implies regulatory revisions, reforms and a greater focus on productivity and innovation.”
However, while EU leaders broadly agree that the bloc needs greater strategic autonomy economically, technologically and militarily, they disagree on how to get there, which is slowing reform down.
Countries such as France, Spain and Belgium back unification, including pooling more resources at the EU level, expanding common industrial policy and building EU-wide defence capabilities.
Meanwhile, Germany, the Nordics and parts of Eastern Europe emphasise sovereignty through competitiveness – favouring deregulation, sector consolidation and stronger national balance sheets over deeper political integration.
“At a high level, there remain questions around the right parameter for Europe – is it a regional union or a set of sovereign nations? Which way will it evolve? This isn’t easily solvable and will likely take decades – well beyond my investment career,” Avigad said.
“But the governance model we have right now is inefficient and unproductive, suppressing innovation due to over-regulation.”
For Avigad, clearing this governance bottleneck is the real determinant of whether Europe can become a more investible region in the more immediate future.
The aforementioned sources of pressure are forcing the bloc to begin to do this, he said, adding “even small improvements in the near term could lead to very positive outcomes given the poor starting position”.
“As an investor, this is an attractive window of opportunity,” he said.
In particular, the European Commission has been leading work building on former European Central Bank chief Mario Draghi’s recommendations to reduce Europe’s strategic dependencies, close innovation gaps and safeguard the interests and wellbeing of European citizens.
Draghi’s report, published in 2024, estimates the EU will require an additional €750bn to €800bn in annual investment from public and private sectors, prompting a number of initiatives to encourage domestic investment and development, including the AI Continent Action Plan, RePowerEU and ReArm Europe.
Avigad sees such initiatives as early signs that Europe is beginning to confront its governance issues and unlock investment opportunities.
Capitalising on Europe’s quest for autonomy
One of the most notable areas of investment opportunity currently lies in defence. There are three stages to the opportunity, Avigad noted – first, the creation of the supply chain, then the creation of national defence primes and finally the creation of European-scale defence primes.
“We are currently in stage two,” he said. “It’s a great investment opportunity because roll‑ups are happening across supply chains in various countries and the designated defence prime can access these opportunities almost uniquely. They are operating in a growth environment they haven’t seen for 30 years, with supply‑side consolidation and accelerating domestic demand. That’s a strong strategic backdrop.”
Avigad expects there will have to be consolidation at the European level if the defence sector is to remain globally competitive.
“We have seen examples in the civil sector with Airbus, and in the military sector with MBDA – it’s a long runway.”
But while defence is benefiting from policy momentum, Avigad warned that Europe’s position in the booming artificial intelligence (AI) trade is far weaker.
“Being long AI and being long fiscal or stimulus winners is crowded – we have been concerned because they are quite linked,” he said.
“If you go through the AI infrastructure value chain, the assumptions embedded in each stage aren’t necessarily compatible. Possibly AI will solve everything, but the investment required is very steep and the payoff is uncertain,” Avigad adding, warning that even a small unwinding of the global AI trade could hurt European beneficiaries.
Instead, Avigad said he is looking at “specific niches that aren’t crowded or particularly exposed to AI or near-term, debt-driven fiscal stimulus”.
Litmus tests
Going forward, Avigad said several “litmus tests” will signal whether Europe is moving in the right direction toward autonomy.
One is whether policymakers begin to prioritise competitiveness when weighing trade-offs. As an example, he highlighted shifts in the European debate over decarbonisation targets, with adjustments to schemes such as the Emissions Trading System suggesting a more pragmatic balance between climate ambition and industrial reality.
Another key test is how EU institutions approach competition law, he said.
“The telecom sector is a fascinating test case – several players are trying to see whether mergers that were previously discouraged might now be allowed,” Avigad said.
“Europe needs those mergers as industries like telecoms require scale to generate investment and compete globally. Right now, there are too many players to incentivise long‑term investment. Whether consolidation is allowed without draconian remedies is a major litmus test for me.”
In the longer term, he remains confident that de-globalisation, regionalisation, productivity and consolidation will offer core investment opportunities across Europe.
“So we are retaining our long-term bets – we own materials, cement, steel and telcos,” he said.