Loïc Lanci, Arnaud Vanolli, and Gioele Giussani, economists at Swiss Re Institute, a leading global reinsurer known for its expertise in risk management and insurance solutions, discuss the potential disruption to Europe’s fiscal consolidation efforts due to geopolitical tensions and growth challenges in their December 2024 report.
The authors argue that geopolitical factors, such as rising defence spending and competitiveness concerns, could undermine Europe’s fiscal consolidation goals and drive borrowing costs higher.
They simulate a scenario of EUR 200 billion in annual public spending, predicting that by 2027, the yield on the 10-year Bund could rise by 130 basis points to 4.1%.
This increase, they note, would impact the insurance sector, with non-life insurers benefiting from growth in public-driven investments, while life insurers could see returns rise by 50 basis points by 2029.
Lanci, Vanolli, and Giussani point out that “Key risks are defense and concerns over competition. These could derail efforts to cut deficits and also lift borrowing costs.”
In their analysis, the Swiss Re economists predict that the yield on the 10-year Bund will rise faster than the market expects, noting that “This underpins our bullish baseline outlook on 10-year German Bund yields, which we see rising at twice the rate priced by markets by 2027.”
They project that geopolitical tensions, leading to more public spending on defence, infrastructure, and energy, could push yields even higher. This increased spending is also expected to lead to political conflicts that may create volatility in the bond market, affecting insurers’ investment returns.
The researchers also highlight that fiscal consolidation efforts across Europe may fall short of the European Union’s Excessive Deficit Procedure requirements.
For instance, in France, the government projects a deficit of 6.1% of GDP in 2024, and the potential for a government shutdown due to political instability could exacerbate fiscal pressures. “Governments in several euro area countries are spending more than specified by EU rules, and fiscal consolidation in key economies in 2025-26 will likely fall short of current Excessive Deficit Procedures (EDP) requirements.”
Despite these challenges, Lanci, Vanolli, and Giussani foresee a shift in European fiscal policy. They suggest that governments will increasingly push for more spending to address growth challenges, noting that “Beyond near-term budget negotiation roadblocks, we do see a potential for a paradigm shift in Europe.”
They also reference Mario Draghi’s The Future of European Competitiveness report, which advocates for more industrial policy and defense spending to bolster Europe’s competitiveness.
Based on their simulations, the economists estimate that the 10-year Bund yield could rise by 130 basis points by 2027 under a median public spending scenario of EUR 200 billion annually, with a peak economic impact of 160 basis points in 2026 as multiplier effects unfold. “Our median simulation of a yearly spend of EUR 200 billion indicates that the yield on the German 10-year Bund would rise by 130 bps to 4.1% by 2027 (see Figure 1). The impact on economic growth would also be positive with a peak impact of 160 bps in 2026 as multiplier effects unfold, new private investments crowd-in and reverse base effects play out in 2027.”
The authors acknowledge that achieving this level of spending would require political consensus, likely not achieved until the second half of 2025. They predict that the upcoming German elections in February could signal a shift toward a government more open to a higher deficit and less fiscal consolidation, particularly in light of Germany’s relatively greater fiscal flexibility.
This could be done through special investment funds or by relaxing the debt brake rule, a move already under consideration by the CDU. “A key signal of a shift to a new paradigm of more spending will be the election in Germany in February. In our view, the outcome could be a new government more open to less fiscal consolidation (ie, a higher deficit), especially with Germany having more fiscal space than other euro area member states. This could be through the setting up of special funds for investment or by relaxing the debt brake rule. The CDU, likely a main party in next coalition, is already considering the latter.”
For insurers, Lanci, Vanolli, and Giussani note that higher bond yields could boost profitability, especially in life insurance, where returns on investment could rise by 50 basis points over five years in the median scenario. “German life insurers’ return on investments could rise by 50 bps over a 5-year horizon under the same median scenario.”
They also forecast a significant rise in savings premiums, potentially reaching EUR 80 billion by 2027, driven by increased uncertainty and consumer shifts toward savings. “This adds upward potential to our new saving premiums projections of EUR 80 billion by 2027, a threefold increase relative to the last 3 years.”
The non-life insurance sector, particularly in areas tied to public investments, stands to gain as well, with real premium growth in the property and casualty (P&C) sector in the euro area expected to increase by 170 basis points in 2026 and 50 basis points in 2027.
The demand for commercial property insurance in Germany could see a substantial jump, with real growth estimated to rise by 450 basis points to 7% in 2026. “In our median scenario spending analysis, we estimate that real P&C premium growth in the euro area could rise by 170 bps in 2026 and by 50 bps in 2027 (from 1.5% real growth forecast in both years). For example, in Germany real growth could increase by about 450bps to 7% in 2026.”
In conclusion, while geopolitical tensions and fiscal uncertainties present challenges for Europe, the increased public spending that is expected to follow could offer significant growth opportunities for the insurance sector, particularly in non-life lines tied to infrastructure investment, as the Swiss Re economists have detailed.
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