Europe’s Politics Remain Challenging. Investors Shouldn’t Worry Just Yet.

European Union politics remain challenging. (Jean-François FORT / Hans Lucas / AFP via Getty Images)

The European Union faced history twice in the waning days of 2025. It went one for two, maybe 0.8 for two.

Critics have been gleefully predicting the European project’s demise since it launched in 1957. President Donald Trump’s administration has amplified the chorus; its U.S. national security strategy declaring that the bloc of 450 million faced “civilizational erasure.”

That lent an existential air to two political deadlines: a Dec. 18 EU summit on supporting Ukraine’s war effort as Washington backed away and a scheduled Dec. 20 signing of a free-trade agreement with the so-called Mercosur countries of South America—a symbolic geopolitical counterstrike against U.S. hostility.

The EU’s 27 member states came through for Ukraine, sort of. The bloc proved unable to play its diplomatic ace in the hole: 210 billion euros ($247 billion) in Russian central bank assets frozen within its financial systems.

Continental heavyweights from European Commission President Ursula von der Leyen to German Chancellor Friedrich Merz backed leveraging these reserves for Ukraine’s benefit. They were faced down by Bart De Wever, prime minister of 12 million-strong Belgium, who holds primary jurisdiction over most of the hoard through Brussels-based Euroclear and feared Russian legal retaliation. The EU requirement for unanimous consent was at its best, or worst.

The summit did agree to raise €90 billion for Ukraine in collective EU debt over the next two years. This could well save Volodymyr Zelensky’s defenders as the U.S. 2026 defense budget dribbles out less than $1 billion for them. Backers of the frozen asset solution were still disappointed. “I do not get how European politicians think it is OK to protect Russian taxpayer money while spending their own taxpayer money to support Ukraine,” says Timothy Ash, a bond strategist at Blue Bay Asset Management and a pro-Ukraine blogger.

The Mercosur deal presents a more classic dilemma: Beleaguered manufacturers in Germany and across Northern Europe would gain unfettered access to nearly 300 million new consumers in Brazil, Argentina, Bolivia, Paraguay, and Uruguay. Farmers would face competition from bountiful South American nature.

The EU can approve treaties with member states representing 65% of the bloc’s population. With Poland dead set against it, that means either France or Italy, both home to rowdy agricultural lobbies, would have to sign on. Italian Prime Minister Giorgia Meloni decided that the signing would be “premature,” despite 25 years of negotiations. The two sides will try again in January.

The tortuous political gymnastics don’t bode well for the EU cohering around thornier goals like unified banking, capital markets, and tax policy, pegged as essentials in former European Central Bank chairman Mario Draghi’s landmark report on restoring competitiveness.

They do indicate that European leaders are giving up hope of cajoling Trump back into the special trans-Atlantic relationship, and will stump up for their own security.

That is good enough, for the moment, for investors, who bid up the iShares Europe exchange-traded fund by 30% in 2025, and are optimistic for more in 2026. “We believe euro-zone risk/reward is improving and expect the region to outperform its peers,” writes Mislav Matejka, head of European and international equity strategy at J.P. Morgan.

Bond vigilantes shrugged off the extra €90 billion in debt for Ukraine. Yields on benchmark German sovereign bunds have inched down since the announcement. Old World civilization isn’t extinct just yet.