Bridging Europe’s Investment Gap: Germany’s Private Capital Push & Policy Reforms

Europe’s current economic trajectory hinges on closing a substantial investment gap. According to McKinsey, annual investment well above previous forecasts—€1.2 trillion per year—will be required over the next five years to catch up with global competitors and meet growing defence spending, vs. earlier estimates of around €800 billion. The gap is especially acute in R&D, cutting-edge technologies, and capital-intensive sectors. McKinsey’s “Investment: Taking the pulse of European competitiveness” finds that large European firms invest €700 billion less annually than comparable US firms in capital expenditure and R&D, and trails in productive asset formation by about €550 billion per year since the global financial crisis.

Germany’s bold policy moves exemplify how Europe can mobilize public investment at scale. The creation of a €500 billion special fund for infrastructure and climate neutrality—split across various levels of government—and constitutional amendments to exempt defence spending above 1 % of GDP from budget constraints represents a structural shift in German fiscal orthodoxy. The plan includes allocating €300 billion for federal projects, €100 billion for climate-related transformation, and €100 billion for regional and local infrastructure. Defence spending is set to rise from ~2.4 % of GDP now to 3.5 % by 2029.

On the investor side, there is considerable momentum. Europe-focused private equity raised ~$311 billion (~€300 billion) through September 2025, equivalent to ~34 % of global fundraising—a record share. Major players are aligning: KKR has deployed ~$20 billion so far in 2025, EQT is doubling its commitments to $250 billion over five years, Blackstone is planning $500 billion of investments over the next decade, and Apollo is targeting up to €100 billion just in Germany.

Corporate strategic behavior matters. McKinsey identifies five bold moves—scaling productive tech/business models, portfolio shifts toward high-growth units, innovation leadership (e.g. pharma, AI), building scale and network effects (e.g. in defense, aerospace), and operational transformation—to create “standout” firms that drive national productivity. For example, only 13 German firms drove two-thirds of productivity growth in a sample period; by comparison, the US sample required 44 standout firms due to larger economy.

Strategic implications include the need for public–private collaboration (regulatory reform matched with project acceleration), targeting ~10–20 multibillion-euro initiatives in strategic sectors, and ensuring capital is not only plentiful but channelled to areas with long-run spillovers. Open questions include: how regions with weak institutional capacity can compete; how to balance defense and climate priorities; how Europe will maintain global competitiveness in cost, speed, and innovation quality; and how fiscal constraints and political opposition may affect implementation.