Is Europe about to soar?

The narrative of the past week has been all about America’s abandonment of its 80 year-long security and defence arrangement with Europe. It’s a frightening time to be a European, given that the US has decided to embrace Vladimir Putin and give its traditional allies the back of its hand. It’s also a horrible time to be an American, an embarrassing time, for the reasons we all know. But in order to stay sane at this moment, I have to look for silver linings. And one that I’m much hoping for is the reinvigoration of the European project.

The EU was founded on the rebuilding and integration of the coal and steel industries in the postwar period. Today, Europe must rebuild its defence industry, and also build a world-beating technology sector. These are big challenges, but the future of Europe — and perhaps even the world — depends on success. What’s more, there will be some major fortunes to be made on European stocks if the continent can pull together economically and politically. Markets are beginning to move tentatively away from their current overweighting towards the US; European indices have been doing better than the US, despite saggy continental growth numbers.

What are the opportunities and challenges here? Let’s take defence first. Bloomberg recently estimated that European defence spending and Ukrainian reconstruction will cost $3tn over the next ten years. Now that Europeans have loosened the fiscal constraints, the continent is set for a spending boom that could dwarf America’s $369bn Inflation Reduction Act. Of course, all this will require much greater financial and fiscal integration. But I’m getting the sense — and Alec, I’d love your sense of this from Kyiv — that the five-alarm fire started by the Trump administration will finally move Europe towards reintegration. There is literally nothing left to lose and much to gain.

If that happens, and there is fiscal space for investment, then Europe is actually in an arguably better position than the US to reindustrialise. Countries like Germany and Italy have a higher percentage of their GDP in the manufacturing sector, and many European firms are world beaters in the “mid-tech” industrial sector, including areas like machine tools, aviation, and automobiles. These are the areas that could help bolster defence, since the processes and worker skill sets are compatible (the retooling of the US automotive industry was crucial to winning the second world war). But Europe would have to decide to push a truly cohesive industrial strategy, particularly now that China has declared itself open for private investment again.

Technology is trickier. As Marietje Schaake quite rightly wrote in the FT last week, “Europe’s dependence on US technology is a critical weakness.” I’m just amazed that EU officials continue to bend to US tech giants’ pressure — EU tech chief Henna Virkkunen actually admitted that Europe withdrew stronger AI regulation in order to spur investment from Silicon Valley. If the combination of JD Vance’s Munich Security Conference speech and Elon Musk’s dismantling of the US federal government doesn’t convince Europeans of the folly of counting on American politicians or companies to act in their best interest, I’m not sure what will. 

This may sound a bit like a conspiracy theory (so much does these days), but I’ve always thought that Musk’s embrace of the AfD was about not only far right political views, but the sowing of discontent within Europe to forward his larger aims of a world without government. The very best thing that Europe could do right now, for the world and for itself, is to thwart that goal by committing to its own shared future, militarily, economically, and politically.

Alec, my question to you is, will it happen?

Recommended reading

Alec Russell responds

Rana, your rousing call-to-arms to Europe will be enthusiastically received in the snowbound streets of Kyiv, where I am for a few days. After Donald Trump last week confirmed the Ukrainian government’s worst fears of his intentions, by opening talks with Russia without including Ukraine, officials, soldiers, MPs, and many more here are pinning their flagging hopes on Europe.

A European rebound of course is important for far more than just Ukraine. So your contention that this may be the moment for a much-needed revival of the continent’s economy, and also its collective ambitions, is absolutely the right argument to be posing. But whether this actually will happen is another matter.

The good news for you is that your message falls on fertile soil. Just about every time they meet now one or other of Europe’s leaders bemoan the state of the continent and warn, implicitly or even explicitly, that unless they change their approach to government, their successors will inevitably end up being squeezed between the world’s two great powers, America and China. Under discussion in particular is the European Commission’s seeming catch-all response to an issue: when in doubt, regulate.

But words, as you know are cheap. I anticipate hearing a lot of powerful rhetoric from European leaders on Monday when many are due in Ukraine to mark the third anniversary of the full-scale invasion by Russia. They will be welcome after the insults and derision that rained in from Trump last week. But what Ukraine really wants to hear is actual commitments, most of all of military matériel, but also of long-term budgetary assistance.

That may happen; it certainly should. As for your broader vision, absolutely America’s challenge to Europe to take on its own security is accelerating an overdue and essential increase of defence budgets, however painful this will be domestically. There are also grindingly slow discussions on collective procurement. But for now I think that this is as far as the continent will go in meeting your challenge for it to commit “to its own shared future, militarily, economically, and politically”.

As for Ukrainians, everyone I speak to here is of course grateful for Europe’s support. But are they counting on it for the future? Absolutely not. They know that in our new “might is right” era the only people they can really count on are Ukrainians.