Can Europe be Saved?
A few thoughts on the state of Europe amid a twin-pronged assault from the United States and Russia
Here is this week’s newsletter. A warm welcome to new subscribers. Thanks as always to the generous paid subscribers whose support makes this worthwhile. A shorter post this week regarding the extraordinary developments in the last few days on US-European relations. I’ll post again with other thoughts on the global economy during the week. Please do share this with anyone you think may be interested. And if you can afford it, please do consider becoming a paid subscriber. I look forward as always to your comments and feedback. And do email me if you have questions or ideas for future posts.
A few thoughts on the state of Europe:
The European Union is facing an all-out assault from the United States. The new US National Security Strategy, which painted the bloc as a greater threat to US interests than Russia or China, has been followed up by a series of what appear to be coordinated attacks by senior officials. Deputy secretary of state David Landau has demanded that European governments choose between Nato and the EU; his boss Marco Rubio has accused the EU of an “attack on the American people” because it levied a €120 million fine on social media platform X for breaches of EU transparency rules which he wrongly claimed was an attempt to censor Americans; Under Secretary of State Sarah Rogers has touring European capitals touting new instructions to US embassies to report on crimes committed by immigrants and alleged restrictions on free speech, supposedly out of concern to protect Europe from “civilisational erasure” but in reality to amplify far right talking points.
The Trump administration’s hostility to the EU is deeply ideological. It partly reflects MAGA’s obsession with the idea of Europe as a white christian homeland under threat from mass migration, as Noah Smith says. But the main reason that Trump hates the EU, as Michael Feller notes for Geopolitical Dispatch, is the same reason that Vladimir Putin hates a democratic Ukraine or Xi Jinping hates an independent Taiwan: “the EU presents an unacceptable alternative to Trump’s concept of Western civilisation, just as Kyiv does for the Russkiy mir or Taipei for Han China”. Indeed, the new US strategy’s priorities for European policy are almost indistinguishable from those of Russia, as noted by the Kremlin itself. For years, Russia has been engaged in a covert hybrid war designed to destroy the EU through disinformation and support for far right parties. Now the US is openly engaged in a hybrid war against the EU of its own.
The immediate battleground between the US and Europe concerns Ukraine, where it has been clear since February that Trump intends to end the war by forcing Kyiv to capitulate to Russian demands to surrender territory. Europeans fear that abandoning the highly fortified cities of Donbas would, in the absence of the most robust security guarantees that the US seems reluctant to provide, leave Ukraine vulnerable to future attack. So far, Kyiv has been able to withstand pressure from Trump to capitulate, but for how much longer? Sir Keir Starmer, Friedrich Merz and Emmamuel Macron will meet in London on Monday to discuss what to do if Trump’s latest peace process fails. Their hope is that the US will continue to allow Europeans to buy arms for Ukraine’s defence, but the risk is that Trump will (once again) cut off all military assistance and intelligence sharing. In a leaked transcript of an earlier meeting of European leaders, Macron warned of the risk that the US will “betray” Ukraine, while Finland’s Alexander Stubb has publicly warned of the possibility of an “unjust peace”.
A key test of Europe’s ability to continue to support Ukraine is whether it can agree on a mechanism to keep funding Kyiv beyond the end of the first quarter when it is set to run out of money. The European Commission’s proposal to use Russia’s frozen assets to provide Kyiv with a “reparation loan” has already run into ferocious opposition from Belgium, where most of the assets are based. Already the EU has had to scale back the size of the intended loan from €140 billion to €90 billion and is having to rely on an unprecedented invocation of emergency powers to transfer the assets out of Belgium under qualified majority voting to overcome a likely Belgian veto. Whether this is enough to get the measure agreed at a summit of EU leaders on December 17/18 remains to be seen. But the US has made clear that it wants the assets unfrozen as part of any peace deal and has been lobbying member states to try to block the reparations loan going ahead. We know from recent US diplomatic efforts what such leverage can entail.
The US argues in the new NSS that a Ukraine peace deal and the return of “strategic stability” with Russia is essential to the revival of the European economy. The implication is that Europeans will lift all sanctions on Russia and resume imports of Russian oil and gas. That is of course hard to square with Trump’s insistence just weeks ago that Europeans (other than Putin and MAGA-aligned Hungary and Slovakia) accelerate their elimination of imports of Russian hydrocarbons and import more US LNG. On the other hand, it is less hard to square with reports that Trump donors have been in negotiations to buy stakes in Russian arctic gas projects and in the the NordStream 2 gas pipeline from Russia to Germany that was sabotaged early in the war.
How much economic impact an end to the war might have is open to question. An analysis by Goldman Sachs suggests that the eurozone economy could see only a limited boost to growth of just 0.2 percentage points in a limited scenario of a ceasefire, rising to 0.5 percentage points of extra growth in an upside scenario arising from a comprehensive peace plan. The main channels for this extra growth would be a modest improvement from lower energy prices, even if direct imports remain modest; a limited boost to consumer confidence; some increase in bilateral trade with Russia; spillovers from Ukrainian reconstruction spending; offset by the return of refugees to Ukraine leading to reduced domestic spending. In other words, a ceasefire is unlikely to alter by much the current trajectory of the European economy.
What would alter the trajectory of the European economy is the same thing that economists have been arguing would alter its trajectory for over a year: deepening the single market along the lines laid out in the Draghi report. So far, progress has been slow, with only 11 percent of recommendations implemented. What’s more, policies to deepen the single market now risk running into US hostility, which according to the NSS, stands for “the sovereign rights of nations, against the sovereignty-sapping incursions of the most intrusive transnational organisations, and for reforming those institutions so that they … further American interests”: policies aimed at redirecting European savings towards greater domestic investment risk conflicting with US goals to increase European investment in the US; efforts to deepen the defence single market have already run into complaints that the EU is discriminating against US suppliers; EU plans to increase energy independence were denounced in the NSS as “subsidising” China.
Making progress in any of these areas was already hard enough, given splits among European member states. But any attempts to reform the EU to boost its competitiveness and deepen the single market must now contend with overt US support for far right populist parties and governments opposed to any advances in European integration. The NSS makes clear that the Trump administration sees the rise of “patriotic” parties as a source of optimism about Europe and helping them alter Europe from its current trajectory as a core national security priority. That is hardly an idle threat. The Trump administration has already shown with its support for Javier Millei how far it is willing to go to support foreign actors that it considers politically aligned. Indeed, as Simon Evenett has noted, access to the US market under the new Trump dispensation is determined by strategic alignment, which is judged entirely by political relationships. Expect the US to deploy an armoury of inducements and threats to bring governments into line.
Even if Europeans can successfully navigate the coming days and weeks, what does the longer term hold in store? In a sobering analysis for Institute Montaigne, former French diplomat Michel Duclos warns that the likelihood of future conflict with Russia remains alarmingly high, regardless of what happens in Ukraine, given Putin’s long-standing goal of breaking the Nato alliance. He sets out various plausible scenarios for how such a confrontation might unfold, starting with large-scale hybrid attacks of the sort that Russia has been deploying against Europe recently that are designed to test reactions, intimidate and deter. That could then be used as a prelude for a small tactical incursion into Nato territory—such as occupying the Estonian border city of Narva—alongside nuclear threats. Would the US agree to activate NATO’s Article 5 mutual defence clause? If not, Europeans would be left to fight Russia alone - or face the effective collapse of collective security.
How Europe ought to respond to these threats is clear enough. Duclos argues that Europeans need to accelerate their rearmament programmes, with a particular focus on building up capabilities in areas where they currently rely on the Americans such as mobility and deep strike capabilities and satellites. Ian Bond comes to similar recommendations in a stark new analysis for the Centre for European Reform, including the need to develop European command structures outside NATO and the EU and to strengthen European defences against hybrid attacks. Meanwhile Ignacio Garcia Berrera argues in a new paper for Bruegel that the EU needs to reduce its vulnerability to coercion by both America and China by identifying and mitigating chokepoints in its supply chains and adopting new retaliation strategies.
The danger, of course, is that none of these things happen and that instead, a de facto Russian victory in the Ukraine war only deepens rifts across the continent. As Bond notes, the EU will also have difficult decisions over whether and when to admit Ukraine as a member. That will raise difficult issues about the EU budget, as Ukraine would qualify for outsized payments under agricultural and cohesion funds, as well as Ukraine’s commitment to the rule of law and willingness to stamp out corruption. Hungary has pledged to block Ukraine’s accession. At the same time, an end to the war may is bound to expose splits over doing business with Russia. As Louis Gave notes for GaveKal: In 1914, no one expected that within four years the Austro-Hungarian, German, Russian and Ottoman empires would have imploded... It is not a given that political stability will follow a Ukrainian peace deal. Far from it. Much more likely is that a Russian victory will sow greater European division than we have witnessed in generations.”
Of course, what we don’t know is what effect this twin-pronged assault on Europe from America and Russia will have on domestic politics. Current polls suggest that Putin and Trump-aligned Viktor Orban is on course to lose the general election in Hungary next year. A bigger test awaits in 2027 at the French presidential election. On the other hand, all three of the leaders of Europe’s major economies gathering in London on Monday - Starmer, Macron and Merz - are deeply unpopular amid doubts over their political survival. In Britain, it is striking how little attention the new NSS has received in the right-wing media, as has Nigel Farage’s Reform Party’s past links to Russia, suggesting long-standing antipathy to Europe and atavistic Atlanticism trumps doubts over America’s illiberal turn. Meanwhile Starmer’s modest efforts to reintegrate parts of the EU and UK economy appear to be making painfully slow progress. A pre-condition for Europe to remain a pole in the emerging multipolar world is leaders who believe this ideological battle is worth fighting - and can be won. The alternative is vassalage.
And so it comes to pass that the only nation on earth that has the words “united states” in its name seeks to lecture Europe/eurozone countries on civilisational erasure, whilst having an indigenous population of c.1%.
This is an excellent and unfortunately very realistic recount of the situation, Simon, thanks so much. The US has taken its mask off and it is a very ugly face.
First thing Europe should do is fortress its capital markets pooling its national debt into joint severe liability up to 60% of GDP like Von Weizscher suggested in 2010 and Blanchard later. That would offer a viable liquid alternative to the UST bubble. Than fast track all possible elements of the single market. And for God’s shake, start building a pan European national narrative! Any other route is serfdom.