The Death of the West plus other mortal threats to Europe
Thoughts on Europe's darkest days since the 1940s, why common defence is so difficult, Britain’s geostrategic choice, Trump's MEGA-Europeans, and should you buy on the sound of trumpets?
A warm welcome to all the many new subscribers over the past week and particular thanks to those who have become paid subscribers. Remarkably, this newsletter is now read in 101 countries. Your interest and support is hugely appreciated. It has been an extraordinary week with so much going on that it is hard to make sense of it all. This post is free to read so please do share with anyone you think may be interested. And if you can afford it, please do consider becoming a paid subscriber. In the meantime, I look forward as always to your comments and feedback.
In this newsletter:
Europe’s Darkest Days: The need for hard power
Common defence: Easier said than done
Must Britain Choose? Geography is destiny
MEGA-Europeans: Trump’s useful idiots
European equities: Buy on the sound of trumpets?
1. Europe’s Darkest Days
It has been without question the darkest week for Europe since the 1940s, and unfortunately is likely to pave the way for many darker days to come. The day that Donald Trump picked up the phone to Vladimir Putin and effectively signalled America’s willingness to surrender Ukraine was the day that the old world order collapsed, confirmation that we have entered a new world of empire. Any lingering illusions that the returning US president could be deflected from the path that he had been signalling clearly for at least a year, if not since his first term in office, were shattered. That said, this week we learned three things:
Trump considers Ukraine to be a part of Russia’s legitimate sphere of interest. He would be willing to hand Ukraine to Vladimir Putin on a plate, preferably after securing access to Ukraine’s critical minerals. This much was already clear from Trump’s adoption of Kremlin talking points, regarding the need for Volodmyr Zelenksy to put himself up for re-election. If Europeans want to try to preserve Ukrainian independence, they will have to fight (and pay) for it themselves. Since Trump knows that the Europeans are in no position to provide credible security guarantees, particularly when the US has made clear that they would not be covered by Nato’s Article 5 mutual defence pact, this was simply a diplomatic fig-leaf.
Trump has effectively called time on NATO. His defence secretary Peter Hegseth has been clear that the US no longer considers European security a priority and has warned that America is likely to reduce its military footprint in Europe. Hegseth says the shift is because America needs to prioritise its strategic rivalry with China. But this is obviously false because Trump has said he wants a three-way deal with China and Russia that would allow America to halve its defence spending. Besides Trump told Ursula von der Leyen back in 2020: “You need to understand that if Europe is under attack we will never come to help you.”
The Trump administration does not just hate the European Union but is actively seeking to break it. How else to interpret vice president JD Vance’s extraordinary speech to the Munich Security Conference in which he threw the administration’s backing behind Europe’s far right parties and called for their inclusion in governments? The idea that this US government, led by a president who tried to violently overturn an election and is in the process of undermining the rule of law in America, cares about democracy, or is motivated by concern over Europe’s long-standing struggles with irregular migration, is laughable. Vance’s warm invocation of Brexit was a clear signal of what the administration thinks of the EU.
From this flow three challenges, all of which carry significant economic implications. The first is clearly to try to prevent Trump simply handing Ukraine over to Russia. Whether Europeans will be able to convince Trump, who agreed the most abject surrender to the Taliban in his first term, to take account of their interests, or come up with credible security guarantees that will give Ukraine a chance of maintaining its sovereignty, will clearly be the primary focus of diplomatic efforts over the next few weeks. The fact that Europeans will not even be involved in the ceasefire negotiations hardly bodes well. As the saying goes, if you’re not at the table you’re on the menu. But at the very least, Europe will need to conjure significant financial resources in very short order.
The second challenge concerns the risk that Russia might take advantage of the new ambiguity about America’s commitment to Nato by attacking an EU member. Russia is already suspected of waging a near-constant hybrid campaign against the EU. The Danish intelligence service has warned that Russia could be in position to launch an attack on a neighbouring country within six months of the war in Ukraine ending. The economic consequences of an attack on a eurozone member could be devastating, given the risks of bank failures, market freezes and sovereign defaults, all of which would require massive interventions to prevent contagion, testing eurozone solidarity.
This sobering essay by Keir Giles of Chatham House in the FT sets out the kind of scenarios that keep defence experts awake at night:
Where once Russia-watchers focused primarily on a Russian move in the Baltics that would be accompanied by nuclear threats to keep Nato out of it, now they think through what would happen if those threats were backed up with a demonstrative non-nuclear attack on one or more European cities. Because the best way to focus, for example, German minds on whether their country would be willing to trade Hamburg for Vilnius would be a practical demonstration of what that really means, delivered through a range of possible methods.
The third challenge is one that I’ve been highlighting in Wealth of Nations over the past few weeks: the extent to which the new age of imperialism that Trump has ushered in poses risks to Europe’s access to critical resources. That Trump’s priority in the peace negotiations seems to be to secure access to Ukraine’s critical minerals is telling. Treasury secretary Scott Bessent’s attempt to strong-arm Zelensky into signing a contract that he had only been given four hours earlier that would have seen Ukraine hand over the rights to 50 percent of its critical minerals as recompense for America’s past support and with no commitment to future support, was the purest gangsterism. This is the world we now inhabit.
As this excellent Substack post by Karim Al-Mansour makes clear:
The era of assuming that markets would always function in the absence of geopolitical intervention is over. The question is no longer whether states will interfere in the free flow of goods—it is how aggressively they will shape, weaponize, and restructure their industrial foundations to ensure control.
Nations are imposing export bans on critical materials. Governments are blocking foreign takeovers of strategic industries. State-controlled investment funds are being deployed to actively shape industrial landscapes. The idea that trade will remain neutral is dead.
This is not a temporary correction. It is a fundamental restructuring of global economics. The nations that recognize, invest in, and defend their sovereignty industries will dictate the terms of global power. Those that fail to do so will find themselves on the receiving end of economic blackmail, supply chain disruptions, and strategic coercion.
The question is no longer whether governments will intervene in markets. The question is: who will control the future of production, and who will be forced to beg for access?
There is one inescapable truth to be drawn from the developments of the past week and the urgency of confronting these three challenges: Europe needs to become a hard power again - and fast.
2. Common Defence
Everyone agrees that Europe needs to become a hard power player. Indeed, that has been obvious since at least the beginning of last year. It is of course scandalous that over a decade after it was first set, six European members of Nato still do not meet the 2 percent of GDP defence spending target Between 1999 to 2021, European members of Nato increased their deterrence investment by just 23.9%. Over the same period, America increased its spending by 65.7%, Russia by 292% and China by 592%.
What is not so easy is to figure out how Europe can get to where it needs to be from where it is today. Indeed, a lot of commentary calling for more EU defence spending simply glosses over just how hard it will be to deliver. There are only three ways for Europe to increase its defence spending but none are straightforward.
The first is for national governments to simply increase their defence spending. The obvious problem here is that many countries, notably Italy, France, Spain and Britain, are already deeply indebted and close to breaching their fiscal rules. Ursula von der Leyen has proposed activating the emergency clause under the European Union’s fiscal rules, which would allow member states to significantly raise defence spending without having to make deep budget cuts.
Yet this requires the consent of the European Council, which may not be forthcoming given opposition from fiscally conservative countries such as Germany and Sweden. Nor can it be used repeatedly so would only be a temporary expedient. Permanently changing the fiscal rules would a long process, and would in any case add to risks to long-term financial stability.
The second option is to reallocate to defence spare capacity from existing EU programmes, for example the Next Generation EU post-pandemic recovery fund. But this too would require unanimous approval by the EU Council, while the amount that could be raised this way is minimal. Goldman Sachs reckons the sums available are only 0.4% of EU GDP and only until 2026.
The third option is for the EU to fund a big increase in defence spending via common borrowing. This has the obvious attraction that while individual member states may be highly indebted, the eurozone as a whole is not. It has a combined debt to GDP ratio of just 89 per cent, compared to 123 percent in the US. The market has also shown a strong appetite for common EU bonds. This is patently the only long-term viable option. Yet as Goldman Sachs points out, this is far from straightforward:
Issuing EU debt under a new programme requires the commitment of additional contributions to the EU budget by member states to prevent European debt from de-rating. Such contributions then require a vote in all national parliaments, in addition to the EU Parliament. The inclusion of non-EU members would raise the institutional hurdle for implementation even further and detach the new debt from current EU bonds.
This last point is crucial and gets to the heart of why no progress has been achieved despite countless discussions over the past year, not least at an informal gathering of EU leaders only two weeks ago. If Europe is to have any strategic autonomy in this new world of empires, then it matters not just that it has weapons, but where it buys them from. It will rightly want to avoid becoming dependent on external suppliers such as America that might try to impose restrictions on how weapons can be used, particularly if its interests are no longer aligned with the EU.
At the same time, it has a clear strategic interest in developing the capabilities of its own deeply fragmented defence industrial base. According to EU figures, between 2007 and 2016, member-states spent over 60 per cent of their procurement budgets on non-EU equipment. Meanwhile, according to figures cited in the Draghi report, in the year between June 2022 and June 2023, 78 per cent of EU member-states’ procurement went to non-EU suppliers, with 63 per cent of that accounted for by the US.
Yet as a recent report by Luigi Scazzieri for Centre for European Reform has highlighted, trying to develop a common defence policy that can quickly meets short-term needs while supporting the long-term development of the domestic defence industry raises a host of deeply complicated political issues:
To what extent should non-EU defence companies be eligible for spending under any common EU procurement and defence R&D programmes? Britain in particular has one of Europe’s leading defence industries, and has extensive partnerships with EU defence companies. A number of major defence firms have a strong presence both in the UK and the EU, such as Airbus, Leonardo and MBDA. Too restrictive an approach risks disrupting existing co-operation. On the other hand, to what extent are EU members willing to allow EU money to subsides non-EU firms?
If British firms are to be eligible for inclusion in common EU procurement and defence R&D programmes, then should Britain participate in a European joint defence fund? That might seem an elegant solution. On the other hand, including Britain raises difficult questions as to what guarantees it would offer and what resources would be used to repay the interest and principal. Any common defence bonds to which Britain was a signatory would be different to the current common EU bonds issued under the next Generation EU programme, and so may not receive the same market treatment.
Who should oversee a common defence fund? As Scazzieri notes, many member states are deeply uncomfortable with handing a greater role in defence to the European Commission. “Most see the Commission as a relatively new and inexperienced actor in defence, particularly when compared to NATO, and they do not trust it to make the right choices.”
How would greater EU involvement in defence be viewed by Washington? As Scazzieri notes, “the US has always been suspicious, thinking that there was a risk of Europeans duplicating NATO efforts, discriminating against non-EU allies (especially in terms of procurement), and ultimately decoupling from the US. Many eastern member-states trust the US more than they do other European partners, and this makes them wary of initiatives that seem protectionist and might upset Washington.”
There are no clear answers to any of these questions, which is why there has been no progress despite more than a year of discussions. Will that change swiftly now under the extreme pressure of the changed world order? I fear not.
3. Must Britain Choose?
Trump’s upending of the global order poses particular dilemmas for Britain. It has long tried to position itself as a bridge between the US and the EU. On the one hand, it is uniquely entangled with the US via its intelligence and defence links. It has dispatched Peter Mandelson to Washington as British ambassador in an attempt to preserve the “special relationship”. It will also be hoping that outside the EU, it will be able to negotiate special treatment that will spare it Trump’s tariffs. Indeed, it is possible that Trump will offer a special treatment as a way to drive a wedge between Britain and the EU.
On the other hand, geography is destiny. It is absolutely not in the British national interest for parts of Europe to succumb to Russian imperialism. Nor, despite the fever dreams of some Brexiteers, is it in Britain’s interests for the EU to sink into chaos. As one of the continent’s only military powers, it is essential that Britain plays a leading role in any common defence initiatives. And yet, as discussed, its position outside the EU vastly complicates attempts to forge a common European policy.
That may mean that the balancing act may become increasingly hard to sustain. As Ian Bond notes in a new report for the Centre for European Reform:
De Gaulle claimed that Churchill told him during World War Two that if Britain had to choose between Europe and the open sea, it would always choose the open sea. Now that Trump is on the other side of that sea, however, the UK and Europe need to build bridges across the Channel as quickly as possible. Keir Starmer’s meeting with EU leaders on February 3rd, at which they discussed defence and security co-operation, was a step in the right direction.
The fact that Starmer will attend the gathering of European leaders to discuss the crisis in Paris tomorrow is a further good sign. The British government has been commendably robust in demanding that Ukraine be given credible security guarantees and that Europeans are included in the negotiations. That goes some way to reverse the dreadful signal sent by Starmer’s craven decision to refuse to sign the communique at last week’s AI summit in Paris.
Even so, the geostrategic choice facing Britain that I discussed last week may become increasingly hard to avoid:
between being a satrapy of America or to pursue a much deeper reset of relations with the EU unencumbered by the red lines of Theresa May, Boris Johnson, Liz Truss, Rishi Sunak and Keir Starmer.
4. MEGA-Europeans
It is not just Britain for whom Trump’s abandonment of the western alliance poses serious questions. The same is true of those far right parties that the US government is clearly counting upon to disrupt and dismantle the EU. Those parties are currently revelling in their association with Trump and believe that they are riding the crest of a populist wave that will sweep them to power.
Last week, the members of the far right Patriots of Europe group gathered for a triumphalist summit in Madrid to celebrate Trump’s return to power. The participants included Marine Le Pen from France’s National Rally, Matteo Salvini from Italy’s League and Santiago Abascal, the leader of Spain’s Vox. Later in the week, Orban hosted Alice Weidel, the leader of Germany’s AfD party in Budapest despite her being considered too toxic even for the Madrid bash.
Yet the fact that the Patriots gathered under the umbrella of a pan-European party that sits in the EU parliament participating in a conference no doubt partly funded by EU money under the slogan “Make Europe Great Again” is a clear sign of the dilemma these parties now face. None of them officially advocate leaving the EU or eurozone, having seen how Brexit is working out. They insist that are not anti-European. Meanwhile, some, including Marine Le Pen’s National Rally, have historically had a strong streak of anti-Americanism.
The result is a series of contradictions that may become increasingly hard to sweep under the carpets. As Le Monde noted of the conference:
Orban attacked Europe's spending to support Ukraine in "a hopeless war," a subject the others carefully avoided. Santiago Abascal, the head of Vox, expressed his support for Alice Weidel, the far-right Alternative for Germany (AfD) party's candidate for chancellor, but he was not followed in this by his European friends, who have considered the AfD in the European Parliament to be toxic. No mention was made of President Trump's intention to impose tariffs on Europe, nor his proposal to expel two million Palestinians from Gaza, nor his demand for European countries to double their defense spending, nor even the digital oligarchy's stranglehold on the US federal state. Le Pen, for her part, avoided speaking of his liberal economic vision, which is very different from the RN's platform.
In fact, it is not obvious these parties have anything much in common, as Bulcsu Hunyadi, a researcher on far-right movements in Europe for the Budapest-based think tank Political Capital, told Balkan Insight:
“They all criticise immigration and cherish national sovereignty, but, in fact, there are a lot of issues where they do not agree.” Hunyadi mentions how Italy would like to receive more help from Central European countries for the relocation of migrants; the Dutch far-right leader Geert Wilders is averse to providing poorer EU countries like Hungary with EU money; and the approach to gender and family issues is also fundamentally different between Western and Central Europe.
It may suit Europe’s mini-Trumps to ignore these contradictions. Most of them, like Trump himself, have little interest in ideology or political consistency. They are simply authoritarian grifters whose primary interest is in dismantling democratic checks and balances so that they can enrich themselves and their cronies while ensuring that they can hold onto power.
But as Europe finds itself increasingly squeezed between newly emerging empires, will they come under pressure from voters to explain how they intend to make a continent yoked together by a common currency and a single market “great again”? Or will they do as Trump and Putin hope and block common European responses? That would make them, to use Vance’s expression, the true “enemy within”.
5. European Equities
According to the old stock market adage, you should “buy on the sound of cannons, sell on the sound of trumpets”. But the last few weeks seems to have turned that wisdom on its head. Trump’s tearing up of the global order may be an existential threat to Europeans long-term security and prosperity, but that does not mean it cannot be good for European asset prices.
At the start of the year, I wrote a column for the FT noting that bearish sentiments towards European stocks and bonds had reached extreme levels and looked at what could go right in 2025 that could lead to European assets outperforming. Since then, I am pleased to report that European equities have significantly outperformed the rest of the world, driven by the reasons I identified: expectations of much looser monetary policy in response to a significant slowdown in growth, and hopes of lower energy prices as a result of any ceasefire in the Russia-Ukraine war.
The Stoxx 600 index of leading European shares hit a new all-time high last week of 552, up 8.17 percent so far this year and outperforming global peers by 6%. How much further could the uprating go? Goldman Sachs sees the possibility for a further modest re-rating, lifting the index by a further 5 percent to 580, given the potential benefits from a ceasefire of a lower risk premium, lower energy prices, better consumer confidence, stronger economic growth. Its economists estimate a potential Euro area GDP increase of 0.2% in a limited ceasefire scenario and a 0.5% boost in an upside scenario.
Meanwhile there are two other items that I identified at the start of the year which could change economic sentiment upon which the jury remains out. The first is the willingness of the EU to address the significant internal barriers to growth in its single market which have led to trade in goods and services in the EU actually declining in recent years. A typically hard-hitting piece by Mario Draghi in the FT highlighted just how much damage this internal protectionism in the form of gold-plated national rules is inflicting:
The IMF estimates that Europe’s internal barriers are equivalent to a tariff of 45 per cent for manufacturing and 110 per cent for services. These effectively shrink the market in which European companies operate: trade across EU countries is less than half the level of trade across US states. And as activity shifts more towards services, their overall drag on growth becomes worse.
At the same time, the EU has allowed regulation to track the most innovative part of services — digital — hindering the growth of European tech firms and preventing the economy from unlocking large productivity gains. The costs of complying with GDPR, for example, are estimated to have reduced profits for small European tech firms by up to 12 per cent. Taken together, Europe has been effectively raising tariffs within its borders and increasing regulation on a sector that makes up around 70 per cent of EU GDP.
The second is the need, almost universally recognised by all credible economists, for Germany to lift its debt brake which has held back investment for over a decade with disastrous consequences for the country’s growth and productivity. An interview with the likely next chancellor Friederich Merz in the The Economist does not exactly fill one with optimism. While Merz says he is open to discussing it, he is reluctant to talk about it publicly, and firmly discourages any talk of common European debt to fund defence. It is hard to disagree with The Economist’s verdict on Merz’s timidity in an editorial:
Too often, Mr Merz behaves as if the hard part will be to get elected. Yet governing will be much harder. To command his coalition and to carry through difficult reforms in a time of turmoil, he will need a mandate for sweeping change. So far, he has been too timid to ask for one.
There are real opportunities amid the current adversity for Europe, with the right leadership, to transform its economic and geopolitical prospects. But if the events of the past week cannot bring about the necessary shift in the mindset of the leaders of Germany, the EU and wider Europe regarding the continent’s existential challenges, it is hard to know what will.
Darkest week since long before the 1940’s In fact ever. I can’t think of circumstances so dire in modern history. The one tiny shaft of light is that Trump is so erratic that he may do a 180 degree turn if he sees a better outcome if he dumps Putin. Putin is fundamentally week and Europe can outgun Russia if it gets its act together. That’s a big ‘If’
Brilliant article Simon.. It’s so galling, terrifying and awful. He has been telegraphing it all along of course, but now it’s actually happening it seems surreal.. It’s almost as if Putin has programmed the US over the last week. Trump is the antithesis of everything America once stood for.. Deep breath: time to get real and get our shit together!