- Trump 2.0 is bringing Europe together, but the urgency for greater action predates that.
- Last year’s Draghi report on competitiveness was a major wake-up call.
- EU’s plans to boost defence spending substantially is striking.
- Germany’s recently passed legislation to loosen its fiscal purse reinforces the continent’s resolve.
- Much can go wrong, but Europe has the wherewithal to mount a major comeback.
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Commentary: The case for Europe
Europe is at an intriguing crossroads. Its problems are well known, including sapping productivity and weak growth, an aging population, struggles with managing immigration, energy insecurity, the war in Ukraine, and the steady rise of the far right.
And yet, its stock market has revved up this year, sitting on double-digit gains even as US markets have corrected. The decade-long investment thesis of US exceptionalism is under challenge; investors are looking at Asia and Europe for better value and opportunities.
What has caused Europe’s moment in the sun, and will this be a sustainable revival? While Donald Trump’s forceful and antagonistic policies on trade and national security have been a major wake-up call, we detected a shift in European resolve last year. We think the resolve will outlast Trump 2.0.
Last year’s Draghi report caused major ripples in European circles. The report made a strident call for regional focus on boosting innovation, decarbonisation, and security. It estimated that to do this, funds worth about 4.5% of Euro Area GDP were needed annually. The report’s message resonated then, and now, with Trump 2.0, resonates even more.
Earlier this month, EU Commission President Ursula von der Leyen presented a plan to mobilise up to €800bn for defence spending over the next four years. This push was further reinforced on March 21, with Germany's upper house voting for a landmark bill that plans to unlock hundreds of billions of euros for defence and infrastructure projects. The legislation, passed with more than two-thirds majority, will amend Germany’s fiscal rules, allowing for a sizeable increase in spending. Public spending’s contribution of European GDP growth is poised to increase substantially.
Europe’s push for productivity gains would come from public spending on technology and infrastructure, but the private sector will also be spurred by the unifying tide. Europe’s leadership on green transition, from setting decarbonisation standards to investment in renewables, will continue. The region’s research universities and laboratories are about to get a big funding boost.
Given the leadership position of the US on many tech verticals, along with the headlines grabbed by China’s relentless stride, Europe is often overlooked. But the fact is that Europe maintains leadership in many areas of the critical technology stack, including semiconductor lithography, chemicals, glass, laser, GLP1 drugs, and fintech. Coupled with its high-quality human capital, high standard of living, and deep reservoirs of savings, Europe has the wherewithal to deal its challenges.
How can this positive momentum be derailed? The US (and potentially Russia) could sow discord within Europe, with some governments keen to pursue narrow goals as opposed to the continent’s collective good. Europe might also struggle to contend with China’s rise as a manufacturer of high value-added products. Future elections could bring to power parties uncommitted to the European vision. But recent developments show that regional leadership is energised to deal with the looming generational challenges. The odds of a European renaissance is rising.
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