- 14/1/2025

"Europe First" is the answer to "America First"

2 min

An imposed peace

Replace Germany with the EU, add the election of an isolationist American president to the mix, and the EU is left with a colossal problem. How to escape this straitjacket? In the past, the EU has always shown determination in the face of shocks. And there will be several in the coming years. So let "Europe First" become the answer to "America First".

If there is one shock we will not escape, it is the imposed peace in Ukraine. President Trump assumes that Europe is a rich and prosperous region and should therefore face the perceived threat from Russia alone. This leaves the United States free to focus its military spending on the Chinese threat. The perception that Russia has got a good deal and is therefore likely to attack neighbouring countries like the Baltic states and Moldova is prompting the EU to act. It doesn't matter whether this "domino theory" is justified or not. What matters is that most European countries believe it.

A central financing capacity

The first step must be to build a military-industrial complex equivalent to Russia's. Russia spends almost 9% of its GDP on defence while the EU spends less than 2%. We need to expand our central budgetary capacity. What was impossible until now, except the EU’s NextGeneration fund, is on the table. Several EU countries are currently debating the creation of a financing vehicle of at least €500 billion for common defence projects and arms purchases.

"There is growing agreement that we need to contribute more to defence," Greek Prime Minister Kyriakos Misotakis recently said, "and the time may have come to set up a common European mechanism to finance joint projects." As well as defence, the "Europe First" strategy must also apply to energy supply. Its increasing dependence on imported US LNG exacerbates Europe's massive competitive disadvantage due to much higher energy costs. We will need time to untangle these dependencies. In the short term, the price to pay will be to import more energy and defence equipment. This is the peace offer to appease a deal-focused American president and deter him from touching import tariffs.

Boosting domestic demand

At the macroeconomic level, the "Europe First" approach involves boosting domestic demand. We need to move away from Germany's mercantilism, which translates into a chronic surplus on its current account. European investment and consumption boost domestic demand.

Concretely, this means, for example, strengthening domestic demand for electric cars and clean tech. Governments must provide support and invest to get this machine going.

The transition to renewable energy at the expense of imported fossil fuels will only succeed if our electricity grid and infrastructure allow it. The consumer will only buy electric cars en masse if charging points are deployed throughout the EU. Once Europe has clearly and definitively set its course and prepared its money, private investment will follow, both within the EU and from outside. Chinese companies want to produce electric cars in the EU. Let them conclude joint ventures with European car manufacturers, which are currently lagging behind, in exchange for their more advanced technology. Europe will thus gradually build a new ecosystem for electric cars, including battery technology. A protectionist approach can still be considered in other sectors where Europe still has a technological lead.

Financing

Here too, the central pillar on which public investments in this "Europe First" strategy rest is a common European financing vehicle. The financing of private initiatives and investments passes through the creation of the capital markets union. In this regard, European countries must choose between maintaining their dependence on the United States for venture capital and swallowing their pride to establish a global European supervisory body and fully integrated financing centres. A third source of financing lies in the securitisation of loans – the reconditioning and sale of loans allow banks to use the capital they had set aside to cover the risk of these loans to grant new loans.

Can Europe reinvent itself? Is this "Hamiltonian" moment of collective European debt coming to an end? By European standards, the necessary reforms are titanic. But an imposed peace and a Russian bear showing its teeth at Europe's borders, without American protection, pose a clear and brutal danger. The EU has no choice. It will have to test the limits of its financing capacity. Otherwise, it will become a punching bag and a museum for the rest of the world in the decades to come.