Until about two weeks ago, “the idea that Europe would no longer be able to rely on America’s military might for its defence was unthinkable”, says Emma Duncan in The Times. “Now it feels inevitable.” Following the angry scenes in the Oval Office on 28 February – which saw the putative leaders of the free world berating the exhausted leader of a European democracy invaded by its imperialist neighbour – all bets are off.
What once felt like Donald Trump’s naive appeasement of the Kremlin now has the stench of active support for it. On 3 March, Trump confirmed a pause on US military aid to Ukraine, and Europe faced up to a dramatic weakening of the transatlantic military alliance.
Isn’t that a bit dramatic?
Perhaps. The political, cultural, social, economic and security ties between the US and Europe run “broad and deep”, says Neil Shearing on Capital Economics. They’ve been severely tested before – notably during the Vietnam and Iraq wars – but Europe and the US have stayed close allies. Moreover, the cost to the US of walking away should not be understated. “It is partly the size of the US bloc that gives America an advantage over China in a fracturing world” – and its diversity matters, too. US allies include low-cost manufacturers (Vietnam) and high-tech economies (Japan and South Korea). “Europe is responsible for a significant part of this diversity.”
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Why is Trump disengaging?
The bottom line is that Trump doesn’t see Russia as a threat to US security. His priority is to deliver tax cuts while keeping the bond markets calm: he is already planning big cuts in defence spending, and wants rid of the commitment to Ukraine. Most fundamental, says Roger Boyes in The Times, is that Trump’s White House wants to “move on from the depressingly 20th-century war in eastern Europe” and “gear up for the big geopolitical challenge of the presidency: the face-off with China”. As for Ukraine – and by extension the security of Europe – that appears to be of negligible interest for an “America First” administration whose strategic priorities are to reassert US strategic hegemony in the western hemisphere (taking control of Greenland and the Panama Canal) and to stop the Sino-Russian alliance developing permanent military structures. On 4 March, in his speech to Congress, Trump reavowed his intent to get hold of Greenland – a sovereign territory of Nato ally Denmark – “one way or the other”. The next day, it was reported that the US had stopped sharing intelligence with Ukraine – seriously harming Kyiv’s ability to identify and strike Russian forces – and also instructed US allies (including the UK) to cease sharing US-sourced intelligence with Kyiv.
Where does that leave Europe?
Rapidly making plans to spend more on its own defence. Under an agreement made in 2014 – the year Russia seized its first Ukrainian territory – Nato’s members all agreed to spend at least 2% of GDP on defence per year by 2024. In reality, only 23 of the 32 members are expected to have achieved that when revised and updated figures are published this month. Notable laggards include Canada, Spain, Italy and Belgium, who all spend less than 2%. Those spending the most include Poland (4.1%, a near-doubling since the 2022 invasion of Ukraine, and heading higher) and the US (3.4%, though its defence commitments are global, rather than solely focused on the North Atlantic and Europe). The UK is one of a big group of countries spending between 2%-2.5% - at 2.3%, we’re ninth in the league table.
What increases are planned?
Keir Starmer has pledged to hit 2.5% of GDP by 2027 – three years earlier than planned – with the ambition of hitting 3% in the next parliament. UK core defence expenditure (excluding aid to Ukraine, service pensions and the intelligence agencies) will rise from £53.9 billion this year to £67.3 billion in 2027, but it’s then projected to flatline for the rest of the parliament. To put this in context, the UK has not spent 3% of GDP on defence since 1993-1994, 4% since 1986-1987 and 5% since 1967-1968. These are the sort of figures that some analysts predict will be necessary in a new era of US disengagement. Alas, the spending increase is “not a serious response to the challenges the UK faces”, says Martin Wolf in the Financial Times. The rise in defence spending is trivial and the extra cost to be borne by the public is zero.
What about elsewhere in Europe?
If the US abandons Europe altogether, then it will need to spend 6% of GDP to fill the gap, says Emma Duncan in The Times. Recently, the European Commission president Ursula von der Leyen announced a plan to bolster Europe’s defence industry and increase its military capability by raising nearly €800 billion and relaxing fiscal rules to allow for greater defence investments. Funds are to be rushed into air defence, artillery, missiles and drones, with a target of raising average EU military budgets by 1.5% of GDP over four years. The new German chancellor in waiting, Friedrich Merz, said his government would loosen the country’s infamous “debt brake” to allow for higher defence spending.
Is this an economic opportunity for the UK?
Yes, the UK can “realistically expect economic returns on its defence investments”, says Wolf. “Historically, wars have been the mother of innovation”, and there’s every chance that ramped up defence spending will create opportunities. Stand by for a Europe-wide “high-octane blast of military Keynesianism”, says Ambrose Evans-Pritchard in The Telegraph. Just as World War II lifted the US out of the Great Depression, “military revival could do much the same for a Europe trapped in economic defeatism and learnt helplessness for two decades”. If there is anything positive to be taken from the shocks of the past fortnight, it may be that.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
-
Inheritance tax reform ‘largely protects family farms’ – what are the alternatives?Independent analysis of the government’s inheritance tax reforms has found eight out of 10 farming estates will be able to pay their IHT bill without having to sell off parts of the farm
-
UK inflation hits highest level in 18 monthsInflation jumped again in July, hitting 3.8%.
-
The most likely outcome of the AI boom is a big fallOpinion Like the dotcom boom of the late 1990s, AI is not paying off – despite huge investments being made in the hope of creating AI-based wealth
-
The rise of Robin Zeng: China’s billionaire battery kingRobin Zeng, a pioneer in EV batteries, is vying with Li Ka-shing for the title of Hong Kong’s richest person. He is typical of a new kind of tycoon in China
-
How retail investors can gain exposure to Lloyd’s of LondonIt’s hard for retail investors to get in on the action at Lloyd’s of London. Here are some of the ways to gain exposure
-
The goal of business is not profit, but virtueOpinion Serve your customers well, and the profits will follow, according to a new book. It rarely works the other way around, says Stuart Watkins
-
Earnings estimates are a rigged game – especially in the USThe number of US stocks beating earnings estimates tells us only that guidance has deliberately been set too low
-
Why is Britain's industrial base crumbling?Opinion More and more factories in the UK are closing, and the government doesn’t seem to care. What’s going on?
-
Scotland's former first minister Nicola Sturgeon leaves behind a toxic legacyOn the left, Nicola Sturgeon is seen as something of a political hero. That makes sense… but only if you exclude her actual record in office
-
The true nature of economic growthOpinion The feds making a number go up is one thing; true economic growth is quite another, says Bill Bonner
