Market Commentary: A New Wake-up Call for Europe

In the recent customs negotiations between the EU Commission and Donald Trump, it was obvious that the Europeans were at a disadvantage. They had to accept virtually all of his demands and received nothing in return that they didn’t already have. Most notably, they didn’t even seem to consider – or didn’t dare – to impose counter-tariffs on U.S. imports or to tax the oligopolistic, in some cases even monopolistic, American tech giants. Yet the EU runs a massive bilateral deficit in services – it is almost as large as its surplus in goods trade (0.8 vs. 1.1 percent of EU GDP). So there would have been leverage.

In the end, Ursula von der Leyen was content with the fact that tariffs on European goods would only rise from the current 2% to 15% – but to secure this “concession”, she had to promise to import around 700 billion euros worth of energy from the U.S. over the next three years, and to increase European investments in the US by about 550 billion euros between now and 2029. According to the White House, the EU has also agreed to purchase large quantities of U.S. weapons. This aligns with the agreement made at the NATO summit at the end of June to raise European military spending from today’s barely 2% to 5% of GDP by 2035.

Was that necessary? The media spoke of an unconditional surrender and a humiliation for Europe. And yet: yes, it was necessary – because without U.S military support, the end of Ukraine as an independent state would be foreseeable. And if nuclear Russia were to go further and attempt to bring the Baltic states or Moldova – with their large Russian-speaking minorities – “home to the empire,” there would be little to oppose it militarily. The British and French nuclear arsenals are vanishingly small compared to Russia’s and therefore unsuitable as a deterrent. Would politicians of these two European nuclear powers be able to credibly convey to a potential Russian aggressor that their soldiers are prepared to die in defense of Riga, Warsaw, or Berlin? I don’t see it.

In other words, from today’s perspective, Western Europe is entirely dependent on the United States – and Trump took advantage of that. The trade concessions are a kind of expensive insurance policy meant to prevent the worst. Whether this submissiveness will prove to be the best survival strategy and whether the insurer (the U.S.) will honor its commitment is far from certain. At the moment, under the U.S. umbrella, the Europeans are primarily seeking to buy time and rearm massively, so that any attack by Russia on Western Europe becomes too risky and thus pointless. In this sense, submissiveness is a rational strategy.

What is needed above all is a joint military policy of the Western European countries – something like a mini-NATO. This would include a central command structure and a central procurement system, as well as a large budget funded by own revenues – for example, from uniform shares of value-added tax revenues. That may sound quite unrealistic, but it helps to clearly envision where things need to go if Europe one day finds itself on its own and Russia does not abandon its imperialist ambitions. European integration must also be urgently advanced in other areas. Switzerland, the most recent victim of Donald Trump, may also move closer to the EU which would boost the standing and negotiating power of Western Europe.

The economic conditions for a massive armament effort are in place. It would hardly require any significant cuts in living standards. Measured in purchasing power parity by the International Monetary Fund, Western Europe’s GDP (including the UK and Norway) will amount to nearly 35 trillion dollars this year, while Russia’s stands at just 7 trillion. Even if Russia fully shifts to a war economy and allocates 25% of its GDP to the military, that only amounts to 1.8 trillion dollars per year – exactly as much, in absolute terms, as the 5% the Europeans plan to spend. If push comes to shove, Europe can mobilize enormous reserves.

It’s a pity that I am doing these calculations. As an economist, I wonder whether all this money now being poured into the military wouldn’t be better spent on a peace project that benefits all sides. It’s not a law of nature that Western Europe and Russia must prepare for war. Doesn’t Russia have better things to do than expand its territory – especially if it were offered more attractive options? In other words: we need a new Ostpolitik, a policy of de-escalation. It could be a project for French president Macron who loves big and visionary projects. After all, and I hardly dare to say it, Russia is still part of Europe.

About Wermuth Asset Management
Wermuth Asset Management (WAM) is a Family Office which also acts as a BAFIN-regulated investment consultant.
The company specializes in climate impact investments across all asset classes, with a focus on EU “exponential organizations” as defined by Singularity University, i.e., companies which solve a major problem of humanity profitably and can grow exponentially. Through private equity, listed assets, infrastructure and real assets, the company invests through its own funds and third-party funds. WAM adheres to the UN Principles of Responsible Investing (UNPRI) and UN Compact and is a member of the Institutional Investor Group on Climate Change (IIGCC), the Global Impact Investing Network (GIIN) and the Divest-Invest Movement.
Jochen Wermuth founded WAM in 1999. He is a German climate impact investor who served on the steering committee of “Europeans for Divest Invest”. Jochen was on the founding investment committee of Germany’s SWF KENFO from June 2017 until February 2024.

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The information contained in this document is for informational purposes only and does not constitute investment advice. The opinions and valuations contained in this document are subject to change and reflect the viewpoint of Wermuth Asset Management in the current economic environment. No liability is assumed for the accuracy and completeness of the information. Past performance is not a reliable indication of current or future developments. The financial instruments mentioned are for illustrative purposes only and should not be construed as a direct offer or investment recommendation or advice. The securities listed have been selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the issues presented and do not necessarily form part of any portfolio or constitute recommendations by the portfolio managers. There is no guarantee that forecasts will occur.

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