Hard-Hitting World Leaves EU Soft Power Stranded
(Bloomberg Opinion) -- Last week, with uncertainty raging over whether the US would join Israel in striking Iran, Italian Defense Minister Guido Crosetto delivered an elegy for a soft-power Europe that looked stranded in a hard-power world. 'We talk about Europe as if Europe counted for something,' he said. 'But its time is over, and I say it with sadness.' It turned out to be a fitting prelude to the weekend's events as Europe's last-ditch push for diplomacy with Tehran ended with American bombers striking Iranian nuclear sites.
It speaks to wider anxiety over Europe's geopolitical future as drones and missiles continue to pound Ukraine, tensions rise in the Taiwan strait and the Middle East erupts. Yes, the combination of Vladimir Putin and Donald Trump has finally stung the European Union out of complacency, with the prospect of rearmament projects worth €800 billion ($920 billion) sending share prices soaring and industrial capacity whirring into life. German weapons maker Rheinmetall AG, for example, is outperforming tech darling Nvidia Corp. and taking Gucci parent Kering SA's place on the Euro Stoxx 50 index. Yet at the same time, we're a long way from a European defense worthy of the name.
Even as military budgets flip to feast from famine, political willpower is showing signs of strain, as are supply chains after decades of undernourishment. Dependence on US security and Chinese components runs deep, making much-needed strategic autonomy look entirely theoretical. And fragmentation along national lines is hampering economies of scale: A new analysis by the Kiel Institute and Bruegel finds Europe has credibly boosted production of artillery shells and howitzers, while output of tanks and infantry vehicles still falls well short of matching Russia's — which would require a sixfold increase.
Last week's Paris Air Show showed some of these mixed signals: As the Dassault Aviation SA Rafale circled the skies and Italy's Leonardo SpA talked up industry consolidation, grumbles from some on the sidelines suggested firm orders remain slow and joint platforms lack unity. Rheinmetall's announcement of a partnership with US venture-backed Anduril also raised eyebrows among those who would have preferred to see European startups benefit.
A revolution is needed on several levels as North Atlantic Treaty Organization leaders prepare to meet in the Hague to agree on future spending — with 2% of gross domestic product becoming a bare minimum. With Goldman Sachs Group Inc. estimating that spending by euro members will reach 2.8% of GDP by 2027, fiscal divides are still too obvious between countries that aspire to boost their militaries and and those that can actually afford to, with Germany's new position as the world's fourth-biggest military spender pretty much in a league of its own. Incentives like an escape clause from EU fiscal rules and tapping a new €150 billion defense fund are only a start: More levers need to be pulled, from the European Investment Bank's balance sheet to a more defense-focused EU budget. Pension funds will also need to join the effort on a continent that tends to invest its savings abroad.
And while defense is firmly within the remit of national member states, there needs to be a serious attempt at knocking down the barriers to a true continental market for materiel. Joint procurement is low and duplication high, with 17 battle tanks on offer in Europe versus one in the US, according to management consultancy firm BCG. Instead of waiting for a Yalta-style moment where leaders agree on how to divide and allocate responsibilities, strong players like France should lead by example with more support for pan-EU collaboration.
More industry consolidation may help here, perhaps along the same lines as Franco-German plane-maker Airbus SE. But even more than Airbuses, Europe needs more tech-savvy Andurils of its own. The US currently outspends Europe on research and development by 10-fold; the future of warfare may belong as much to unmanned drones and artificial intelligence as B-52 bombers or F-16s. That means encouraging collaboration between defense and startups, promoting a strong research ecosystem and integrating capital markets. It's not too late to give the old continent a shot of strength.
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This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Lionel Laurent is a Bloomberg Opinion columnist writing about the future of money and the future of Europe. Previously, he was a reporter for Reuters and Forbes.
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