Thoughts

June 27, 2025 | 16:19

Europe Has One Less Worry

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

Check one off the list!

Europe faces a mountain of challenges, not just from the continued fallout of Russia’s invasion of Ukraine. More recently, the mountain was U.S.-centred. The current Administration was 1) becoming increasingly reluctant to defend the continent (President Trump threatened in 2018 to withdraw from NATO, and his tone this year had not changed), and 2) is threatening 50% tariffs on Europe’s exports unless a trade deal is made. Well, at least one challenge can be taken of the list. The NATO Summit produced what was likely the best result: an agreement among the 32 members (minus 1) to increase defence spending to reach 5% of GDP over the next decade, from the current goal of 2%. Europe had said it needed a minimum of seven years to hit the target, so the timeline was welcome news. And, President Trump saying that he was with NATO “all the way” was likely met with relief. There has already been a move to increase spending. The biggest bazooka will come from Germany’s €500 bln infrastructure/defence spending fund. This week, the Cabinet finally approved the draft budget for this year, and the budget framework for 2026, so the ball can start rolling. The EU’s €150 bln loan-to-weapons fund was also given the green light by each of the capitals last month, so loans can be made to buy components to build those needed weapons, as long as 65% of those components are from companies based in the EU, Iceland, Liechtenstein, Norway, Switzerland, and Ukraine.

Spain is the one member that refused to commit to the 5% goal. PM Sánchez assured the membership that its military is able to support NATO, and can do so with spending of 2.1% of its GDP. Spain’s carve-out did not win it any friends and it now looks like the black sheep of NATO. President Trump is also not impressed, and threatened to double tariffs on the country’s exports. That brings us to the second challenge… the trade war. Negotiations between the U.S. and the EU have not gone smoothly and President Trump threatened a 50% tariff on the EU if no deal is struck by July 9. The pressure is on. Also not helping is Chancellor Merz accusing Brussels of making the talks “far too complicated” and he wants German cars to receive a carve-out from the deal (as the U.K. did). One official called that “delusional”. France’s President Macron was also quite outspoken at The Hague, but there is talk that Europe will grudgingly accept a 10% baseline tariff. Brussels is also looking into quotas, which will allow exports of goods up to a certain quantity with a low tariff (or tariff-free). Europe will likely give more than it will take. It doesn’t have much of a choice. The clock is ticking.