Caution is required when selecting stocks of European listed companies as the European Union works on a policy to promote strategic autonomy in response to a rapidly changing geopolitical environment. For asset owners and investors, this involves risks and opportunities.
The EU’s mercantilist policy, supported by strict government control, aims to reduce dependence on outside economic influences. One key task is to ensure that critical sectors and the exploitation of essential raw materials remain within the union. Investors see potential in this strategy.
For instance, Koen de Leus and Philippe Gijsels of BNP Paribas Fortis write in their bestseller “The New Global Economy,” that the transition to a CO2-neutral world is “one of the biggest investment opportunities ever. Don’t miss your chance!”
For now, the EU’s green transition hinges on China
(share in world output)
Rob Deneke, manager of Juno Partners’ European Continuation Fund, which invests in European family businesses, believes that the energy transition and Brussels’ drive for strategic autonomy will eventually move Europe forward, though not without risks.
“Scarcity in raw materials and critical minerals will lead to higher prices and thus higher inflation. Companies are already stockpiling larger supplies because in the current geopolitical environment it is no longer ‘just in time’ but ‘just in case’.”
Rob Deneke, manager of Juno Partners’ European Continuation Fund, on Europe’s resilience (in Dutch):
Emmanuel Macron, in a recent lecture at France’s Sorbonne University, outlined Europe’s ambitions. He noted that the EU’s strategic unity has strengthened over the past seven years, with increased involvement in public health, debt financing, technology, climate, and energy policy.
In particular, the formation of a common energy market is crucial. “Carbon-neutral energy is the key to climate, sovereignty and employment. Europe must become an electric superpower,” Macron said. However, he warned, “civilisations can die out. We are at a tipping point. Europe can die. Whether that happens is up to us.”
See: Speech president Macron at the Sorbonne University, Paris, 25 April (in English and French)
The EU’s strategic autonomy policy, launched in 2020, was initiated by France under Macron. Paris identified two significant developments: the Paris Climate Agreement and rising tensions between China and the United States. Chinese President Xi Jinping’s ambitions are clear.
Centennial paradigm shift
Last March, Xi, visiting Vladimir Putin in Moscow, referred to a “centennial paradigm shift.” In the West, this was interpreted as a reference to China’s goal of becoming the world’s most powerful country by 2049. China and Russia are intensively cooperating towards this aim, meeting for bilateral consultations more than forty times.
The West anticipates a scenario leading to an endgame, potentially involving China’s invasion of Taiwan. The US Department of Defence estimates China will be ready by 2027. Such a scenario would have major consequences for the US and Europe.
In 2018, the US stated it could not fight a two-front war. According to the think tank Groupe d’études géopolitiques, this explains Nato’s quick and harsh response to Russia’s invasion of Ukraine: it aimed to defend Ukraine and diminish Russia’s offensive capability, preventing it from threatening Europe in the short term.
Industrial Competitiveness
US pressure on Europe is increasing, and the EU realises it must accelerate its strategic autonomy goal. Europe is relatively weak militarily and losing industrial competitiveness.
‘Our Europe is mortal. It can die, and all depends on our choices.’
French president Emmanuel Macron, in his Europe speech at the Sorbonne (in French):
“The lack of raw materials hinders the transition to a carbon-neutral world,” argue Elwin de Groot and Bas van Geffen, macro strategists at Rabobank. In their study “Europe’s Quest for Strategic Autonomy Requires Dealing with Structural Weaknesses,” they highlight Europe’s challenges: deglobalisation, vulnerable supply lines, and protectionism. Strategic autonomy involves tackling these weaknesses simultaneously with significant investments.
The urgency is demonstrated by the Critical Raw Materials Act, in force since May, which aims for greater diversification. For instance, a country’s dependence should not exceed 65 percent of annual consumption. The EU also wants more production within its borders, leading to higher costs. The International Energy Agency (IEA) writes that investment for the green transition must rise from 1,200 billion dollars in 2020 to 4,400 billion in 2030. This could pressure EU member states’ budgets and sovereign debt, the ECB recently warned.
See: Europe’s quest for strategic autonomy, Rabobank
An Achilles’ heel in strategic autonomy is the production of both civilian and military goods. Europe’s competitiveness is declining due to an ageing population and rising production costs. This trend, starting in Germany in 2017, is exacerbated by China’s dominance in wind turbines, solar panels, and critical minerals processing.
Zero-sum realpolitik
Rabobank acknowledges that the EU was once a peaceful trading bloc but now faces a different world. “The cost of responding to challenges is huge, but the price of not responding will be much higher still.”
“In a world of ‘zero-sum realpolitik,’ if you don’t control commodities, you lose your industry. Without industry, you lack a significant army. Without an army, you cannot control resources,” say de Groot and van Geffen. This triggers a downward spiral of economic and social instability.
‘The EU’s strategic weakness calls for political coordination that is without precedent.’
Elwin de Groot, head of macro strategy at Rabobank
Elwin de Groot attributes Europe’s vulnerability to neglecting the strategic autonomy triangle. “The EU had a neoliberal agenda of free trade, letting the market solve everything. But now we realise there needs to be more direction.”
Rabobank draws hope from the pandemic, which showed EU solidarity in crises. “A tremendous fiscal stimulus took place from southern Europe, thanks to northern Europe,” says De Groot. The current challenge of de-industrialisation, raw material dependence, and a limited defence industry could bring EU member states closer together.
The three cornerstones of structural autonomy
Structural weaknesses in Europe’s quest for “strategic autonomy” are a lack of key resources, industrial competitiveness and military power. All three are now interlinked, Rabobank argues.
De Groot does not believe these challenges can be addressed with 20th-century Keynesian or neoliberal thinking. The EU’s and member states’ debts are already too high. Rabobank’s study presents a thought experiment. “The EU’s strategic weakness calls for unprecedented political coordination and an untested policy mix of targeted fiscal easing, higher interest rates, and targeted lending.”
Debt requires new approach
“Grounding the three pillars of strategic autonomy requires modest inflation, public debt sustainability, and social cohesion. The money for this will not come from markets but from the EU and its member states. The state can place so many orders that new suppliers will emerge in strategically important sectors. It may also temporarily suspend production of consumer goods or retrain workers to transition to strategic sectors.”
This so-called “creative destruction” requires intense cooperation between the EU and the ECB. The central bank could exempt certain strategic sectors from higher interest rates, provoking debates about what is strategic. De Groot believes this “out of the box” approach is justified, “because a shift should be forced from investment to strategic sectors. Pumping money alone won’t work, especially with a tight labour market leading to more inflation.”
De Groot on Europe’s ambitions for an open strategic autonomy: (in Dutch)
The framework also advocates a form of protectionism, “because China and the US do the same.” De Groot says, “Yes, that distorts the market, but it’s the price you pay. Support is crucial; otherwise, it won’t get off the ground. We need a common enemy to build support, be it China’s rise or the removal of the US security umbrella.”
Like Airbus
De Groot acknowledges that for a European defence industry, the state or EU finances it, as it did with Airbus. “We can provide cheap loans to these companies. Then we as Europe can guarantee the purchase of their products, ensuring their business case.”
This mercantilist approach, he admits, may have long-term costs but can bring significant benefits. “The best example is the US DARPA. Innovations like the iPhone have roots in the defence industry.”
Protectionism “is a form of market distortion, but then that is the price you pay for it.
Elwin de Groot, head of macro strategy at Rabobank
De Groot says economic models, like companies, need reinvention. “The neoliberal model worked well to a point, but we may have gone too far. Achieving strategic goals requires concessions.”
De Groot’s “out of the box” approach aligns with Macron’s Sorbonne lecture. Macron advocated common policies in almost all areas, proposing “European champions with common investments in strategic sectors.” He also called for a true common market, giving European startups a similar starting position to US and Chinese counterparts. “Our strength is a domestic market of 450 million consumers.”
‘Europeans are innovative. After all, necessity breaks the law, which means that like in the US, there will be re-industrialisation in Europe too.’
Rob Deneke, manager of the Partners’ European Continuation Fund
Rob Deneke of Juno Partners believes the strategic autonomy policy will be positive in the long term. “Europeans are innovative. Necessity breaks the law, leading to re-industrialisation in Europe: companies, such as suppliers, will return, likely with subsidies and government support.”
Author: Cees van Lotringen.
Editor: Raymond Frenken.
Artwork: Vincent Wielders.
This article was originally published in Dutch on InvestmentOfficer.nl.
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