A wake-up call for Europe to tariffs and defence issues

Europe is ramping up fiscal stimulus, partly driven by fears of a reduced US security commitment to NATO and Ukraine. Notice how, Germany has announced major defence and infrastructure spending, while broader EU initiatives will inject further public investment into critical sectors. In the meantime, the EU has been discussing the concept of "strategic autonomy" which emphasizes the need for Europe to be more self-reliant in defence and security matters. This includes increasing investment in defence capabilities and fostering cooperation among EU member states.

Is this warmongering or simply playing safe so that Europe if and when attacked can fully resist possibly without US protection. Many recall how the ongoing conflict in Ukraine has heightened security concerns in Europe, leading to increased calls for greater defence spending and military readiness. This situation has prompted some European countries to reevaluate their defence strategies and budgets. But the money is scarce given that some European economies are still recovering from the impacts of the COVID-19 pandemic, which has influenced budgetary priorities, including defence spending.

Economic constraints may limit the ability of some countries to significantly increase their defence budgets in the short term. The EU has also sought to engage in dialogue with the U.S. to resolve trade disputes and avoid escalation (and the imminent imposition of US trade tariffs). Of late, following the Ukraine/US spat in Washington, has suddenly awoken Europe to take a more focused angle on its own defence. All of the EU members last week have agreed to ratchet up defence budgets. Several factors contribute to this trend, including geopolitical tensions, security threats, and commitments to NATO.

The ongoing conflict in Ukraine and Russia's aggressive posture in Eastern Europe have heightened security concerns across the continent. European nations have belatedly recognized the need to bolster their defence capabilities in response to these threats. NATO members have committed to spending at least 2% of their GDP on defence but many agree that this is only a start and needs to go up. As, many European countries have historically fallen short of this target, the current security environment has led to renewed discussions about meeting this benchmark. The principle of collective defence under NATO reinforces the importance of adequate defence spending among member states.

European nations are increasingly aware that a strong NATO is essential for their security. Germany has committed to a substantial increase in its defence spending, including a special fund of €100 billion to modernize its armed forces. The EU is pursuing a path toward greater strategic autonomy in defence, which includes increasing investment in European defence industries and reducing reliance on external suppliers, particularly from the U.S. As mentioned earlier, the EU's 27 leaders approved a plan drawn up by the European Commission that aims to mobilise €800 billion euros to "re-arm Europe" against any perceived threat from Russia. Europe faces a clear and present danger, and therefore Europe has to be able to protect itself. So stated, European Commission chief Ursula von der Leyen calling it "a watershed moment" for Ukraine and for the continent.

The defence plans allow states to spend much more – at a time when Germany's chancellor-in-waiting Friedrich Merz is embracing radical reforms to fund the country's rearmament. Public sentiment in some European countries has shifted in favour of increased defence spending, particularly in light of the perceived threats from Russia (yet some, like the UK can only do so by reducing cuts on social programs and foreign aid). Popular support from citizens is increasingly supportive of investing in national security and defence capabilities. There is a growing political consensus in several European countries regarding the need to prioritize defence spending, which has facilitated the allocation of additional resources to military budgets.

The geopolitical landscape has prompted many European nations to prioritize defence spending, modernize their military capabilities, and enhance cooperation through initiatives like PESCO and the EDF. While challenges remain, the overall trend indicates a significant shift toward increased investment in defence across the continent. But, one may stop and ask; what is the effect of an increased defence budget spending at a time when the US is threatening the imposition of new tariffs on European commerce.

How disruptive are tariff wars to Europe? At their core, tariffs are detrimental to markets because they distort the natural allocation of resources and disrupt global production efficiency. In an ideal economic landscape, capital flows to where it can be deployed most efficiently, ensuring lower production costs and higher-quality goods. Tariffs, however, artificially inflate imported goods’ prices, forcing businesses to shift towards domestic production even when doing so is economically suboptimal.

The consequence is increased business costs, higher consumer prices, and an overall drag on economic efficiency. Although no formal tariffs have yet been announced on European companies, ongoing discussions and Trump’s push to reshape global trade suggest Europe will not remain unscathed. Potential levies on key industries such as automotive and industrial goods are growing a seismic shift in how financial institutions must manage governance, risk and compliance.

The question of whether Europe is "braced" for U.S. tariffs and its relatively low defence budgets involves several interrelated factors, including trade relations, defence spending, and geopolitical dynamics. In summary, Europe is navigating a complex landscape regarding U.S. tariffs and ratcheting its defence budgets. While the EU is preparing for potential trade tensions with the U.S. and is actively seeking to buttress inflation stress resulting, yet it is wisely strengthening its trade relationships. Surely, defence spending remains a critical issue, particularly in light of security challenges in the region.

The push for increased defence budgets and strategic autonomy reflects a recognition of the need for Europe to enhance its security capabilities while balancing economic constraints. The evolving geopolitical dynamics will continue to shape Europe's approach to these challenges in the coming years.