Europe facing its destiny

• Jean-Christophe Rochat
  CIO
  Banque Heritage

Anglo-Saxon investors, scalded by the turbulence in the US, have been looking to return to the European markets in recent weeks.  A potential catch-up for European assets is emerging, but will European decision-makers be able to seize this opportunity without letting it slip away?

Deep and rapid movement of tectonic plates

That’s an understatement: things are moving faster and faster since the end of the pandemic and the war in Ukraine. And this is particularly true for the European Union. The Franco-German couple, the historic pillar of the Old Continent, seems to be collapsing in mid-air. And the cause lies not only in the recurring but reversible tensions between the two countries, but rather in their long-standing problems.

The German economic model has taken a sharp turn for the worse in recent years. In France, the political and institutional crisis is worsening, and the welfare state model is under immense pressure. The arrival of the Trump administration, with its disruptive, anti-establishment stance, has only intensified this dynamic. The risk of marginalisation is clearly looming, particularly through tensions with NATO, threats of tariffs, and peace negotiations in Ukraine.

In the 1940s, the Czech economist J. Schumpeter theorised the concept of “creative destruction” for businesses: innovation, by overturning the established order, leads to a reorganisation of production methods. This concept takes on its full meaning today with the rise of artificial intelligence. While the United States is a fervent promoter of artificial intelligence, Europe struggles to grasp its opportunities, seeking instead to regulate it. The gap between the two is widening, despite Emmanuel Macron’s efforts to position France at the heart of this dynamic.

Transmuting European leadership

The Schumpeterian analogy can also be applied to geopolitics. The emergence of Trump 2.0 marks a radical turning point in international relations. In Europe, the erosion of the Franco-German partnership is paving the way for the rise of Giorgia Meloni’s Italy and Poland, while consolidating the role of Ursula von der Leyen, President of the European Commission.

The issue of common defence, once taboo, has now become a priority. The adoption of the Strategic Compass in 2022 established a roadmap for security and defence, enabling the launch of the European Defence Fund to finance multilateral military projects. Military expenditure is now included in the European budget.

The parliamentary elections scheduled for the end of February in Germany are particularly closely watched. A grand coalition could weaken the famous debt brake, paving the way for the removal of obstacles to the Draghi/Letta 2024 major investment plan, designed to boost European competitiveness.

Under the spotlight in the short term

The old nationalist demons, however, have not entirely disappeared. Germany, for example, is currently blocking Unicredit’s takeover bid for Commerzbank, a move that testifies to deep-seated reluctance towards any transnational banking concentration. Yet the creation of a genuine European banking union could enable the emergence of giant financial groups capable of rivalling the American titans. But for the time being, this ideal remains a mirage.

On another front, post-Brexit, the European Union seems to be re-establishing closer ties with the United Kingdom, particularly in the area of defence. The Starmer government, which is less resistant than its predecessors, plans to rebuild a more solid relationship with the EU, going beyond military issues alone. A dynamic that could change relations between the two sides of the Channel.

However, one crucial area remains unresolved: energy. At present, the EU still lacks a coherent common energy policy. Germany has dismantled its nuclear power stations at a time when other countries are stepping up their commitment to this energy source, while the Netherlands has closed its vast natural gas fields. During the pandemic, Europe certainly found some respite thanks to imports of American liquefied natural gas (LNG), but at what price? Today, Europe’s energy dependence on the United States has replaced its dependence on Russia, a worrying reversal.

Against this backdrop, Europe seems to be moving backwards. The ever-increasing energy bill is weighing heavily on the competitiveness of European businesses. The EU is at a critical crossroads: how long will it be able to rely on temporary solutions? Is there still time to take the plunge and avoid falling behind?