By Simon Zeise
Even the US’s closest allies in the EU are no longer willing to bow to Trump’s dictates.
The EU has made itself economically dependent on the US. The war being waged by Israel and the US against Iran highlights the consequences. However, the crisis also presents an opportunity: the euro could strengthen its position as investors seek alternatives to the dollar; and rather than relying on expensive energy imports from the US, the continent could begin to boost its own green energy production and diversify its trade relations.
Transatlantic relations have become unbalanced. Over the past twenty years, Europe has lost ground to the US. While the EU economy was still larger than the US economy in 2008, at 16.2 trillion US dollars compared to 14.7 trillion US dollars, the US economy grew to 25 trillion US dollars by 2022, while the EU and the UK together reached only 19.8 trillion US dollars.
Since 2022, Europe has relinquished one of its most significant global competitive advantages. The continent committed to doing without cheap gas and oil from Russia and switched to importing Liquefied Natural Gas (LNG) on a large scale from the US, Norway and the Middle East. Energy prices rose sharply in Europe. The US rose to become the world’s largest energy exporter, reaping profits at the expense of Europeans.
The European Commission announced that it had rectified a long-standing mistake by freeing itself from its one-sided dependence on energy imports from Russia. In reality, the EU has become increasingly dependent on the US. Last year, the EU sourced 57 per cent of its LNG imports from the United States. And the war in Iran has caused energy prices to rise significantly once again.
The Wall Street Journal (WSJ) outlines a possible solution: “Now Europe effectively has to decide whether to turn to the US or China to keep the lights on.” If the continent generates more solar and wind power domestically, it will source most of the equipment from China, which is the world’s factory for clean-energy technology. A conflict with the US would be inevitable: at Davos, US Commerce Secretary Howard Lutnick said this was a bad idea and would make Europe ‚subservient‘ to Beijing“, wrote the WSJ.
Home-grown problems
The EU’s infrastructure has been run down for years. According to the Draghi Report, there is an investment gap of between 750 and 800 billion euros annually within the economic area. With the Maastricht Treaties, the EU committed itself to an extremely restrictive fiscal policy, which stipulates a maximum budget deficit of 3 per cent of GDP and public debt of 60 per cent of GDP for member states. These rules act like a fiscal straitjacket and have played a major role in widening the productivity gap with the US.
The EU has only ever provided significant growth impetus in crisis situations, such as the Covid-19 pandemic, which prompted it to issue joint bonds worth 750 billion euros for reconstruction. Yet this would be an opportune moment to strengthen Europe’s position as a safe haven for global investors. “The euro is already the world’s second most important currency and accounts for around 20 per cent of global foreign exchange reserves. Nevertheless, its economic significance lags far behind Europe’s weight,” writes Ludovic Subran, chief economist at Allianz, the world’s largest insurance group. The Iran crisis highlights a structural reality, according to Subran. The reform agenda is clear, he said. Europe should expand its stock of safe euro assets through joint issuance — EU Bills for short maturities and EU Bonds financing common goods.
Trump is forcing Europeans to rethink their approach
Indeed, Trump’s aggressive foreign and economic policies appear to be prompting the US’s transatlantic partners to rethink their stance. The remarks by Joachim Nagel, President of the German Bundesbank, caused a stir when he publicly spoke out in favour of Eurobonds. He justified his position by stating that Europe’s security had not been under such threat since the Second World War as it is today. The Bundesbank has been the bastion of restrictive monetary policy in Europe for decades. Yet Nagel remarked: “We are now living in a different reality.” In doing so, he openly backed French President Emmanuel Macron, who had previously declared: “The global market … is increasingly fearful of the US dollar. It is seeking alternatives. Let us offer it European government bonds.” Significantly, Nagel positioned himself against German Chancellor Friedrich Merz, for whom European government bonds remain a no-go.
US tariffs on goods from the EU have hit Germany particularly hard. Last year, exports to the United States fell by 9.3 per cent, bringing them down to the level seen during the 2021 coronavirus pandemic. Even for the German government, which has still not condemned the US and Israeli wars in Gaza and Iran and is even continuing to supply weapons to the Netanyahu government, the time seems to have come to free itself a little from the grip of its big brother. Merz caused a stir in parliament when he said he could well envisage a trade agreement with China. During his visit to Beijing in February, the German Chancellor offered China’s leader Xi Jinping a deepening of the strategic partnership. Just a few months earlier, Merz had spoken of a systemic conflict between the West and a Chinese-Russian ‘axis of autocracies’.
The EU Commission is actively seeking to prevent a rapprochement with China. Under the Industrial Accelerator Act (IAA), Brussels aims to limit foreign direct investment in batteries, electric vehicles, solar photovoltaics and critical raw materials. A move that is dividing the EU. Nine EU countries – including the Czech Republic, Estonia, Finland, Ireland, Latvia, Malta, Portugal, Sweden and Slovakia – have warned that restricting foreign investment could have an impact on prices, supply chains and competition. The Chinese government sees the move as a slap in the face. The Ministry of Commerce expressed “deep concern”. The European Union (EU) should not underestimate China’s determination to take swift and decisive countermeasures should Brussels further tighten its protectionist measures against China, wrote the Chinese newspaper Global Times.
Spain leads the way
But there is another way. Now Spain is seeking closer ties with Beijing. Prime Minister Sánchez’s visit to Beijing two weeks ago to meet President Xi marked a turning point in bilateral strategy. Rather than focusing solely on reducing imports, Spain has encouraged Chinese companies to set up local production facilities. This strategy aims to reduce capital outflow by shifting the production of high-value goods – previously imported from mainland China – to the domestic market. Prime Minister Pedro Sánchez returned from his meeting with Xi having secured concrete cooperation agreements. Among other things, a battery plant by the Chinese group Hithium is to be built in the Spanish region of Navarre, creating 700 jobs. Originally, Hithium had planned to build a plant in Dallas in the United States and secure the subsidies guaranteed by the Biden administration’s IRA. However, as the Trump administration had scrapped this state support, Hithium opted for a location in Europe.
Spain’s course suggests a shift in the economic and political balance of power within the EU. Madrid was one of the first countries to condemn the genocide in Gaza and the war in Iran, while German Chancellor Merz thanked the US for doing the “dirty work” for Europe in the Middle East. The EU’s economic base, centred on Germany and dominant for decades, is eroding, as the country is among those suffering most from high energy prices and is dependent on foreign trade. Under Sánchez, Spain is recording growth rates of around 3 per cent – figures Berlin can only dream of.
Conclusion
For a long time, internal political and economic divisions have paralysed the continent. Yet the US’s disregard for international law is prompting Europeans to take the first serious steps towards the beginnings of a multipolar world order. The opportunity is ripe to free itself from its self-inflicted immaturity.
About the Author
Simon Zeise is a business journalist based in Berlin with a focus on the political economy of financial markets and geopolitics. He holds a Master’s degree in Philosophy and History.
