The Battle for Europa

The road to global hegemony goes through Europe.

“Since we cannot change reality, let us change the eyes which see reality.”

—Nikos Kazantzakis

“The flight of Europa” by Paul Manship

Much like the depiction of calm Europa being abducted by Zeus in the form of a steadfast bull, today’s Europa has been abducted by “external forces” — and we don’t know where they are taking her.

The first major crisis for the EU was the financial crisis of 2008. It was solved (i.e. patched) by unconventional monetary policy, bank bailouts and some kicking the can down the road.

The broken system was seemingly put back together, and things came back from the brink, until the European Debt Crisis kicked off via Greece in late 2009.

This crisis was the first opportunity for the Germans to show the world their stuff, post-fall of the Berlin Wall, after decades of laying low and focusing on national rebuilding.

Sadly for Europe, what the Germans had to show was very ugly. Chancellor Angela Merkel approached EU-wide politics as an extension of German domestic politics, and rolled out the punches in order to garner more support at home.

The narrative was, “Why should lazy Greeks be bailed out with the money of the hardworking German taxpayer?”. This one-sided view prolonged and deepened the crisis, ultimately putting the totality of the union at risk.

Merkel is long gone but the crises the EU is faced with today are of a much higher magnitude — extending into the realms of existence and identity.

The pandemic of 2020 and the Russian invasion into Ukraine of 2022 have uncovered further shortcomings.

Is Europe a sovereign bloc with strategic autonomy and self determination?

That was the open secret question plaguing the EU, but it’s no longer a secret. The Emanuel Macron speech of April 2024 gave credence to a new reality within the structures of the Union— that it is fighting for its life.

“A voluntary association of equals turned into an involuntary association of un-equals.”

—George Soros

A Self-Destructive Direction

The EU went from having an unfair but acceptable hegemon (Merkel) and a semi-sustainable direction — to having NO hegemon and a self-destructive direction.

Today, the people of Europe disagree with the path the bloc is taking, and they are expressing that in the polls.

The protest vote and the “Far Right” is growing across the board, with notable examples being 1) that of the AfD in Germany, 2) Giorgia Meloni’s now-ruling Brothers of Italy and 3) the Slovak MEPs suspended by the Socialist Group because they supported a right-wing government, one which is turning away from supporting Ukraine.

Europeans are becoming increasingly resistant to anything that endangers their security and prosperity. The two most contentious issues right now across Europe are the immigration crisis and the war with Russia.

Immigration seems to still be uncontrolled across the EU, while the war in Ukraine is raging on and on a slippery slope with heightened rhetoric from EU countries.

This rhetoric of escalation is not benefitting Europe one bit. Europe’s combined military capabilities have been on the decline for decades while the fiscal situation of the Euro Area is too weak to handle a ramp up of military spending.

Regardless of this, the coalition government of Chancellor Olaf Scholz is drastically increasing military spend to become war ready in case Russia decides to expand the war.

The consequences from this paradigm shift are material and long tailed.

It’s all risk/reward

When a big chunk of Europe believes the war in Ukraine is not their war to fight, — what is the point in militarising against Russia and cutting economic ties?

Europe went from being dependent on Russian energy to drafting laws to reduce consumption while looking for alternative ways to source energy.

But this cannot be achieved by the push of a button — Europe drastically lost competitiveness from this pivot, and the full consequences are still to be felt.

Whether you are anti, pro or agnostic vis-á-vis Russia, my point is that the EU is going all in on this war in Ukraine — it’s all risk/reward.

In my view, this would have never happened if Europe truly had strategic autonomy — instead, this strategic pivot was only executed because of unbearable pressure from the US.

I can picture the message being, “If you are not with us, you are against us!”

And I believe this is the relationship that Macron was referring to when he said that Europe must never be a vassal of the US.

The conflicts in Ukraine and around Taiwan are extensions of a greater conflict — the one between the US and the broader G7 -Vs- a rising China and the broader BRICS.

And so the signalling to the EU from the Americans is not without merit; because without the full and unequivocal support of the EU, the US cannot fight this battle.

Confiscation and a Tit for Tat

“In response to Russia's war in Ukraine, the United States and its allies prohibited transactions with Russia's central bank and finance ministry and blocked about $300 billion of sovereign Russian assets in the West, most of which are in European not American financial institutions.”

Regardless of politics and side-picking, these types of moves are bound to have repercussions. The East will not just sit idle and do nothing while the West is weaponising finance.

Putin has already started confiscating Western-owned assets while other countries are taking note of this and diversifying their reserves away from the US Dollar.

The currency debasement that is expected going forward as we enter harsher times is definitely a consideration as well. More on this here.

State-Backed Capitalism & Protectionism

In Macron’s speech, he also mentioned that the EU needs to loosen its State Aid rules to respond to increased protectionism and state subsidies from US and China.

The US was always on the forefront of the technological revolution, and China hasn’t done so bad either — but the EU’s penetration in global tech is almost inexistent. And what’s more, the EU is also left behind in new tech like AI and Quantum Computing.

De-Globalisation and the EU

• The East (China, Russia etc.) needs a healthy cooperation with the EU to trade and sell its goods and services.

• The US needs the EU to stand with it against a rising East, else it will be very hard to stop China surpassing the US in global influence.

But neither the US nor China care what will happen to Europe in the process — they are not out to protect Europe’s interests, she has to protect them herself.

As long as the collective EU does not act towards this, it is in serious danger of dissolving with unimaginable fallout for the region.

Talk is Cheap, Emanuel

In my view, Macron’s proposals are not only too general but also value-destructive. Europe is not suffering from a lack of AI, space exploration or “AgriTech”…

And she isn’t suffering from a wrong ECB mandate either! (as Emanuel is suggesting)

Europe is suffering from over-regulation, a business un-friendly environment and rules and regulations that give oversized control to Brussels — resulting in misguided top-down decision making and a principal-agent problem.

In this case, the principal is the European people and the agent is the EU institutions that are supposed to operate for us — not for their institutional self-preservation.

The EU needs to work on unleashing the animal spirits of creativity and business, not command bureaucrats in Brussels to “create” economic growth and prosperity — that would never work.

And what’s worse, Macron believes that this transition should be funded by an EU joint-debt program. Again, too much centralised planning for no ROI.

The Consequences

The loss of EU direction and lack of strategic autonomy, together with a confused narrative and weak capital markets will result in a Euro that continues to fade.

I can see the Euro ultimately falling to 0.90 against the Dollar, spurring another wave of imported inflation in the process.

Recall that energy commodities are traded in Dollars, and more Euros will need to be shipped out to energy producing countries for the procurement of energy as the Euro fades…

The Way Forward

In my book, borrowing more to burn more is not the path to prosperity.

The EU as a collective needs to regulate less and give more autonomy to members to support local industry; as long as the state budget doesn’t over-borrow in the process.

It needs to spend less and create more, rather than the opposite. Budget deficits are through the roof — and political rhetoric seems to normalise this completely.

Mario Draghi, in an interview from 2 years ago when he was Italian PM said that the way out of debt is through growth. Well, Europe doesn’t have growth and deficits are growing much faster than the economy, so….

Europe needs to accept that it needs a painful and long adjustment process (like Greece, remember?) to get out of this mess — but a mess they will albeit get out of in the end.

If the powers that be in Europe continue to beat the same drum either with Draghi, Ursula or anyone else — the problems will only compound and they will eventually become inescapable.

Sincerely,

Philo 🦉

Next Up On Philoinvestor

• Working on a piece on buyout candidates I have on my radar.

• Working on a thematic piece on companies that will be negatively affected by de-globalisation.

• The inverse of the above: Started shortlisting companies that are robust to geopolitical changes.