2021 M03 5
For the first time since the early 1990s a consensus is emerging about the EU’s purpose. Faced with a growing number of internal and external challenges, Europe’s leaders and policy chiefs have converged on a concept called ‘strategic autonomy’ as the response to Europe’s problems. The phrase implies more debt mutualisation, more industrial policy, and more defence spending.
Behind the new orientation stands the old idea that a strong state is one that is not dependent on others. Or as EU Council President Charles Michel has put it,“less dependence, more influence.”
European economic policy has always been characterised as a compromise between Germany’s ordoliberal tradition—a broadly free-market tradition that tolerates more state regulation than the Anglo-Saxon model—and French dirigisme, in which the state is the most important economic actor. However, the growing number of internal and external threats is pushing Germany much closer to the French worldview.
Several factors are driving Europe to pursue strategic autonomy. The main four are: a growing recognition of the diminishing weight of EU members in the world; that countries are ‘weaponizing interdependence,’; that export-led growth is increasingly difficult due to closed Asian economies; and that the EU needs to bolster its defence. The common thread in all of this is a growing recognition of the threat posed by China, and less trust in the Atlantic alliance.
Strategic autonomy is a game changer for debt mutualisation and for moving beyond the north south division that has paralysed EU politics in the last decade. Creditor countries now see EU fiscal spending not just in terms of resources but also in terms of geopolitics. The climate transition is also driving a major loosening of purse strings.
The second major consequence of strategic autonomy is a heightened shift towards industrial policy. The most important political actor in this shifting debate has been Germany’s BDI, which is much more sceptical of China than it was in the 2010s. The shift in European economic policy can be grouped in four broad segments: state aid, level playing field, innovation policy and supply chain security.
Finally, the third major consequence of strategic autonomy is significant shift in the EU’s defence posture. This is likely to drive a significant shift in the defence market, and perhaps major consolidation.
For investors, the key market developments to watch, at this early stage, are the risk premium on Southern European assets relative to the core, which are expected to stay at their historic lows, and depending on the effectiveness of EU fiscal union, perhaps even shrink further. For industrial policy, the key tools to watch are state aid, level playing field, innovation policy, and supply chain security, and the impact on large companies. For defence spending, the key things to watch are defence sector consolidation. In all scenarios, strategic autonomy, or a policy like it, is expected to remain important to Europe given the permanent and growing external vulnerabilities of the continent.
All investments carry the risk of capital loss.