This formula, attributed to President Carter’s former advisor, Zbigniew Brzeziński, as long seemed irrelevant in a Europe that would like to see itself as “posthistoric”, peaceful, and economically integrated. But reality came crashing down over the last few months, with war returning to the Union’s doorstep, and the need for a strategic awakening. Europe is rediscovering a forgotten truth: if it is unable to defend itself, it shall have neither political sovereignty nor economic independence. Defence is the foundation that determines all the other fundamentals.
Defence, reality check and incipient sovereignty
The war in Ukraine has put an end to a long-standing strategic illusion. In just a few weeks, Europe discovered just how vulnerable it really is, with dispersed military capabilities, insufficient stocks of arms, and critical dependence on the American umbrella. These weaknesses illustrate a loss of autonomy that undermines our sovereignty.
The awakening is brutal, but salutary. The agenda on military budgets extends over the long term, but national intentions have already begun to rise dramatically. France is talking about 3.5% of its GDP going forward, while Poland will approach 5% by 2025. Germany has had the EU’s largest defence budget since 2024 and the country has announced €500 billion in additional military spending over ten years.
The issue of allocating budgets to equipment will be central. The European Defence Industrial and Technological Base (EDTIB), which is highly fragmented, will need to be structured and players with critical mass will need to be established in order to compete with the major US suppliers. As part of these efforts, we have discovered an unexpected ally: the new President of the United States of America. In an interview with Le Figaro in May, Ariane de Rothschild stressed that “Donald Trump is doing a great service to Europe by forcing it out of its lethargy”. By threatening to withdraw from NATO, the US president is spurring Europe into action, as shown by the stock market performances of European defence companies relative to their US counterparts. The political tone has changed. Strategic autonomy is a clearly stated objective. And public debate has acknowledged an obvious fact: without credible defence, Europe shall enjoy neither political sovereignty nor economic sovereignty.
With this in mind, it is entirely in the interests of investors to reintegrate defence into their strategic readings. Geopolitical stability is a prerequisite for lasting performance. No security means no long-term investment.
The Draghi report: investing for economic sovereignty
In his report submitted to the European Commission in September 2024, Mario Draghi, an economist and former ECB President, proposes nothing less than a paradigm shift. In response to the erosion of Europe’s competitiveness, he argues for a collective leap in the shape of a large-scale coordinated investment strategy focused on sovereignty. He advocates a Europe that entirely takes on its role as a full-fledged economic player, capable of competing with the United States and China.
This ambition rests on three pillars:
— Energy: Europe must ensure clean, competitive and independent energy. This involves renewables, the return of nuclear power (conventional and SMR, small modular reactor), denser electricity networks enabling industrial electrification, and the use of liquefied natural gas to offset the loss of Russian gas. Energy self-sufficiency is a prerequisite for a competitive and resilient industry.
— Innovation: the key challenge here is productivity. From 2040, the European Union will lose two million workers per year. It will need to produce more with fewer workers and to do so it will be required to master critical technologies (AI, biotech, space, semi-conductors) and restore its capacity for innovation.
— Financing: Europe has abundant but poorly allocated savings. Mario Draghi is calling for a “Savings and Investment Union” (SIU) to harness these savings to finance our sovereignty, in particular through the modernisation of the capital markets and a genuine banking union (see previous article), as today’s European banking sector is excessively fragmented.
But without security, these pillars remain fragile. Critical value chains, energy infrastructures, laboratories, factories: all these essentials rely on a stable geopolitical base. Defence is not a priority among others; it is the vital strategic factor underpinning the whole.
For investors, a transformation to be captured today
Long considered a taboo for investment, defence is now an accepted management theme, supported by governments, industry and European institutions. Budgets are growing rapidly, European tools and resources are increasing (notably the European Defence Fund), and a forthright determination is emerging to consolidate an integrated European defence industrial and technological base.
But this dynamic is just the beginning. Public capital will not be enough. The Draghi report calls for a joint effort in which private investors will play a strategic role in financing the continent’s transformation. Defence is a major component of this transition, but it is not the horizon. European sovereignty will also play out on the economic front, through energy, innovation and financing.
Reasoned investment in sovereignty must not be a “one sector show”, with its consequences in terms of volatility. By investing in the economic pillars of the Draghi report, private players can capture a fundamental transformation while diversifying their exposure to a cross-cutting and sustainable theme: sovereignty.
Investing in European sovereignty means capturing a deep-seated movement that generates financial performance with rearmament, energy rebuilding, reindustrialisation and critical innovations, not to mention the financing of these investments. These dynamics are no flash in the pan; they are long-term themes upheld by strategic European players. And in addition to financial returns, it is also a non-financial commitment. This theme embodies the responsibility of contributing to the rebuilding of our common home and the autonomy of our collective decisions. Quite simply, it is about our freedom. As Jean Monnet said, “men accept change only in necessity, and see necessity only in crisis. ” — The time has come to choose.
Anthony Penel
European Equities Portfolio Manager,
Edmond de Rothschild Asset Management
Caroline Gauthier
Co-head of Equities,
Edmond de Rothschild Asset Management