Brigid Laffan: Europe is in danger of becoming a plaything, not a player

Europe entered the second half of 2025 under acute geopolitical strain as a more confrontational U.S. National Security Strategy (published Dec. 5) and rhetoric supportive of nationalist forces signal a rupture in transatlantic ties, while China’s ambivalent stance toward Russia and rapid technology-led expansion have intensified economic pressure — EU trade deficit with China quadrupled in volume and doubled in value between 2015 and 2024. The piece argues Europe is relatively weak as hard power and the weaponisation of interdependence rise, and urges two priorities: secure Ukraine’s future (including continued arms supplies and funding options such as frozen Russian assets or collective borrowing) and shore up the political economy through massive, coordinated investment in defence, technology and the energy transition while protecting the single market and regulatory frameworks. For investors, this implies a likely re-rating of defence and domestic tech/energy sectors, potential sovereign/collective EU financing activity, heightened regulatory risk for global tech platforms, and sustained geopolitical tail risks that will reshape supply chains and capital allocation across Europe.

Analysis

Europe entered the second half of 2025 under acute geopolitical strain, encapsulated by Commission President Ursula von der Leyen's September remark that "Europe is in a fight" and the European Council convening on December 18, 2025. The US National Security Strategy published on December 5 and related rhetoric (including JD Vance's Munich remarks) signal a decisive shift in Washington's posture — openly endorsing "patriotic" forces and exhibiting deep antipathy toward the EU — and the article argues this has ruptured transatlantic security and trade ties while pressuring a negotiated settlement in Ukraine that could favor Russia.

China's stance is described as ambiguously supportive of Russia and economically disruptive: the EU's trade deficit with China quadrupled in volume and doubled in value between 2015 and 2024, and Chinese overcapacity plus rapid technology gains are hurting European manufacturers. The piece highlights Europe's relative weakness in hard power, vulnerabilities in rare earths and defence capacity, and the weaponisation of interdependence that limits the single market's leverage.

Policy prescriptions in the article are twofold: secure Ukraine through continued arms supplies and financing (including using frozen Russian assets or collective borrowing) and mount a large, coordinated European push in defence, technology and energy transition while preserving regulatory frameworks and social safety nets. Market implications include a likely re‑rating of European defence, domestic tech and energy-transition sectors, increased sovereign/collective financing activity as a potential catalyst, heightened regulatory risk for global tech platforms, and persistent supply‑chain and commodity pressures.

Key Decisions for Investors

• Increase tactical exposure to European defence and dual‑use industrial names that would benefit from sustained arms supplies and coordinated rearmament, while keeping position sizes conservative given political and execution risk
• Rotate into European energy-transition and domestic technology hubs likely to receive coordinated investment or policy support, prioritizing companies with scalable EU footprints and clear policy or funding visibility
• Monitor EU moves on using frozen Russian assets or collective borrowing as potential catalysts for sovereign issuance or funding vehicles and adjust sovereign-duration and credit exposure accordingly
• Reduce or hedge exposure to US/global tech platforms most exposed to intensified EU regulation and reputational risk stemming from calls to regulate social media and tech platforms
• Overweight firms with secure access to rare earths, localized supply chains, or insulation from Chinese overcapacity and underweight manufacturers most vulnerable to Chinese import pressure