Should You Invest in Europe Without America?
Markets soared last week at the prospect of a Ukraine cease-fire, but the long-term case for Europe has changed.
We can rejoice for now at the prospect of lower energy prices, better European growth prospects and, above all, an end to the killing in the brutal, three-year-old Ukraine war. But as diplomats hash out the details, careful investors will want to analyze the fine print and what it will mean to risk money in a continent with fading U.S. security guarantees.
Consider what we heard last week. Defense Secretary Pete Hegseth tells the Ukraine Defense Contact Group that the United States is “no longer primarily focused on the security of Europe.” President Donald Trump says he essentially buys Vladimir Putin’s narrative on who’s to blame for starting the war. (Hint: It’s not Russia’s fault.) And Vice President J.D. Vance tells European leaders to pay more attention to “the threat from within.”
The settlement coming into view has three parts. Ukraine won’t regain its lost territory or join NATO. Europe must take primary responsibility for Ukraine’s security and reconstruction. America can turn its attention elsewhere – possibly to Greenland or Gaza.
Amid the cries of appeasement at the Munich Security Conference (yes, in Munich!) where Vance spoke on Friday, senior U.S. officials suggested these terms don’t necessarily mean Ukraine’s permanent renunciation of lost lands or NATO membership. Nor do they exclude the possibility that the U.S. could expand its military and logistical support for Ukraine should Russia violate the deal.
But none of these nuances troubled financial markets, which embraced the potential benefits of cheaper natural gas for European households and manufacturers if Russian sanctions are relaxed. Weaker inflation pressures should allow the European Central Bank to consider steeper interest rate cuts, too. Stocks of construction firms and warrants linked to Ukrainian economic growth also jumped on the prospect of post-war reconstruction.
Still, thoughtful investors will be looking beyond a short-term trade to assess just what is happening to the geopolitical underpinnings of the Old Continent, which is still experimenting with a brand-new vision of integration and shared sovereignty.
Transatlantic defense cooperation was intended, in the words of Lord Ismay, NATO’s first general secretary, “to keep the Russians out, the Americans in and the Germans down.” Over roughly 75 years, America’s commitment removed all doubts about European security even as the Soviet Union launched a rapid military buildout that included nuclear weapons.
In the absence of that commitment, it’s unimaginable that 450 million Europeans in 27 countries would have chosen to pool their national sovereignty to create a single market, a single currency and a single set of policies on trade and competitiveness. Growth has been disappointing, but even most British voters now regret having left.
For decades, America has been nudging Europe to take more responsibility for its own security, and it’s possible that this latest jolt from Trump’s Washington will accelerate plans for closer EU cooperation and more spending on defense.
But the heart of the problem is that Russia, Ukraine and Europe find themselves stuck in what strategists call a “security dilemma.” The more Ukraine seeks security guarantees from the West, the more Russia feels threatened. The more Russia arms itself, the more Ukraine and its partners need guarantees.
A thoughtful investor understands that the causes of the war are less important than the terms of the peace.
Having won at least lengthy deferral on Ukraine’s NATO membership, will Russia tolerate Kyiv’s efforts to join the European Union? Is NATO protection now contingent on members reaching spending commitments, which President Trump has just raised to 5% of GDP? And how soon before Russians and Europeans start doubting U.S. nuclear guarantees?
It's not that more Russian tanks will come spilling into Poland anytime soon, although those odds are surely higher than they were a decade ago. European governments without ironclad U.S. security commitments suddenly become much more vulnerable to an aggressive Russian foreign policy that covers everything from how Russian language is taught in Ukrainian schools to which Russian companies should get German government contracts.
An end to open hostilities will ease the path for more Russian gas flowing westward and make Europe once again dependent on Moscow for cheap energy. And if the much bigger threat risk to European industry remains the surge of inexpensive Chinese manufacturing exports, it will be even more difficult to confront Russia’s most important ally.
These dynamics may play out initially in currency and sovereign debt markets, as investors price in the further strain on national budgets that will come from rising defense spending. But the consequences may be most damaging to foreign direct investment amid a geopolitical landscape that is shifting so fast.
A thoughtful investor understands that the causes of the war are less important than the terms of the peace.