Newsletter #79 - March 2025

Global shifts: the transition from globalization to regionalization

The world has entered a period of profound economic and geopolitical transformation, shifting away from globalization towards regionalization. The long-standing reliance on interdependent global supply chains and open trade is giving way to a new reality where nations are prioritizing regional economic resilience, security and industrial self-sufficiency.

In this emerging order, the European Union and the United Kingdom are again forming a unified economic and strategic bloc, adapting to evolving geopolitical tensions and economic uncertainties. This shift is driven by a combination of protectionist trade policies, supply chain disruptions and the need for greater security coordination. European policymakers now recognize the importance of strengthening regional industries, securing energy independence and investing in collective defence capabilities.

The transition to regionalization is not limited to trade and industry but extends to military cooperation, infrastructure development, and regulatory alignment within Europe. As the EU and UK recalibrate their economic and security priorities, their shared focus on industrial competitiveness, supply chain security and defence integration signals the beginning of a more self-sufficient and resilient European economy.

The Trump administration's first 100 days: tariffs and economic uncertainty

President Trump's early tenure has been marked by assertive trade policies aimed at reshaping America's economic relationships. On 1 February 2025, he signed executive orders imposing a 25% tariff on all goods from Mexico and Canada and a 10% tariff on Chinese imports, with a lower 10% rate specifically targeting energy exports from Canada, including electricity, natural gas and oil. These measures, intended to address trade imbalances and protect domestic industries, have introduced significant uncertainty into the global economy and supply chains.

The immediate effects of these tariffs have been multifaceted. US consumers are experiencing increased prices on imported goods, leading to a decline in consumer sentiment and spending. Businesses reliant on imported materials face higher production costs, prompting some to delay investments or consider layoffs. The agricultural sector, particularly soybean farmers, has been adversely affected by retaliatory tariffs from China, resulting in reduced exports and financial strain.

Financial markets have reacted negatively to these developments. The S&P 500 and Nasdaq 100 indices experienced significant declines following the tariff announcements, reflecting investor concerns about potential economic slowdowns and reduced corporate profits. The increased costs associated with tariffs have raised fears of inflation, which could lead to higher borrowing costs and dampen economic growth.

Europe’s shift towards defence collaboration and rearmament

In response to evolving geopolitical dynamics and perceived threats, key European nations - France, the United Kingdom and Germany - are intensifying efforts to enhance their defence capabilities. This collaborative approach marks a significant shift in Europe's defence posture, emphasizing self-reliance and reduced dependence on external powers i.e. the United States.

A cornerstone of this initiative is the European Union's "ReArm Europe" plan, unveiled by European Commission President Ursula von der Leyen. The plan proposes an €800 billion investment to bolster Europe's defence industry and military readiness. This includes €150 billion in loans designated for the procurement of European-made weapons, aiming to strengthen the continent's security infrastructure and support its arms industry.

The proposal also suggests loosening fiscal constraints to allow Member States to increase defence spending without breaching budget deficit rules. This approach reflects a growing consensus among European leaders on the necessity of a robust and autonomous defence mechanism, especially in light of shifting US foreign policy priorities.

Germany’s fiscal policy under Chancellor Merz: adjusting the debt brake

Germany, under the leadership of incoming Chancellor Friedrich Merz, is undergoing notable fiscal policy adjustments to accommodate increased defence and infrastructure spending. Traditionally adhering to stringent debt regulations, Germany is now advocating for exemptions to these rules to address emerging security challenges and infrastructure needs.

Chancellor Merz has proposed an indefinite exemption for defence spending from the European Union’s fiscal rules, marking a departure from Germany's historical austerity stance. This proposal aims to facilitate substantial investments in defence without violating fiscal regulations. Merz’s plan also includes significant national borrowing to boost defence capabilities, reflecting a commitment to enhancing national and continental security.

Domestically, Merz is working to secure support from coalition partners, such as the SPD and the Greens, to increase state borrowing for defence and infrastructure projects. This strategy underscores the urgency attributed to strengthening Germany’s defence posture in response to evolving geopolitical threats.

The EU's clean industrial deal: environmental and economic implications

The European Clean Industrial Deal represents a strategic pivot in EU policy, ostensibly maintaining a commitment to sustainability while shifting priorities toward industrial competitiveness, economic resilience and geopolitical security. The deal serves as a recalibration of previous environmental policies, moving away from rigid green mandates in favour of pragmatic economic imperatives. The core objective is to lower energy costs and re-establish the competitiveness of European industries, ensuring that businesses can thrive in an increasingly difficult global economic environment where supply chains constantly affected by changes in the geopolitical manoeuvring of the Trump administration.

Energy costs and industrial competitiveness

One of the primary mechanisms of the Clean Industrial Deal is the reduction of energy prices for European industries. While past initiatives focused on aggressive decarbonization and green subsidies, this new approach acknowledges the economic burden of high energy costs imposed by previous policies. The EU has recognized that its industries, particularly manufacturing, are at a severe disadvantage due to energy costs that are significantly higher than those of their American and Asian counterparts. As a result, the Clean Industrial Deal prioritizes energy efficiency, streamlined regulatory frameworks and the expansion of nuclear and natural gas as key transitional energy sources.

This shift also reflects a pragmatic realization that Europe's geopolitical and economic challenges necessitate a stronger industrial base. The EU Commission has tacitly acknowledged that its previous policies, while well-intentioned, had the unintended consequence of driving production offshore, benefiting non-European economies that operate with fewer restrictions. The new policy direction seeks to prevent further deindustrialization and promote reshoring of critical industries, particularly in sectors such as steel, automotive and chemical production.

A "green" cover for strategic prioritization

While the rhetoric of the Clean Industrial Deal continues to include sustainability, the emphasis has clearly shifted. The EU is keeping a "green" cover to maintain political cohesion and public support, but the real focus is now on economic resilience and security imperatives. The narrative surrounding the deal frames these adjustments as necessary refinements rather than a complete departure from green objectives. However, the removal of the EU's stringent sustainability classification system signals a quiet yet significant retreat from previous environmental commitments.

Refocusing on core strategic priorities

The recalibration of EU policy also reflects a broader strategic realignment. With rising geopolitical tensions and an evolving global security landscape, the EU recognizes the need to prioritize defence, external border protection and intelligence capabilities over purely environmental concerns. The Clean Industrial Deal aligns with this shift by ensuring that industrial and energy policies support broader strategic goals.

Defence production is now at the centre of industrial policy, with a growing consensus that Europe must reduce reliance on external suppliers for critical military components. The shift away from stringent green restrictions enables European industries to invest in high-energy-demand sectors such as metallurgy and ammunition manufacturing, which are crucial for defence production. The EU recognises the need to be able to produce essential military goods in Europe.

First strategic move: Nordic ammunition standardization

In a significant step toward European defence integration, the five Nordic and three Baltic states have agreed upon a common standard for ammunition. This agreement is a direct response to the pressing need for military readiness and interoperability within the region. By aligning technical standards, these countries are improving logistical efficiency, reducing procurement costs and ensuring that their armed forces can operate seamlessly in coalition settings. This development is indicative of a broader European trend: security concerns now outweigh rigid environmental policies, and industrial policy is being reoriented to support these objectives.

Conclusion

The global economic outlook is becoming increasingly fragile as high tariffs imposed by the US and potential retaliatory measures from other nations create inflationary pressures worldwide. The rising costs of imports are already filtering through to consumers and businesses, reducing purchasing power and increasing operational expenses. This inflationary trend, coupled with declining consumer confidence, threatens to push major economies into a state of prolonged stagnation.

Uncertainty surrounding global trade and supply chains is dampening investment, as businesses hesitate to commit capital amid unpredictable market conditions. This reluctance to invest, combined with inflationary pressures, raises the likelihood of stagflation - a period of low economic growth, high inflation and rising unemployment - throughout 2025. With Europe focusing on defence spending and the US escalating trade disputes, the economic climate is deteriorating and the risk of a deeper downturn looms large.

The outlook for 2026 remains even more uncertain. If high tariffs persist and global trade tensions escalate, the potential for long-term economic stagnation increases. The combination of weak investment, supply chain disruptions and persistently high inflation could entrench economic instability, further straining both businesses and consumers. Policymakers must now balance economic resilience with security priorities, as failure to do so may prolong economic hardship well into the future.