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Undertaking one existential transformation is a challenge. What about two? That’s the situation Europe finds itself in.
Until recently, the continent’s policy priority was to build a net zero energy system. After a rough geopolitical week in which the US walked back its implicit protective role, that is rapidly being supplanted by the need to rebuild its defence capabilities.
That makes for a double whopper of investments. A rough estimate of Europe’s additional clean spending needs comes to €300bn a year from now to 2030. Raising the percentage of GDP that goes into defence to — say — 3.5 per cent implies a similar level of extra investment, before factoring in any economic growth.
Markets have been clear on which they think will take priority. Over the last twelve months, defence stocks such as Germany’s Rheinmetall and France’s Safran have far outperformed beneficiaries of the green transition such as European utilities.
But for all that, finding the money for both need not be insurmountable. We are mostly talking about two different pockets. Defence spending is governments’ job. And while some countries — see, for instance, Greece and Italy — don’t have a lot of debt capacity, the EU’s debt-to-GDP ratio is less than 90 per cent. Joint borrowing is politically fraught, of course. But at least there is room to do it.
By contrast, the vast majority of the energy transition investments are going to be financed by private enterprise. And a big chunk relates to technologies that are in the money already — such as solar and batteries — whose deployment will not result in higher overall costs for consumers.
That still leaves a few areas of the energy transition looking exposed. Convincing households to install heat pumps may well require government funding. The constraints of the UK mean that support for carbon capture and storage, a relatively expensive abatement technology, is already up for the chop.
Nor is money the only bottleneck. Lots of investment means lots of demand for materials, equipment, components and construction personnel. Energy and defence have different supply chains, but there will be some overlap. That’s a recipe for cost inflation and delays. Bandwidth is also an issue. There are only so many existential crises one can grapple with at any one time.
Yet Europe underinvests in productive assets, spending an average of 15 per cent of GDP on it compared to about 17 per cent in the US, according to Goldman Sachs’ senior economist Filippo Taddei. And, done right, domestic spending can in time result in longed-for growth, spilling over in demand for chemicals, plastics and other beleaguered segments of the European economy. Europe’s daunting transition crush is amply worth doing.
camilla.palladino@ft.com
