In the words of Helmut Kohl, the late former chancellor of Germany, Europe has been in a poor state since the transition to the 21st century. While it has largely remained prosperous and peaceful, the continent has fallen behind in terms of growth, innovation, and military prowess since the end of the Cold War.
But a region that was until recent weeks content to let America underwrite its security has experienced a reality check. European countries and institutions are scrambling to respond to the geopolitical shifts that we discussed in last week’s News Flash. With the US stepping away from Europe and moving closer to Russia, both crisis and opportunity await.
Following an altercation in the Oval Office last Friday between US President Donald Trump and Volodymyr Zelenskyy, President of Ukraine, the US has paused military aid to Ukraine. European leaders are preparing for a world where they will need to take more responsibility for the continent’s security.
European Commission President Ursula von der Leyen this week presented an €800 billion plan to re-arm European Union (EU) member states and provide military support for Ukraine. The plan would mobilise €150 billion in loans and loosen the bloc’s fiscal rules, allowing members to exceed normal deficit and debt limits for military spending.
Many EU members states have committed to ramp up military spending, following the likes of Finland and Poland, who are already ploughing more money into defence. The UK, France and Germany – the three largest European economies – have vowed to increase defence spending as a percentage of GDP to fill the vacuum left by the US.
If Europe is able to turn resolve into action, a boost in defence spending could do more than strengthen security. It could also give moribund European economies a welcome shot in the arm by revitalising technology, research & development, innovation, and the ailing manufacturing base.
Not only has Europe allowed its defence spending to stutter and its military assets to atrophy, it has diverged economically from the US. The EU economy grew only 0.9% in 2024 compared with a 2.8% rise in the US. GDP per capita is twice as high in the US as in the EU. A surge in military spending could help close the gap.
The project is complex and will be time consuming. Getting some 30 countries aligned behind a defence vision will be challenging. Ramping up production will take time. And spending on defence may mean cuts on other priorities such as welfare, infrastructure, and the green transition, which might be negative for growth and stability in some countries.
Analysts and markets appear to take a bullish view. Already, investors are seeing opportunities beckon in the European defence sector, helping European markets to outperform US indices over the past week and the year-to-date. Britain’s BAE Systems is up around 17% for the week, Germany’s Rheinmetall gained nearly 20%, France’s Thales increased 27% and Italy’s Leonardo was up about 18%.
In dollar terms, the Euro Stoxx 50 is up 0.2% for the week and 11.85% year to date, while the FTSE 100 is up 0.8% for the week and 9.2% year-to-date, helped along by a weaker dollar. By contrast, the S&P 500 fell 3.6% for the week and is down 2.4% year-to-date, while the Nasdaq 100 has dropped 4% for the week and is down 4.6% year-to-date.
The strong gains in European defence stocks isn’t the only factor in the recent divergence between European and US equities markets. Volatile tariff policies, concerns about Big Tech concentration, and relatively high valuations have all contributed towards US equities’ soft performance since Trump’s inauguration.
Whether defence spending will Make Europe Great Again remains to be seen. But we are, for now, seeing investors start to rotate from the US and Big Tech towards wider exposures. One sign of the shifting tectonic plates: The US dollar has weakened by circa 4% this week, in contrast with its past strength in general risk-off environments.
“Europe will only become a military power again by becoming an industrial power again.”
– Claude Malhuret, Member of the Senate of France
Global News
- French President Emmanuel Macron has proposed extending France’s nuclear deterrent to other European countries, aiming to reduce reliance on US military support and enhance Europe’s defence autonomy. Macron emphasised that any use of France’s nuclear arsenal would remain under the exclusive authority of the French president. The initiative has sparked mixed reactions: some European leaders back the idea, while others worry about its impact on NATO’s security framework. The proposal highlights Europe’s growing need for self-sufficient defence systems to ensure unified responses to potential threats.
- European leaders at a meeting in Brussels yesterday said they would stand by Ukraine and spend more on defence in a world upended by Trump’s reversal of US policies. Washington provided more than 40% of the military aid to Ukraine last year, according to NATO, some of which Europe could not easily replace. Some leaders still held out hope, in public at least, that Washington could be coaxed back into the fold. However, Russia said yesterday it “categorically” opposes any deal that allows European troops to act as peacekeepers in Ukraine. Twenty-six EU leaders ignored Hungary’s siding with Russia as the rest of the bloc backed a declaration of support for Ukraine.
- The EU will propose extending €150 billion in loans to boost defence spending as the bloc tries to adjust to Trump’s abrupt pullback of American security on the continent. Bloomberg Economics calculates that protecting Ukraine and expanding militaries could cost the EU’s major powers an additional $3.1 trillion over the next 10 years.
- Zelenskyy has reaffirmed his commitment to ending Russia’s war on Ukraine swiftly, despite a recent dispute with Trump over the approach to peace, which he called “regrettable”. Following Trump’s suspension of US military aid, Zelenskyy reached out to the US while also expressing gratitude for the EU’s continued support. He emphasised the urgency of immediate action to ensure regional peace and stability and to counter Russian aggression.
- European officials were told yesterday that Trump wants to link the proposed US-Ukraine minerals deal to demands for Kyiv to commit to a quick ceasefire with Russia, according to sources. Trump is now ready to finalise the agreement on natural resources, which was put on hold after last week. Trump said on Tuesday that he appreciated Zelenskyy’s willingness to sign a minerals deal, which will see Ukraine give the US access to its mineral deposits.
- German stocks are surging, and bund yields are climbing after Chancellor-in-waiting, Friedrich Merz, said the country will unlock hundreds of billions of euros for defence and infrastructure investments in a dramatic shift that upends its ironclad controls on government borrowing.
- Trump addressed a joint session of Congress for the first time since he returned to power on Tuesday, saying that “the American Dream is unstoppable”. In the longest presidential speech to lawmakers on record, he outlined his vision for his second term. The six key takeaways are: He predicts a bumpy ride ahead on tariffs; US and Ukraine could be mending relations; he wants the US to acquire Greenland, and he stood by Musk despite protests over job cuts. Meanwhile, the Democratic pushback was loud.
- Trump’s economic policies, especially the unpredictable imposition of tariffs, are raising concerns about US economic growth. Businesses are facing increased uncertainty, slowing investment and expansion. Economists and betting markets now predict a 32% chance of a US recession in 2025, up from 23% in February, largely due to these trade policies.
- On Thursday, Trump exempted goods from Canada and Mexico from the 25% tariffs he had imposed earlier in the week, as part of a North American trade pact. This latest change in his shifting trade policy, which has caused volatility in financial markets and among business leaders, initially only applied to Mexico. However, the revised tariffs order, issued on Tuesday, now includes Canada as well, covering both of the US’s largest trading partners.
- Canada says it won’t scrap tariffs unless all US levies are lifted, with Ontario scrapping a $100 million deal with Elon Musk’s Starlink, while banning US companies from procurement contracts. Canada has since started working on protectionist plans. One example is expanding the criteria for intervention in foreign investment by adding a provision that would allow it to reject purchases and takeovers that it views as posing harm to the country’s broader “economic security” in the rapidly shifting trade environment.
- China has set an economic growth goal at about 5% for 2025, raising expectations for officials to unleash more stimulus later this year as they confront a trade war with Trump. Premier Li Qiang announced the target on Wednesday morning as he delivered the government’s annual work report to the national parliament in Beijing. This marks the third straight year that China has set that goal but repeating it again will be difficult.
- The “Magnificent Seven” tech stocks saw sharp declines in early March 2025 as trade tensions and economic concerns weighed on markets. The Nasdaq Composite, heavily influenced by these stocks, neared correction territory, with Nvidia hit particularly hard due to tariffs on chip exports to China. Despite previous gains driven by AI and innovation, macroeconomic uncertainty now overshadows their outlook. Analysts suggest a potential rebound depends on trade policy stability and economic signals improving.
- Taiwan Semiconductor Manufacturing, the world’s top producer of AI chips, plans to invest an additional $100 billion in US plants that will boost its chip output on American soil and support Trump’s goal of increasing domestic manufacturing. The spending, which marks one of the largest outlays by a foreign firm in US manufacturing, adds to $65 billion in planned investments in the US and would eventually bring its American presence to a half-dozen plants.
- As at Thursday’s close the S&P 500 was down 3.6% for the week
Local News
- Zelenskyy will visit South Africa on 10 April for talks with President Cyril Ramaphosa focused on ending Russia’s war in Ukraine. The meeting was confirmed by presidency spokesman Vincent Magwenya, who described it as “a continuation of ongoing engagements” in an inclusive peace process. South Africa has maintained a non-aligned position on the Russia-Ukraine conflict, with Ramaphosa previously suggesting this stance could help broker peace. The meeting comes at a critical time as both leaders work to improve relations with the?United?States.
- Minister of International Relations and Cooperation, Ronald Lamola, yesterday called for continued multilateralism and self-sufficiency as the US shifts further towards an isolationist stance. Though South Africa values its strategic relationship with the US, Lamola said recent actions by the Trump administration had accelerated the need for self-reliance, citing the African Union’s new public health order and the importance of domestic capabilities to counterbalance Washington’s moves.
- DA leader John Steenhuisen argues in a BusinessLIVE editorial that the local citrus industry stands at a precipice as the effects of Trump not renewing the African Growth and Opportunity Act would be devastating. According to the Citrus Growers’ Association of Southern Africa, under the Act, exports to the US totalled more than 102,000 tonnes last year, with a value of R1.7 billion.
- The rand hit its highest in nearly three months against the dollar today, which is struggling as Trump’s tariff policies fuel fears of a prolonged global trade war that could hit economic growth and fuel inflation. The rand was at R18,12 against the USD at the time of writing, and its highest level since mid-December.
- An agreement has been reached in Cabinet after days of robust debate over Finance Minister Enoch Godongwana’s Budget. This could include a 0.75 to one percentage point increase in VAT, instead of the two percentage points that caused the Budget to be postponed to next week. This proposal was said to have come after a special meeting last week where National Treasury presented its proposals to the Cabinet.
- A Business Report editorial on Wednesday questioned whether the government would need to raise VAT by two percentage points if not for wasteful expenditure. The Auditor-General found nearly R8 billion was wasted by national government departments in the 2023/24 financial year.
- The economy expanded at the slowest pace in four years in 2024 as most sectors failed to contribute to growth because of logistical constraints, weak consumer spending, a drought and poor fixed investment. Gross domestic product expanded 0.6%, compared to 0.7% in 2023, Statistics South Africa said in a report released on Tuesday.
- The World Bank has urged South Africa to consider easing BEE and labour policies to make it less demanding for foreign companies to invest in the country. In an overview on “driving inclusive growth” in South Africa, the global lender said the country should adjust its regulations to market realities.
- Microsoft will invest an additional R5.4 billion in South Africa by the end of 2027 to expand its cloud and artificial intelligence capacity in the country. Vice Chairman Brad Smith made the announcement at an event in Johannesburg on Thursday, ahead of an upcoming South African investment conference. The pledge adds to R20.4 billion that Microsoft has already invested in South Africa and should give the economy a welcome boost.
- Discovery Bank turned profitable for the first time, having reported results for the first half to December, giving CEO Adrian Gore the confidence to aim for tripling its profits to R3 billion in the next five years. The breakthrough came ahead of expectations, Gore said in an interview with Business Day shortly after the company issued an earnings report on Monday.
- Shoprite Holdings is expanding its Sixty60 on-demand grocery delivery service to 19 stores across eight provinces after a successful pilot in Gauteng and the Western Cape. Shoprite’s digital platforms have boosted growth as it reported a 9.9% rise in earnings in the six months to December on Tuesday. Headline earnings per share for the 26 weeks to end December increased to 662.3c from 602.8c a year ago.
- Woolworths reduced its interim dividend by 28% for the six months ending December, citing increased macroeconomic risks in South Africa due to recent US-related geopolitical tensions, despite a rise in consumer confidence. The retailer, which released its financial results on Tuesday, will pay a half-year dividend of 107 cents per share. Strong sales and market share growth in its food division were offset by weaker performance in its clothing businesses in both South Africa and Australia.
- Spur Corporation reported a 10% increase in total restaurant sales for the six months to December, despite intensified competition in the casual dining sector. The group plans to open 47 new restaurants in South Africa and 13 internationally in the 2025 financial year. Headline earnings per share gained 12.1% off the back of a 13.8% increase in revenue. The interim dividend was 11.6% higher year-on-year.
- As at the time of writing, the rand was 3% stronger against the dollar and the ALSI was 2.7% up for the week.
Sources: Dynasty, Business Report, BusinessLIVE, BusinessTech, TimesLIVE, CNN, Bloomberg, Reuters, BBC. CBN,?etc.
