The Smashing Of European Nash Equilibria

We Europeans have grown accustomed to living in what game theory calls a “Nash equilibrium”. A Nash equilibrium is a situation in which no player can unilaterally change his strategy and achieve a better outcome, given what the other players are doing.

In this text, I am arguing that we were protected by very fundamental Nash equilibria and that we are now facing challenges that could overturn these essential balances that used to promise a better world.

Security

With the threat of mutually assured destruction (MAD strategy), starting a war is irrational and not a move to a better outcome for any player. A dominant player or a determined alliance of players (for example, NATO) can force the other players into such a Nash equilibrium: peace, in this case.

Sustainability

Another example of a Nash equilibrium can be observed when wealthy nations uniformly demand certain sustainability standards. If access to their large markets hinges on meeting these standards, suppliers worldwide will comply. It is easier and more profitable to follow one set of regulations than to produce goods with different rules for different regions.

Over the past few decades, Europe has benefited from various Nash equilibria:

Security: Firstly, Europe is protected by NATO, which is practically capable of escalating any conflict indefinitely, hence a war against Europe is irrational. And even though the U.S. carried the largest financial burden of NATO defences, the U.S. military dominance versus its NATO peers has been in its own best interest: the U.S. prevented an emerging European military rival by both outspending and protecting Europe, while ensuring American soil remains far from any likely warzone (forward defence strategy).

Sustainability: Secondly, the European Union is one of the wealthiest single markets, which means that its policies come with dominant strategic powers. In many cases, multinational companies find it more cost-effective to meet EU requirements across their entire operations rather than follow one rule for Europe and another for everywhere else. In other words, Europe’s policies on sustainability have a reasonable chance to be adopted globally eventually. Trade agreements such as the proposed Transatlantic Trade and Investment Partnership (TTIP) could have amplified Europe’s ability to lead on sustainability worldwide, had negotiations continued beyond the Obama era.

Wealth: Thirdly, with a European Union GDP higher than that of the U.S. ($ 28 trillion for the EU vs. $ 27 trillion for the U.S.), our combined wealth is our strategic capital that grants us a broader range of possible moves – and thus great flexibility to adopt to possible future challenges. In other words, our wealth allows our policies for adjustments, and we can afford a hit and a setback if push come to shove.

The rise of political disruptors in the U.S.

However, Trump’s re-election heralds an era of unprecedented U.S. policy disruption, and these anticipated shifts threaten to shatter three of our core assumptions:

(1) That the U.S. will continue to perceive its overwhelming military supremacy within NATO as a stabilizing factor – protecting the Western world and deterring rivalries,

(2) That the European Union can continue to set sustainability benchmarks for the globe, with other regions choosing long-term market access over short-term cost savings, and

(3) That Europe’s position as the world’s wealthiest continent will remain unchallenged, helping it navigate future problems comfortably.

Weaponizing Defence

A Trump administration could potentially weaponize its military dominance and global economic reach to coerce Europe on several fronts:

(1)?Demanding that European nations hike their defence budget commitments from 2% to 5% of GDP – alongside obliging them to purchase American military hardware – could drain European resources, shifting hundreds of billions of euros annually into U.S. coffers. This shift would effectively push Europe’s annual defence spending from around $300 billion to nearly $1 trillion – an increase almost on par with the entire U.S. military budget.

(2)?The U.S. may well dismantle sustainability and environmental regulations at home, and reduce corporate taxes from 21% to 15%, creating a massive competitive advantage for American companies. Europe would then face pressure to scale back its own standards or watch businesses lose ground.

(3)?Europe could be compelled to buy more U.S. fossil fuels and weaponry. Such spending would weaken Europe’s economy and delay efforts to transition to greener energy sources.

Conclusion

Together, these developments expose just how fragile these game-theoretical balances truly are – and how swiftly they could collapse.

To safeguard its security, economic power, and global influence, Europe must act unified and decisively. This means bolstering our independent defence capabilities, accelerating investment in renewable energy and sustainable industries, and doubling down on research and development. Only by fortifying these pillars can Europe maintain the policy leverage it needs to shape a stable and prosperous future for itself and for the wider global community.