INSIGHTS

 

 

What will the upcoming EU elections mean for sustainable investors? Listen to Jason Mitchell discuss with Henry Foy, the FT’s Brussels Bureau Chief, about June’s EU elections, why the policy agenda will likely pivot towards defence an away from the Green Deal, and how EU policymakers may try to reframe defence and security for sustainable investors.

Recording date: 25 April 2024

Henry Foy

Henry Foy is the FT’s Brussels Bureau Chief, leading coverage of EU affairs and managing a team of correspondents that reports on European politics and policy. He is also the lead writer of Europe Express, the FT’s agenda-setting weekday newsletter on European affairs. Previously, Henry was Moscow Bureau Chief, where he interviewed Vladimir Putin and charted his regime’s descent into repression. He has also been posted in Warsaw and London. He joined the FT in 2013 from Reuters, where he was a correspondent in India.

 

Episode Transcript

Note: This transcription was generated using a combination of speech recognition software and human transcribers and may contain errors. As a part of this process, this transcript has also been edited for clarity.

 

Jason Mitchell:

Welcome to the podcast, Henry Foy. It’s great to have you here, and thank you for taking the time today.

Henry Foy:

Thanks a lot, Jason. It’s great to get a chance. Sorry about the news flow this week getting in our way.

Jason Mitchell:

No, I understand. And news events do change a lot. So Henry, let’s start with some scene setting for this episode. Why are the upcoming EU elections important, and what’s at stake? Can you, I’d say broadly, draw out the contours of what’s going to the EU ballot box in June?

Henry Foy:

Sure. So EU citizens from all 27 countries will vote between June 6th and June 9th for the next make-up of the European Parliament, 750 MEPs. And this is a key moment every five years, where the legislatures who will ultimately vote yes or no on all the different bits of legislation that are produced by the EU in the coming five years are chosen. So it’s a snapshot of political opinion in Europe at any one time, and then defines the next five years to come. What it looks like at the moment is that this vote will broadly be a referendum on three key issues, the EUs stance on migration, which is a perennial issue in Europe, external migration and how its handled. The EUs position on the Ukraine and support for Kyiv, both militarily and economically, and the cost of that support, and of course the benefits too, to Europe’s security. And thirdly, the Green Deal, the rafter climate legislation and environmental legislation that’s been passed over the last four years.

Do citizens of Europe think that is a good or a bad thing? And how’s it impacted their life? Now, what we’re seeing in the polls at the moment, and look, we’re six weeks out from the vote, what we’re seeing in the polls is that, broadly speaking, is that the centre-right and the centre-right will win roughly the same amount of seats that they did the last time, in 2019. But the Liberal grouping and the Green grouping will lose votes, roughly 20, 25% of their seats will be lost, and at the expense of gains made by the right and the far right. That’s linked to the migration issue, it’s linked to the Ukraine issue, and it’s linked to the climate issue. But the silver lining, if you like, is that the centre, at least what we consider the centre, centre-right, centre-right, and the Liberal group should have just enough votes to hold slim majority, and therefore keep this more centrist European Commission in charge for the five years to come.

Jason Mitchell:

Yeah, it certainly appears that the EU is getting ready to shift its spending priorities following these summer elections in a way that, and I think we both agree here, could radically diverge from the 2019 policy agenda. I keep hearing about a focus on three things, strategic autonomy, competitiveness, and defence. And so I want to ask what forces are driving the election and the move to shore up the EU defence industry? Russia’s war with Ukraine plays a clear part, but to what degree is the EU making up for the historical underpin over the last 30 years? What about the farmer-led protests against climate regulation? Or is it a matter in the style of, I guess, real politics of reducing EU dependency on the US because of the potential of a more isolationist Trump presidency?

Henry Foy:

That’s right, Jason. I mean, I would say two caveats, the first is that legislatures have passed an enormous amount of Green legislation in the last five years, so it’s not as if that stuff’s all going to go away, that stuff’s now on the statute books, implementation is to come. But the targets, the environmental targets that have been set down are still there, so they’re not going to be ripped up by the next parliament. The second thing is that strategic autonomy, and you’re absolutely right, that is one of the big buzz-words at the moment, strategic autonomy roughly translates into, how can Europe be more self-sufficient, be more self protected, and have more self-reliance. That’s been around for a while now, two, three decades you’ve had people talking about the need for Europe to stand on its own two feet, to stop relying on the US for defence, Russia for energy, China for trade.

It’s become much more important now. Emmanuel Macron, the French president has made it one of his big demands of the next five years for Europe. And you’re right, it’s the war, it’s Trump, and it’s the farmers’ backlash as well that comes into it, and I’ll explain why. On the first, on the war, I mean you have a hot conventional war that’s killing thousands of people on Europe’s doorstep, that is just primarily a security issue Europe hasn’t had to deal with this for a generation, or more. And secondly, more logistically, the demands of supplying Kyiv with weapons, the amount of weapons it needs to defend itself against Russia’s invasion has massively exposed where the limitations are in Europe’s defence industry, they don’t have enough ammunition, they don’t have enough missile launchers, they don’t have enough tanks to give to Ukraine to be able to defend itself. And so there’s been this massive awakening in Europe that what we thought we had that would protect us is wholly insufficient, and that needs to change.

And then on the farmer’s side, what you’re seeing is these protests which have taken place in almost all European capitals but have been focused in places like Poland, Belgium, France. What people are telling me is the tip of the iceberg, and the popular discontent at some of these environmental legislation that targets some of the pressures that are being put on farmers. But people outside the farming industry, people getting told they’re going to change their windows, they’re going to change their boilers, and the cost of that. And people saying, we don’t want to be spending with our taxes for this kind of stuff. And so the commission is shifting, it’s shifting the focus away from that, that Green Deal agenda, and what’s taking up the slack is the defence push, which links into competitiveness.

Jason Mitchell:

Can we do a little more level setting and explain why the EU defence, absent NATO and US support, is such a focal point for policy makers? Where do the EU military industrial complex and the EUs war readiness capabilities stand, would you say? Where the inefficiencies, I often hear about the differential in tank platforms between the US and Europe, so the efficiency per dollar spent in the issues around that for Europe.

Henry Foy:

Yeah, that’s exactly right. I mean, you are seeing just how fragmented the European defence industry is, and therefore it’s more expensive than its rivals and it can’t produce as much as its rivals. The tank factors is phenomenal, there are 14 different tank platforms in EU member states’ armies compared to one in the US, for example. That means the US can produce them cheaper, they can produce more of them, and they don’t spend time competing with other tank platforms in the US. That actually has a practical problem too. In Europe, if these countries are all fighting on the same side those 14 tank platforms can’t always talk to each other, they can’t always appear on the same radar screens, they can’t always interlink what they’re hearing and seeing on the battlefield with each other. In some cases, they can’t even talk to each other, I mean its quite extraordinary.

That has, of course, has lead many, many policy makers to realise that there needs to be some form of consolidation in the EU defence industry, as well as investment. Because you need to scale up, but you also need to scale up quicker and with more efficiency. The argument being, of course, that if you could create some kind of European defence conglomerate that was akin to Airbus, in the aviation sector Airbus is the main competitor to US Boeing. Where you have the Brits make the wings, the Italians make some of the electronic components, the Germans make other bits, and then the French put it all together, and they have a great European plane, but also a great example of great European cooperation. If you could do something like that in the defence industry, maybe not on tanks but on fighter jets, on air defence, on artillery systems, you would get so much more bang for your buck, and you would be able to scale up in a way that makes the whole of Europe feel more secure because everybody has buy in.

Jason Mitchell:

So with this emphasis politically on strategic autonomy, competitiveness and the security and defence industry, what does that mean for the Green Deal, the implications over the next five years? Does that make it essentially the most convenient scapegoat?

Henry Foy:

It does, it does make it a scapegoat. It also makes it simply a victim of the fact that there is a limited pot of money, that there is an EU budget that needs to be haggled over every seven years. The next one begins in 2028, so discussions are already beginning over what that might look like. There’s a limited amount of public money at national member level, at member state level too. I mean let’s not forget, we’re talking now at at time of really quite acutely strained national budgets in many, many capitals, not least Berlin and Paris. Now, that means that when people are making tough decisions on where to spend the money, if you’re taking a euro and putting it in a defence fund, that’s probably coming out of a fund that used look at environmental or climate change issues.

Now, I would say as a caveat to that, just yesterday in Strausberg, which was the last day of the previous European Parliament make-up, they voted through a Green legislation on leaving the energy charter treaty, for example, on packaging laws, on human rights and environmental abuses in supply chains, things like that, these all passed.Some of them passed narrowly, some of them passed with a large margin, but I’m bringing this up to show you that even though the air is coming out of the Green Deal balloon and the defence balloon is blowing up, there is still trust and belief in the legislative framework around the Green Deal. And I think that’s really important to say, that no one is scrapping these targets. What is happening though is that it’s being watered down, and the areas of Green Deal legislature that the farmer’s have, the protesting farmers have targeted most intensely have been rolled back.

The obvious one is on pesticides, where farmers are saying, look, these laws telling us to use fewer pesticides, fertilisers, you’re going to have to scrap that because we need to produce your food. And Brussels basically folded in a matter of days, took that away, angering climate change and environmental NGOs and groups. Does it mean, for the next five years, you’re going to hear nothing about environmental legislation? Absolutely not, it will still be there. But the focus on defence and competitiveness will, I think, at times seem like it’s drowning out everything else, especially if the war on Ukraine rolls into three, four, or even five years.

Jason Mitchell:

Interesting. I was going to ask, I read an article about a draught strategy document, essentially an EU priority list for the next decade through the next five years, which contained references to foreign policy, to defence, to security, migration, and to expanding EU membership. Climate change is barely mentioned, nature and biodiversity, not at all. So are these priorities based around incremental funding commitments? It sounds like from what you’re saying, there’s no change to the statute books, it’s just an issue of fiscal funding or private sector kind of funding.

Henry Foy:

Yeah. I would say that’s exactly it. This document is to be taken as a guideline for what the leaders are going to discuss for the rest of this year as they try to nudge the commission, the next commission and the next parliament in the direction that they want the EU to focus. But you’re absolutely right, there’s no mention of climate change in there, Green issues are buried in a few other sections. But you also have to think, that defence is the sexy thing right now, it’s what everyone’s talking about. Everyone knows that there is a lot of money that’s going to be flowing out of Brussels for defence projects, countries want to be part of that. It’s a good thing to be talking about next to competitiveness and how we make European economies more competitive.

The thing I would say, Jason, is that people are starting to blend the competitiveness and the Green Deal issues together, so even though you’re not hearing too much about the need to fight climate change, it is being baked in to the investments that European governments are being forced to make to try to make their economies more efficient. This, of course, borrows from and was inspired by the IRA in the US, which was a moment that you can’t really overstate the importance of that for the EU. They realised two things, the first is that, oh my goodness, America has really, really deep pockets and doesn’t really think about Europe when it comes up with it’s spending plans. And two, wow, you can boost your economy through this kind of spending, but also focus on Green Deal at the same time. And that was a… The EU was shellshocked for a couple of months, there were these emergency trips to Washington by policy makers to say, how can you do this to us, I thought we were your allies?

But very quickly the Europeans realised, the best way to do it would be to, if you can’t beat them, join them. Try to find ways that EU companies can plug into the IRA, but also come up with ways that we can appit here in Europe and direct spending that’s earmarked for competitiveness and industrial efficiency in areas that also help the Green transition. So yeah, I think you’re absolutely right, you’re not going to steer roll back, but it’s about rhetoric and about focus and about where the money is spent. And the Green Deal will just seem less important for the next five years, even though it still remains a key playing card in what the EU is doing in terms of policy.

Jason Mitchell:

Interesting. I definitely want to dig into this idea that defence is the new HG in a second. But I think more contextually, when I was last in Brussels, this is about six weeks ago, I heard a lot about a new appetite for ambitious EU industrial plans, which as far as I know haven’t really existed historically. Instead, I think the EU has tended to exist by this principle of subsidiarity, kind of devolution around policymaking. I’m just wondering, why is that changing? In March, I think few people saw this particularly in the ESG space, but the EU adopted its first defence industrial plan, the European Defence Industrial Strategy, EDIS. And I’m wondering what does that suggest about more top-down industrial strategies in other industries?

Henry Foy:

Yeah. This is one of the big, biggest if you like, questions of the EU. Should it be a trading block of liberal-minded open economies who do their own thing but cooperate when they can? Or should it be an ever close union which is, quote marks, “An over close union that’s run from Brussels,” where Brussels gets to call the shots, Brussels is given more and more power, and more and more ability to decide policy in member states. And it can pick champions across boarders, it can build policy that will promote pan-European cooperation from the top-down rather than from the bottom-up. It’s a big debate that’s been rumbling really since the 50s and 60s, it’s becoming much more important now because of the role played by the US and China in the global game, if you like, the global competition for influence and for business and economical superiority.

The EU, the liberals in Brussels, the liberals who believed, the economic liberals with a small L, who believed in competition, who believed in free markets, who believed in letting the business and industrial sectors work their own rules of the game out, are losing out. Their influence has probably never been weaker than it is today, and the people who are saying, no, we need top-down policies, we need top-down five year plans, perhaps not five year plans but giving a shine to them. But at least we are going to tell you, this is how we do it, we are going to invest in these areas, this is what you should do, this is how you should work, let us hold your hand as you do it. These people are raising in prominence here in Brussels, and you see that in the defence industrial plant.

You also see it in other areas. I mean, the covid pandemic was quite influential in this space, whereby healthcare, which was something that the original member states of the EU told Brussels to stay away from. They said, “Look, this is one of our member state competencies and you’re never going to be in charge of it.” That is now much more centralised, as a result of the pandemic, and as a result of Brussels grabbing the bull by the horns at the start of that pandemic. And buying doses for the entirety of Europe, arranging supply chains for production of vaccines, etc, etc. You also see it in energy, again, not from bottom-up but because the war between Russia and Ukraine and Russia’s decision to cut off gas supplies meant that Europe had to re-tool its entire energy industry in the space of six months, with enormously high energy prices at that time.

And it was Brussels that said, okay, we’re going to start buying gas collectively, we’re going to start liberalising the electricity markets in ways that you’ve told us you couldn’t do before. And so these external factors, each times there’s a crisis, Brussels gathers more powers. Brussels gathers more ability to call the shots, to pull the levers in member states. And you’re seeing that now in industrial policy, around things like defence, around things like healthcare. And we talked about competitiveness, there are two big reports, one has just come out from Enrico Letta, the former prime minister of Italy, there’s going to be one coming out at the end of June from Mario Draghi, another former prime minister of Italy, both focused on competitiveness in the single market. And it looks, from reading the letter report and from hearing from what Mr. Draghi is looking at, that both are going to call for more spending in the centre, more money for Brussels to dole out, and bigger European champions, consolidation and industrial strategy that’s set from the centre.

Jason Mitchell:

So we’ve talked in a past discussion about your conviction that defence is the new ESG, and to be honest, the ESG investor space has had to think through this in 2021, 2022, following that initial phase of the Russia-Ukraine invasion. But I would say that very few investors ultimately reversed their defence-related exclusions. So I myself am a little bit sceptical when people come out with talking about defence is the new ESG. And to put some numbers to this, so SFDR Article 8 funds, essentially the sustainable funds, they were 68% underweight the defence industry in Q1 this year, so just a few months ago. That compares to 79% underweight in Q1 2022. So yes, there’s definitely been a shift roughly around 10 percentage points since the war started over the last two years. But at the same time, it feels relatively muted. So why is this time different?

Henry Foy:

This time is different, I think… I mean look, okay, I agree with you, defence as an ESG is a silly thing to say, it’s obviously not. But for me it’s a symbol of this shift in mindset here in Brussels. Now, that might not trickle through down to individual investors, but what I would say is, the EIB, Europe’s biggest investment bomb, if you like, or the biggest weight that the EU has is in the process of shifting its investment strategy to allow it to invest in defence. I think that move, when it happens, will have more impact than any speech that von der Leyen can give, or can give every single week, the president of the European Commission saying we should invest more in defence. If the EIB starts doing it, I think you’ll see lots and lots of people following suit.

I mean, somebody’s obviously shifting, Jason, because Rheinmetall, which is the German defence producer that’s won a lot of contracts for artillery shells for Ukraine, it makes a lot of land based weaponry, its share price is up 80% so far this year. So in four months it’s gone up 80%, so somebody is shifting. And I think you’re right, there will be funds that are held in the ESG position for a very, very long time, who have had many, many years to come up with their reasoning as to why they don’t want to invest in defence. Those funds may well never, ever shift into defence. But the market is realising that this commitment to building up Europe’s defence industrial complex is serious and it’s long-term, it’s not going to be done with public money alone, and that there are going to be some private players who are going to make a lot of money from it. And so, I think investors will follow suit.

Jason Mitchell:

Yeah, I don’t entirely discount it. In fact, I actually take it very seriously. And your point about the EIB is absolutely spot on. I did a podcast with the EIB back in 2020, and in 2019 it labelled itself the Climate Bank, right?

Henry Foy:

Right.

Jason Mitchell:

So there is, as you said, clearly a lending pivot there. I guess I’m just wondering, we’ve talked about the EIB, but what do you think the other knock on effects are for other EU institutions? What could we see there?

Henry Foy:

Yeah, that’s a great question. I mean, I think that the biggest impact will be on the commission itself, that Ursula von der Leyen, the president, she’s re-elected, has said that her next term will include a defence commissioner. So effectively a minister for the defence industry in Brussels, where they budget and with the ability to dole out contracts. She’s also said that the commission should become a buyer of last resort for defence factories, which is really quite extraordinary. It’s something they did during the covid pandemic, they essentially said to vaccine producers and makers of vials and needles, look, if you guys build more productions lines, as we’re asking you to, if people don’t buy what you’re producing, we will buy it. We will be your buyer of last resort, we will provide you with a guaranteed offtake.

And what von der Leyen wants to do is apply that to defence production, which is really quite extraordinary, especially for an institution that technically still has a clause in its treaties that permits it from investing in defence military projects. There are, and we’ve reported this last month, there are legal boffins working on how to get around that in the future and arguing that a defence project is different from a defence procurement. I mean, I’ll leave that to the lawyers to decide, but I mean, you can see the direction of travel here. In terms of other areas, I think the European Parliament will have to see how the elections go, whether there is a strong anti-Ukraine, pro-peace slate that’s elected. I’m personally quite sceptical about that, I think there are fringe groups that are using it as an election plank, but the majority are all in favour of supporting Ukraine.

And even in countries like Hungary or Slovakia that have been quite vocal in speaking out against support for Ukraine, popular belief in the need to ensure Russia doesn’t win in that war is still quite high. So I’m less concerned that you’re going to get the election of a very anti-Ukraine or at least pro-peace European Parliament.

Jason Mitchell:

How do you see policymakers reframing defence so that it’s palatable, in other words, investable for sustainable investors? I often hear this linkage between, increasingly, this linkage between security and resilience, but what can policymakers do to legitimise defence or establish a sustainable defence or patriotism norm?

Henry Foy:

That’s a really good question.

Jason Mitchell:

And by the way, I think for me why it’s so interesting is that sustainable investment funds in the EU, at least according to SFTR Article 8, Article 9 funds in terms of assets, now account for more than half of total EU assets. So the last several years have really been spent on developing the prescriptive measures and the norms around sustainable investing. So it feels a little bit awkward now to have to try and redefine that or broaden it.

Henry Foy:

Yeah. I mean, I think that’s a really, really important question, I’m not sure policy makers have worked it out. I mean, you know as well as I do that they can be a little bit cute sometimes with the taxonomy and what they include as environmentally friendly investments or not. I remember a huge debate over whether jet fuel could be included in that because it was becoming more sustainable. Look, the argument you hear from the Eastern countries, the ones closer to Russia, is very similar to Winston Churchill’s famous remark during the second world war when he was asked whether they should cut cultural spending from the UK budget. And he said, “No, the whole point of fighting this war is that we can have our culture to have afterwards.” The argument you hear from the Bulgs and the Naples and the Romanians now, is defence is a sustainable investment because if we don’t invest in defence, there won’t be anything left of us to protect the world afterwards, to protect Europe’s nature, Europe’s environment, Europe’s sustainability afterwards.

I mean, even I think that’s a bit of a stretch, but I can see the argument behind it. Essentially it’s, we should not be right now worrying about our carbon emissions while there’s a aggressive, revanchist power trying to gobble up territory to our east and might not stop when it hits the EU boarder, the NATO boarder. So that’s one argument. The other one is going to be, I think, around, you’ll hear a lot about how the defence industry’s becoming more green, this is something that NATO in particular has been pushing for a while now. Secretary General Jens Stoltenberg, before the war broke out in Ukraine, was talking a lot about this, he was pushing for governments to start declaring their defence emissions, for armies to look into ways that they could make their armies more green.

I mean, the argument that you heard a little bit during the start of the war was if the Russian ground army didn’t rely on diesel, it wouldn’t have got stuck outside of Kyiv in that famous huge convoy that stretched back hundreds of kilometres without any fuel, and was picked off by Ukrainian artillery and planes quite easily. Of course, it also was quite cloudy that February, so you couldn’t have has solar panels on the roof of the tanks either. That’s a bit of a silly example, but it’s used sometimes to say, look, supply of fuel has always been a huge issue in war, I mean one of the reasons why Hitler got stuck at Stalingrad is because he was desperate to get down to Azerbaijan, Baku, and the Soviet oil fields down there. And so the NATO argument is, look, if we can find ways to make armed forced less reliant on fossil fuels, they actually become more combat ready, they’re more efficient.

I mean, I think we’re a long way away from that kind of thing, but these discussions are beginning, and that is, I think, another part of what they’re going to try to do to say, look, investing in defence doesn’t have to be a terrible, bad thing that is going to ruin ESG productions.

Jason Mitchell:

So it seems like there’s two kind of approaches in terms of reframing defence as ESG. On the one side there’s the moral suasion, the reframing element, the other part are the mechanical levers. And I’m wondering, because you talked about the EU taxonomy, what levers really do exist, or what you’ve heard of? The EU defence industry has, as far as I know, argued for the inclusion of defence in the EU taxonomy. Obviously that didn’t happen, but that’s one potential lever. Are there others? Could we see the EU or individual member states issue something like patriotism war bonds, that finance defence that are more, again, palatable for sustainable investors?

Henry Foy:

So there’s this number out there, $100 billion, which was first proposed by the European Commission as the amount of money it would need in the next budget to bring Europe’s defence industry up to some level where it is self-standing. It’s also the number that Jens Stoltenberg, the NATO secretary general has put out there to say, this is how much we need to look after Ukraine for the next five years. It’s also the number that Emmanuel Macron, the president of France has said Europe should try to raise through bonds, as you just referred to, to fund this great investment in the European defence industry. No one’s very sure where that 100 billion comes from, other than it’s quite a good number and it sticks in your head. The big debate is around the joint borrowing and the joint issuing of bonds. This was only done once before, for the covid recovery fund that the EU rolled out to allow its member states to build back better, if you like, to use an American phrase.

It was born out of deep, deep crisis, and an understanding in France and Germany, predominantly, that there wasn’t enough public money out there to do this, a national budget, and that the markets wouldn’t trust every single one of the EUs member states. An of course, the elephant in the room of the EU and the EUs economic interdependency is that, yes, Germany and the Netherlands and the Danes and the Swedes are very rich countries who don’t like borrowing and spending on other countries, but their economies rely deeply on those other countries being able to have steady and strong economies. Poland and Germany is a great example, but also Hungary, Czech Republic, these are countries whose economies are deeply, deeply important for the German economy. So Berlin realised it needed to keep the economies of the rest of the EU running, and the way to do that is to issue joint bonds.

But effectively the market is saying, okay, if Germany and the Netherlands and the Finns and others are part of this collective borrowing, these bonds are good, they are not to be valued at Greek debt, they are to be valued at German debt. Now, the big push now is to do it again, do it again for defence spending. The Germans have always said that it was a one off during covid and they would never do it again, and that they have all sorts of problems with the way it’s been spent and the way that it’s been overseen, so we won’t do it again. I personally think something will come out of these debates that looks a little bit like, as you said, patriotism bonds or war bonds. It will take a long time, it may happen this time next year or even later. And I don’t think it will be a 100 billion, but I think you will have some form of joint borrowing.

For two reasons, mainly, there are countries that need this that don’t have the fiscal space to do it, and secondly, it’s about ensuring that everyone is bought in on the same project. That this is not Germany, France, Italy and a few others investing in their defence industries to help Ukraine now and help Europe in that future. That it’s an entirely European project to rebuild the European defence sector, make us less dependent on the US, and allow us to defend ourselves from external threats, if indeed we are forced to.

Jason Mitchell:

In a keynote speech at the European Defence and Security Summit, this is just on April the 17th, President Ursula von der Leyen said that, “Expanding the EUs,” quote, “defence industrial capacity in the next five years will require a new European defence mindset from member states to institutions, to industry, and to investors alike.” Indeed, the references to investment and industrial capacity are closely linked to security jobs, know-how, and economic growth. What do you think this means for the private sector and the role it’s expected to play, including obviously investors?

Henry Foy:

Yeah. I mean, everyone’s very clear that this will not just be, not withstanding what I just said about defence bonds and a larger EU budget, this will not be done without private money. And this is where you turn to the wider competitiveness piece, the discussions over the capital markets union, and how to make the European capital market more integrated, therefore more efficient, and therefore keeping more of this roughly €300 billion of European wealth that leaves the EU every year. Mainly to the US, where the market is more efficient and effectively offers better returns. And so, the defence point, once again, is being used as a flag bearer for a wider discussion here. It’s, we need to make the European private investment market deeper, broader, better, more efficient so that there is more private money around, so that more private money stays here.

Stays here in European pension funds, stays here in European asset managers, and can be invested in things like defence. Not just defence, but things like defence. And I think what they’re hoping is that if they make the defence industry strategy and the EU investments in it bold enough, big enough, and give a long-term enough perspective, the private money will flow in. And as I said about Rheinmetall, I mean this is happening in certain areas, they need to make it broader, they need to make more of these companies attractive. But you’re absolutely right, the private sector part of it is a huge plank, by convincing the private sector and convincing investors that the defence industry is not just investable, but has high returns and is a long-term bet. If you like the second part of the puzzle, once they’ve got the strategy in place, then they need to sell it to the market.

Jason Mitchell:

Yeah. So essentially after the elections, I mean, it sounds like the pressure, the ramp up on industrial strategy just really takes a different kind of cadence. Because I think fiscally, it’s interesting to me, because that’s obviously already happening. I noted earlier this year, the strategic technologies for Europe Platform, STEP, a programme that supports EU leadership and innovation on critical technologies was reduced, its budget, from €10 billion to €1.5 billion with members earmarking the remaining amount entirely on defence, not green technologies. And I’m wondering, I guess from what you’re seeing, is this STEP programme an anomaly so far, and at least on the fiscal spending side? Or are there other unequivocal signs of the shift towards security and defence?

Henry Foy:

No, I think STEP is a great example. I mean, to give you some context here. STEP came out of deep, deep, deep insecurity in mainly Southern, mainly lower income countries that were worried that when the EU effectively created large loopholes in its state aid regime during the pandemic, and afterwards, to allow countries to essentially break the existing rules and pump money into their own industries. Airlines, for example, is a good example. That the countries that were poorer and had less fiscal room would lose out. And so they said to Brussels, okay, in exchange for loosening the state aid rules, which obviously benefits countries like Germany, countries like the Netherlands, you need to create a central pot that can invest in our economies too, and gives us, doles out money if you lack state aid from the centre.

centre fact that that got cut right back tells you two things, the first is that there’s really not a lot of money out there to spend on stuff, and so your priorities have to be really, really strict. And secondly, that the big spending countries won out, essentially, and that this pot that was promised for the poorer ones didn’t exist. What you’re going to see, I think, is that a lot of that rhetoric around supporting all economies, not just the big ones, will be wrapped into the defence pitch. And they’ve got 1.5 billion, as you’ve said, for the next three years for defence, which is not very much, but the plan is to use that as a seed and to say in the next EU budget, the next MFF, the multiannual financial framework which runs from 2028, there’ll be a much bigger chunk of money for defence spending directly from the EU budget.

And that attached to that will be these potential bonds that I was talking about earlier, which will also invest in it. And so, you don’t hear very much, for example, right now about fiscal ideas, spending ideas, budget ideas for non-defense issues, this is what everyone’s talking about now. How do we raise more money for defence? And how do we make that the key part of the competitiveness push?

Jason Mitchell:

You mentioned silver linings when we started, but are there any silver linings with regard to the Green Deal and the fact that it plays a lesser role in the next five years? Maroš Šefčovič seemed to point to a couple, he’s talked about less bureaucratic red tape and lower energy prices. I’m thinking maybe a loosening of some of the ambitious regulation and legislation that we’ve seen over the last four or five years. But can he really hold to that pledge, do you think? Is this feasible?

Henry Foy:

I mean, I think you can call that a silver lining or you can call that the baseline here. The EUs greenhouse gas emission reduction targets are set, they’re legally binding, I mean climate neutrality by 2050 is legally binding. You would need to have a unanimity of member states and a majority of the European Parliament to agree to change that. So, in many ways the green stuff is done, if you like, it’s now by implementation. There you’re going to get down to, do member states follow through on it? But that’s a separate issue, you’d need 27 different podcasts to answer that. But I take your point, and I think that for people who have put a lot of stock into the Green Deal, this can be a moment where you think, was it all for nothing?

And that’s totally the wrong way of looking at it. And I think that actually, the European Parliament, European Commission and the member states should be praised for the work they’ve done in the last five years on the Green Deal and on that legislation. Despite the huge geopolitical health and security crisis that were going on all at the same time, they’ve got that done. A lot of it is now binding, and they can move on to other priorities now while the Green Deal legislation is put into place. And I think in five years time, I mean I hope so, we look back in five years time and we say, okay, a lot of this Green Deal legislation is now filtering through into real life impacts. And the defence stuff is in the same stage the Green Deal stuff is now, it’s gone through parliament, it’s being implemented, but we’re going to need to wait another five years to see it hit real economies.

Jason Mitchell:

It’s a good way to end. So it’s been fascinating to discuss what the upcoming EU elections in June represent, why the policy agenda will likely pivot towards defence and security and away from the Green Deal, and how EU policymakers may try to reframe defence for sustainable investors going forward given the funding requirements. So I’d really like to thank you for your time and insights today. Henry, thank you so much for this, really enlightening.

Henry Foy:

Thanks, Jason. Real pleasure. Anytime.

Jason Mitchell:

I’m Jason Mitchell, thanks for joining us. Special thanks to our guests, and of course everyone that helped produce this show. To check out more episodes of this podcast, please visit us at man.com/ri-podcast.

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