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EU pursues defence funding amid Trump victory

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With Donald Trump back in the White House, the European Union (EU) is ramping up efforts to strengthen its defence capabilities and “enhance its industries’ competitiveness.”

The EU will investigate new strategies to fund significant military investments and support the development of clean technologies. According to the latest draft declaration, which EU leaders are expected to adopt at today’s Budapest summit (8 November), Brussels will “explore the creation of new instruments” to address future needs. However, no additional funds have been secured to close the bloc’s substantial investment gap.

Concerns about Trump’s potential intentions to “leave Europe on its own” have spurred the EU to pursue a more self-reliant defence strategy and ensure its industries can compete with American firms.

In his report, former European Central Bank President Mario Draghi cautioned that the region risks lagging behind the US and China if EU member states do not swiftly increase productivity by investing an additional €800 billion annually.

The draft declaration reflects a shared sense of urgency among national governments, which warn that “business as usual is no longer an option.”

Fiscally conservative nations, including Germany and the Netherlands, have historically resisted calls for more funding, arguing that sufficient resources are already available. These countries prefer to wait until negotiations for the next long-term EU budget in 2028. However, sources close to the matter told Bloomberg that some eastern and southern countries are advocating for new revenue sources beforehand, especially to boost Europe’s defence autonomy.

Despite resistance from some quarters, diplomats report that the final draft of the new funding instruments is expected to pass on Friday without changes.

Due to initial disagreements, negotiators deprioritized the 2027 deadline for establishing an Energy Union, previously considered a step toward enhancing the EU’s energy independence and reducing clean energy costs for businesses and households. Additionally, a reference to the creation of a sovereign wealth fund for equity investments in critical technologies, aimed at sustaining EU competitiveness, was omitted from the final draft.

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German defense minister clears way for Scholz to lead SPD into elections

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Defense Minister Boris Pistorius has officially withdrawn as the Social Democratic Party’s (SPD) top candidate for the upcoming election, ending weeks of speculation about his potential to replace Chancellor Olaf Scholz.

In a video message released by the SPD on Thursday evening, Pistorius stated that the ongoing public debate had harmed the party’s unity. He informed the party leadership that he was unsuitable for the chancellorship.

“Olaf Scholz is a strong chancellor and the right candidate for the chancellorship,” Pistorius said, emphasizing that the party leader embodies “reason and common sense.” He further urged, “We now have a joint responsibility to bring this debate to an end because there is a lot at stake.”

When Scholz triggered early elections two weeks ago, many assumed he would automatically serve as the SPD’s candidate, given his role as the incumbent chancellor. However, polls revealed that Pistorius, who has been defense minister since early 2023, had become Germany’s most popular politician, sparking a de facto leadership race.

Scholz faces declining approval ratings

In contrast to Pistorius’ popularity, Scholz suffered from one of the lowest approval ratings among German politicians. Voters blamed him for months of political infighting that crippled the three-way “traffic light” coalition, which ultimately collapsed earlier this month.

Despite this, the SPD central leadership continued to back Scholz. Meanwhile, Pistorius faced increasing criticism for failing to address the leadership speculation. In his video message, Pistorius denied initiating the controversy but acknowledged that it had caused “growing uncertainty” within the party and “resentment” among voters.

He emphasized that the decision to step aside was his own and pledged his full support to Scholz, whom he described as an “extraordinary” chancellor. Pistorius also affirmed his commitment to campaigning for the SPD’s re-election.

Supporters react with disappointment

Pistorius’ withdrawal left many of his supporters disheartened. “I regret this development. The aim now must be to work together and achieve the best possible election result for the SPD,” said Joe Weingarten, an SPD member of parliament, in an interview with Der Spiegel.

Another MP, Johannes Arlt, remarked, “I would have preferred a different decision, but now we have one. It is good for the party and the country. We will now go into the federal election campaign united.”

A two-way race for the chancellorship

With Pistorius stepping down, the race for the chancellorship is now expected to be between Olaf Scholz and Friedrich Merz, leader of the opposition Christian Democrats (CDU). Merz, a millionaire and former BlackRock Germany executive, has been polling ahead of Scholz since taking over the CDU leadership in 2022. Scholz’s supporters, however, remain optimistic that he can close the gap and outperform Merz in the upcoming election.

Pistorius: A proponent of German remilitarization

Known for his pragmatic approach to military affairs, Pistorius, 64, earned respect for his tough stance on Russia and advocacy for Germany’s rearmament. Following his appointment as defense minister in 2023, he made clear his opposition to the SPD’s historical reluctance to increase military spending.

Describing Vladimir Putin as “the despot in the Kremlin,” Pistorius warned that Germany must boost defense investments and ensure it is “combat ready.” His hardline approach on security and defense issues distinguished him within the SPD and cemented his popularity among voters.

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Poland urges EU to increase spending on eastern defence

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Poland, NATO’s largest defence spender, has urged its EU partners to bolster border defences with Russia and Belarus. The move aims to demonstrate a firm commitment to European security, particularly in light of Donald Trump’s influence on global defence policies.

Magdalena Sobkowiak-Czarnecka, the deputy minister responsible for preparations for Poland’s EU presidency, set to begin in January, told The Financial Times (FT) that the EU should invest in strengthening border fortifications and air surveillance systems under the Eastern Shield initiative.

“I think solidarity on the Eastern Shield could help show Trump that, as the EU, we understand what needs to be done for defence. If Trump says he will only work with countries that invest in defence, that’s fine for Poland, because we already spend 4% of GDP on defence. But what about the others? Funding the Eastern Shield would demonstrate the shared commitment of European countries,” Sobkowiak-Czarnecka explained.

The Eastern Shield, announced in May, comprises advanced fortifications and air surveillance systems along Poland’s borders with Belarus and the Russian exclave of Kaliningrad. This initiative is central to Polish Prime Minister Donald Tusk’s strategy to counter what he describes as “Russian aggression”, including the “hybrid war” linked to facilitating illegal migration from Belarus into Poland.

The Tusk government has allocated PLN 10 billion (€2.3 billion) for the Eastern Shield as part of broader defence expenditures. These investments will increase Poland’s defence spending from 4.1% of GDP in 2023 to 4.7% by 2025, the highest in NATO and more than double the alliance’s 2% GDP target. In contrast, some EU nations, such as Italy and Spain, have yet to meet this benchmark.

“All our partners must understand that the Eastern Shield is not solely about Poland but also about safeguarding the EU’s borders,” said Sobkowiak-Czarnecka.

Trump’s potential return to the presidency has heightened concerns across EU capitals, given his promises to impose tariffs on the bloc and signals of a potential resolution to the Ukraine conflict that could favor Russia.

Sobkowiak-Czarnecka underscored Poland’s commitment to enhancing EU security on multiple fronts, from increasing military equipment production to countering disinformation and securing energy supplies.

“This Polish presidency comes at a critical juncture. As an expert on Ukraine and one of the strongest U.S. allies in Europe, Poland will be a guiding light in these challenging times,” she concluded.

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European energy market in turmoil: Gas prices reach one-year high

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The European energy market faces significant challenges as natural gas prices soar to their highest levels in a year. A combination of escalating tensions between Russia and Ukraine, Gazprom’s suspension of natural gas supplies to Austria, and colder-than-expected weather has placed substantial pressure on the market.

Industry representatives acknowledge that while sufficient gas supplies exist, the supply-demand balance remains fragile. Negative developments or geopolitical news could quickly trigger additional price surges.

On Thursday, Dutch TTF futures—a key European natural gas benchmark—rose to €48.8 per megawatt-hour (MWh) (equivalent to $538 per 1,000 cubic meters), a level last observed in November 2023. Since the end of the heating season on 31 March, prices have climbed by more than 150%.

The price surge accelerated on Wednesday after Ukraine targeted Russian territory using British-made Storm Shadow missiles. By the close of the trading day, prices had increased by 2.5%, reaching €46.8/MWh.

On the same day, the United States issued a warning based on intelligence reports, predicting a major air strike in the region. Following this warning, many Western countries evacuated their embassies in Kyiv.

Adding to the tensions, the Ukrainian Air Force reported that Russia test-fired an intercontinental ballistic missile (ICBM) capable of carrying nuclear payloads. This event aligns with speculation about changes in Russia’s nuclear doctrine and the US’s authorization for Ukraine to target Russian territory with long-range missiles.

While liquefied natural gas (LNG) demand in Asia remains low, traders are turning their focus to Europe to capitalize on surging prices, according to Bloomberg.

Despite the increased volatility, Gas Infrastructure Europe reports that gas storage facilities across Europe are 90% full. However, the heating season, combined with freezing temperatures in Northern Europe, has amplified concerns about market stability.

Torgrim Reitan, Equinor’s Chief Financial Officer, emphasized that the market’s fragile balance increases the influence of external factors on pricing dynamics.

The state of pipeline gas supplies from Russia is another major concern. On 16 November, Gazprom halted deliveries to Austria’s OMV, citing unresolved payment issues. The company is attempting to recover part of a €230 million arbitration judgment through this suspension.

Despite this, Gazprom continues to supply 42.4 million cubic meters of gas daily to Europe via Ukraine. However, OMV cannot access these supplies and must turn to other sources, such as Slovakia, to meet Austria’s energy needs. According to OMV officials, Austria’s energy requirements are fully covered by alternative suppliers.

Jon Treacy, editor of the investment newsletter Fuller Treacy Money, noted that although Austria maintains official neutrality, most of OMV’s customers are NATO members. Treacy added that Russia’s “long, cold winter” strategy aims to exert pressure on regions beyond Ukraine over the long term.

Market analysts warn that transit through Ukraine—a minor contributor to the European Union’s total gas imports—could be entirely cut off by January 2024. Such a development would further strain an already delicate market, potentially driving prices even higher.

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