COLUMN-What China can teach Europe about geopolitical independence: Klement

By Joachim Klement

March 4 - The transatlantic alliance appears to be coming apart at the seams, meaning Europe will need to quickly develop a strategy for harnessing geopolitical hard power. The continent could look to China for tips on how to achieve this.

The first step is enhancing defensive capabilities.

In the early 1990s, China’s leadership launched a major modernisation of its military. The World Bank estimates Chinese defence spending rose from around $12 billion in 1993 to roughly $296 billion in 2023 – an annual growth rate of over 11% per year compared to about 3.5% in the U.S. over the same period.

Consequently, China now runs the world’s largest naval force by number of ships, and Beijing has also developed modern missile and drone systems, including hypersonic missiles, the world’s most advanced missile systems.

The European Union and Britain are already set to increase their military spending significantly now that the U.S. has paused its support for Ukraine’s fight against Russia.

British Prime Minister Keir Starmer said on February 25 that Britain would seek to increase defence spending to 3% of GDP.

Friedrich Merz, Germany’s likely next chancellor, has also emphasised his willingness to significantly increase defence spending. He floated the idea of an emergency defence fund of €200 billion on top of an existing €100 billion fund.

On Tuesday, the European Commission proposed joint borrowing totalling 150 billion euros as part of an 800 billion euro effort to increase the bloc's defence capabilities.

But Europe may need to think much bigger, because even with these additional funds, it will take Europe many years – and potentially decades – to rebuild its military.

For example, it would take Germany until 2038 to reach the level of combat aircraft production it had 20 years ago, and until 2121 to achieve a comparable increase in artillery howitzer production, according to Kiel Institute forecasts.

And simply spending more will only help so much because European arms manufacturers will eventually hit capacity limits.

ENERGY INDEPENDENCE

Another vulnerability Europe needs to address is its dependence on fossil fuels.

The Russian invasion of Ukraine in 2022 showed how natural gas could be used as a weapon. Since then, Europe has weaned itself off Russian pipeline gas and switched to LNG. But much of this is imported from the United States, so Europe has essentially traded one dependency for another.

And it's a potentially risky dependency, as all signs suggest U.S. President Donald Trump would be willing to use gas as a coercive tool. So given new geopolitical realities, Europe's green transition needs to be accelerated.

If China's experience is anything to go by, speeding up the energy transition could help Europe boost both its lacklustre economic growth and geopolitical power. China has become the world’s biggest investor in renewable energy and nuclear power, two technologies that have reduced its dependence on fossil fuel imports from potential geopolitical rivals.

Carbon Brief recently concluded that China's total investment in solar energy, electric vehicles and batteries represented 10% of the country's GDP in 2024, and it noted that these major green sectors grew three times as fast as the broader Chinese economy in 2024.

Europe is already seeing some cost benefits from investing in renewables.

According to estimates from energy think-tank Ember, rising energy production from renewables has cut the EU's imported natural gas bill by €53 billion over the last five years. In Britain, the "net zero economy" (for example renewable energy and green finance) grew some three times the rate of the economy overall in 2024, the Confederation of British Industry said.

REGULATORY MIGHT

Finally, the EU could learn to be a bit more strategic when creating and enforcing regulations, something China has arguably done in recent decades.

While Europe would likely not seek to be as forceful as China has been in this area, the bloc has regulatory powers that it can unleash in a more targeted way to project geopolitical strength.

Europe’s General Data Protection Regulation (GDPR) and Digital Services Act (DSA) have already demonstrated that the EU can pass laws and regulations that affect companies everywhere in the world.

In particular, the DSA, which seeks to regulate social media platforms, has the potential to be a major thorn in the side of U.S. tech companies since violations can result in penalties of up to 6% of global income.

Given the new geopolitical realities, the EU may increasingly find that it needs to use its regulatory power as a bargaining chip in the face of trade or security threats.

These types of hardball tactics may not come naturally to Europe, but given that other major powers don’t appear to have such sensitivities, it may be time for Europe to rid itself of them as well.

(The views expressed here are those of Joachim Klement, an investment strategist at Panmure Liberum, the UK's largest independent investment bank).