Thread by @SanderTordoir

I wrote a new piece in foreign policy.

The US's postwar role as guarantor of Europe’s security is over – and may even turn adversarial.

But Europe has an overlooked trump card: when it comes to manufacturing Europe blows the US out of the water.

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foreignpolicy.com/2025/03/07/eur…

For European leaders, meeting this historical moment means preparing to defend their national interests on their own. Merz, Macron (+Starmer) seem on the ball

Their trump card: Europe collectively outproduces the United States in steel, vehicles, ships, and civil aircraft.

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EU countries also pay less to service their debts than the United States.

This gives the EU the industrial heft and financial firepower to support Ukraine and embark on domestic rearmament as President Trump abandons Kyiv and NATO.

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The stagnant EU economy has fueled calls for Europe to prioritize high-tech sectors over its industrial base.

But this is a false dichotomy.

Europeans should not fetisishe US big tech too much: it's profit rich but employment poor.

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Manufacturing employs more people (30M v 13), and plays a far greater role in the EU economy than in the United States (16.4% GDP vs 11).

And there are three reasons why maintaining Europe’s manufacturing edge is critical not just for its growth, but also for its security.

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First, manufacturing drives the little productivity growth the EU generates, Airbus, machine-building (ASML!), even cars, aren't things to toss away.

To fund defense spending, the EU will need the income created by its industrial sector to keep debt levels sustainable.

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Second, Europe's strong industrial production is a precondition for Europe to rearm quickly. Supply chains for modern industry double up as defense supply chains.

The US itself serves as a warning of the risks of letting them etiolate (just look at EU vs US shipbuilding).

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Third, even as Europe aims to catch up with the US in advanced tech, its comparative advantage in the transatlantic relationship will continue to lie in manufacturing.

The EU has long run a surplus in manufacturing trade with the US (importing services/tech back).

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Trump aims to reindustrialize and rebalance the trading relationship.

But this plan faces key constraints and may flounder. (Random) tariffs wont reindustrialise America with a tight labour market and migration curbs - especially as he rolls back industrial policy too.

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Manufacturing ensures that the EU remains an indispensable partner to a more transactional U.S. administration. In the future the US can either call China or Europe.

But Europe’s trump card is being jeopardized by both neglect and hesitancy. A couple of points.

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The defense industry is weakened by fragmented, bespoke production and years of underspending.

The cumulative deficit over the last decade relative to NATO spending target amounts to 850 billion euros ($916.9 billion). (h/t @GeneralTheorist)

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As @Brad_Setser and I showed the EU's wider manufacturing sector is also progressively squeezed by China.

China expanding capacity in autos, machinery, clean tech, aviation - despite a lack of domestic demand - is cutting hard into EU producers’ global export markets.

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Adding to Europe’s woes, Trump will impose tariffs on EU goods and is rolling back Biden’s green subsidies benefitting EU car and wind turbine makers.

With China flooding global markets and the US unwilling to accept more EU imports, foreign markets will not save Europe.

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But Europe can take its fate into its own hands. The beating heart of European industry, Germany, is also the country most exposed.

It also has the most fiscal space to respond, and is doing so in force. Markets are now pricing in more growth.

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https://x.com/SanderTordoir/status/1897078783410405584

Higher investment in Germany and other fiscally strong pockets of Europe will stoke domestic demand and offset lost export markets.

But simply increasing aggregate demand is not enough: The EU must also direct it toward strategic industries.

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The EU should use trade and industrial policy to steer civilian demand away from China and toward “made in Europe” production.

Military supply chains need sufficient civil demand too - e.g. steel, but also chemicals to make explosives, and of course batteries for drones.

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The EU is setting up defence (industrial policy pure) but also negotiating a clean industrial deal.

The goal: create sector-wide policies that concentrate European demand, allow fierce intra-EU competition, avoid firm-specific handouts.

We can afford it (0.2/0.4% GDPpy)

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In parallel, the continent needs to move toward producing standardized military kit for mass production (see below).

The promise of stable defense contracts is already revitalizing Germany’s stock market, proving that targeted demand can restore Europe’s industrial core.

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Biden’s signature bills - IRA and Chips - aimed to arrest the United States’ long-standing industrial decline and reduce its reliance on China.

Ironically, it is now the EU, not the United States, in urgent need for these policies.

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Getting industrial policy right will strengthen Europe’s strategic position. It will not address immediate defense deficiencies.

But Europe remains a wealthy region with a powerful industrial base that can drive rearmament and the productivity growth needed to fund it.

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In the future, the US may then face a choice: continue to import the EU’s manufacturing surplus or cement its dependence on China.

So for Europe it's time for a Macronesque/Draghi strategic industrial policy - with a flavour of Delors (use competition in single market!).

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The biggest risk is that EU leaders bicker rather than defend their industrial strength together.

In that sense, U.S. Vice President J.D. Vance was right to say that Europe should worry about the enemy from within.

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CC: @PGKroeger @PhilippaSigl @Shahinvallee @electricfelix @RushDoshi @jpaternotte @maxkrahe @robin_j_brooks @alexprivitera1 @robdewijk @benbawan @MSchularick @m2matthijs @CecileBoutelet @Caffar3Cristina @70sBachchan @ConStelz @GuntramWolff @GerardAraud @LianaFix @ajboekestijn

@JeremyCliffe @jsuedekum @tom_nuttall

With thanks to @CameronAbadi @MehreenKhn, @jonasnahm and @Brad_Setser for great discussions and feedback that helped me to sharpen this argument

And @benbawan for nice discussions on some of the data.