European strategic autonomy: a €1.8 trillion investment opportunity

Talking Heads with Lazare Hounhouayenou

Daniel Morris: Hello and welcome to the BNP Paribas Asset Management Talking Heads podcast. Every week, Talking Heads will bring you in-depth insights and analysis on the topics that really matter to investors. In this episode will be discussing European strategic autonomy. I’m Daniel Morris, Chief Market Strategist, and I’m joined today by Lazare Hounhouayenou, Portfolio Manager. Welcome, Lazare, and thanks for joining me.

LH: Happy to be here.

DM: We’re all aware of the capex that’s being devoted to the development of artificial intelligence technologies – trillions in the US but significant amounts of money elsewhere, certainly in Europe. But we may not be quite so aware of what is going on in Europe around strategic autonomy initiatives. I hear that there’s supposed to be about €1.8 trillion devoted to this theme in the years ahead. Let’s get back to basics. To begin with, could you give us a simple and concise definition of strategic autonomy?

LH: Strategic autonomy refers to the ability of a state – or a group of states such as the EU – to act independently on the international stage and defend its interests against the world’s major power[s] in areas considered essential.

The means used to achieve these objectives, as well as the assessments criteria for sovereignty, evolve over time. In the ’60s, a state’s sovereignty was measured by its industrial and military power. Today, with the rise of AI, it is also determined by data centres, AI models.

This evolution raises new questions such as ‘has the control of [micro]chips and data centres replace[d] the control of physical borders?’ Or ‘does the state still maintain its cultural and political sovereignty when its citizens access information, communicate and form opinion[s] through AI algorithm[s] developed under a different jurisdiction?

In this polarised world, what is Europe’s position and where the region can create value according to its strengths in the long term? We think that regaining sovereignty is an absolute necessity for Europe, which must reposition itself within this new geopolitical landscape.

This requires reducing its dependence on partners and former partners across a number of sectors. Defence is one of them, but energy resources, industry, technology, healthcare and food security must also be mentioned.

DM: That sounds quite comprehensive. Can you make the connection, though, between these initiatives, and why Europe undergoing this shift to greater strategic autonomy is important for investors?

LH: Since 2022, the European Union and several European countries have launched a number of major initiatives involving significant level of investments aimed at strengthening Europe’s autonomy in sectors consider strategic and essential. Looking at the main programmes alone, we estimate that nearly 1.8 trillion of investment will be deployed by 2035.

Naturally, European industrial companies with exposure to these sectors are expected to benefit from this powerful long-term investment trend. In this context, investors have an opportunity to position themselves for the long term by investing in sectors with strong growth prospects while at the same time supporting Europe’s strategic autonomy agenda.

DM: When you look at these initiatives, are you seeing practical consequences from Europe’s decisions? That is, are you seeing progress or, conversely, obstacles, delays, rivalries that justif[y] some people’s scepticism and arguably could generate volatility in the short term?

LH: Europe is moving in the right direction, even if progress is never fast enough. Given the urgency of the situation, Europe is reconsidering its governance framework and recognises that its decision-making process[es] are not sufficiently agile.

Recently, Germany and France proposed to create a new cooperation format bringing together the European Union’s six largest economies. This is intended to overcome the slow pace of decision-making within the EU and allow the core group of countries to make faster progress on economic and strategic priorities.

At the same time, Europe has taken concrete measures in defence. For instance, we are seeing EU member states accelerating spending to meet NATO targets of three and a half [per cent] of GDP for core defence expenditure by 2035. The NATO summit held in Turkey last June just confirmed this trajectory.

Europe protected its steel industry through a protectionist steel action plan, reflected in a 50% increase in tariffs and a 47% reduction in import quotas.

And in the crucial space sector, the European Space agency has approved €22 billion for [20]26 to 20. This is an increase of nearly 30%. The objective is to strengthen Europe’s strategic autonomy in space technology and mission[s].

This non-exhaustive list of proposals and decisions clearly show that Europe is advancing its thinking and governance and taking concrete action. However, Europe has still many challenges to overcome as interest[s] and priority[ies] differ from one country to the other, which is only natural when 27 countries are involved. These disagreements will create volatility around strategic autonomy themes.

But we believe it is important to take a step back and focus on the medium and long-term trajectory, which appear[s] to be moving in the right direction.

DM: Lazare, if I can summarise some of the key points that you shared with us? You explained that simply, European strategic autonomy is a group of policies/initiatives that enable Europe to act more independently on the international stage, with a focus on many sectors – industrial policy, defence, AI, to cite just a few. You highlighted that we’re talking about €1.8 trillion planned to be invested in the years ahead.

The significance of this for investors is simply that a lot of that money will flow to companies and ultimately should drive corporate profits. You acknowledge that it’s not as smooth or quick as we might like, but the important thing to keep in mind is that Europe is moving in the right direction. It does recognise the problems it’s facing and is working to tackle those problems. Well, Lazare, thank you very much for joining me.

LH: Thank you, Daniel. It was a pleasure to have the discussion with you.

DM: That’s it for this week’s episode of Talking Heads. If you would like more information about our capabilities around European strategic autonomy, please reach out to your asset management contact or check out Viewpoint, our website for investment insights at viewpoint.bnpparibas-am.com.

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You’ve been listening to the BNP Paribas Asset Management Talking Heads podcast with me, Daniel Morris, and Lazare Hounhouayenou.

Please do join me next week. Until then, take care.