How will Europe pay for its new weapons?

Katie Martin (0:13)

Pushkin. And Madrid.

The Unhedged podcast has been let loose on the world, and we're making the most of it. So, welcome to the second installment of our humble podcast recorded at the IE Business School in the Spanish capital, with an audience and everything. I'm Katie Martin, a markets columnist and an extremely bad Spanish speaker. I can just about order a cafe con leche or una cerveza, and that's about it. I'm joined by a double whammy. We have Rob Armstrong from the Unhedged newsletter in New York, and he's doing pretty well for a man who got the red eye over yesterday from the States.

Rob Armstrong (0:59)

Hola.

Katie Martin (1:00)

Hola. Que tal? But also we're joined by Barney Jopson. He was my colleague in London for a while.

Rob Armstrong (1:06)

And mine in New York.

Katie Martin (1:07)

Yeah. But now he's the FT's man in Madrid, which I'm going to say is quite a sweet gig.

Barney Jopson (1:12)

Yeah, it really is. It really is. Great to be here with you.

Katie Martin (1:16)

So listeners, if you get confused, Rob is the massive, brash American. Barney is the infinitely wiser sounding guy with an English accent. So that should keep you straight. What we're actually going to talk about today is this extraordinary display of European unity that's come not out of nowhere, but as a direct response to what's been happening on the geopolitical stage with Donald Trump, with the situation in Ukraine. European markets are having an absolutely scorching run in stark contrast to what's been going on in the US. This is like not how the world works at all.

This is not what we've witnessed pretty much ever in the past sort of 20 years that I've been looking at markets. So Barney, tell us, you've been over in Spain for, was it two and a half years now over here. How is Trump 2 viewed from over here?

Barney Jopson (2:15)

Well, let's talk about the defense side of things first. One reason for the changes that you mentioned there is that Europe is petrified that Trump is about to pull away the US defense shield that has protected this continent for so many decades. And that's led to the erasing of all kind of red lines. It's led to the sacrificing of sacred cows because Europe has realized that, holy cow, we need to do something different to defend ourselves. That's got a whole bunch of implications. One is that Germany said it's going to throw off the fiscal shackles and start spending whatever it takes to boost its own defense industry. You've got the European Commission talking about raising 150 billion to lend to member states so they can invest in their own defense. It's led to defense stocks soaring in Europe this year, precisely because they're the ones, they're the companies that are going to get the bonanza of an increase in defense spending. So that's just one side of it, but that's just changed everything in a space of a couple of months.

Katie Martin (3:11)

Yeah, no, absolutely. And I was looking at a really cool chart the other day from S&P, the rating agency. And it charts how close a country is in Europe to Moscow against its defense spending. And so if you're, so the Baltic States and Poland spend a huge amount of money on defense. So you're talking like somewhere between three and a half and four percent of GDP they spend on defense. Now, the further away you get from Moscow, the less and less and less you spend on defense. Spain and Portugal are not fulfilling their part of the bargain here.

Is there an acceptance in the Spanish corridors of power that something's got to change here and that you need a new defense strategy? Or is there a sort of idea that, look, we're miles away. Why do we need to worry about this?

Barney Jopson (4:02)

You're right that for a long time Spain and Portugal have been sort of trying to hide in the corner hoping they don't get noticed. But they now have been noticed by you and everyone else. I mean, just to put some figures on it, the NATO target is that members should be spending 2% of GDP on defense. Spain last year spent only 1.3%.

So it's a long way away. It's got a long way to go. And now NATO is talking about lifting that target from 2% to 3%. So it's even further away. The realization that something needs to be done in Spain has dawned. But for a host of political and historical reasons, you can't just click your fingers and change. So the Prime Minister here, Pedro Sanchez, is talking very gingerly about the fact that, yes, we need to act. Yes, we're good Europeans. Yes, we're going to support Ukraine. But that has not yet resulted in a meaningful pledge to increase defence spending. It has not yet changed his policy on how to support the defence industry because if he moves too fast, it will trigger a backlash from members of his own governing coalition and from some people on the streets in this country which is still largely anti-war and pretty pacifist.