Briefing Could Europe fight back?

A dangerous divorcée

If it comes to a stand-off, Europe has lots of leverage over America

“THE ACTION that is needed has to be bold and determined,” declared Ursula von der Leyen, the president of the European Commission, this week. She was talking about how the European Union should respond to Donald Trump’s habit of tearing up supposedly “ironclad commitments”, thereby threatening “European values”. “Extraordinary times,” she averred, “call for extraordinary measures.”

So far, the EU’s response to Mr Trump has been fairly ordinary. After America imposed a 25% tariff on steel and aluminium on March 12th, it said it would charge punitive levies on €8bn ($9bn) of American imports from April 1st and on a further €18bn of imports from mid-April. Despite Mrs von der Leyen’s fighting talk, Europe does not want its row with America to escalate and hopes Mr Trump’s worst instincts can be moderated. But were the EU’s disputes with America to intensify, it does have a surprising number of ways to exert pressure on its wayward ally.

The EU’s most obvious geopolitical asset is the size of its market. Together with Britain, Norway and Switzerland, the continent’s GDP reaches $24.5trn, almost as big as America’s $29trn. American firms, from brewers to banks, would like to continue doing business in that market. That is the premise of Europe’s retaliatory tariffs, which will fall initially on easily substitutable luxury goods, such as Harley-Davidson motorcycles and whisky.

The hitch is that tariffs or other restrictions on imports from America hurt European consumers as well as American exporters. A case in point is Europe’s biggest import from America, energy. Last year it gobbled up 35% of America’s exports of crude and refined oil. More than half of America’s LNG went to Europe, too. Demand from the bloc, which may well keep rising long into the 2030s, underwrites many of the multibillion-dollar gas-export projects under development in America. Were Europe to curtail LNG purchases from America, many American energy firms would be in trouble. But it is hard for Europe to do this without crippling its already limping economy or again becoming dependent on Russia, an alarming predicament from which it has only just escaped.

Tech bruise

A more plausible, albeit for the moment entirely hypothetical, target is America’s tech giants. Europe can probably do without Instagram, a social network owned by Meta, for instance, but Meta would be hit hard by the loss of European revenue. Europe has lots of ways to make life difficult for such firms short of banning them from European markets, including taxation and competition policy. This allows it to calibrate the torment, gradually tightening the screws if need be.

The fact that these digital giants pay little tax in Europe has been a sticking-point in the transatlantic relationship for years. In part, low tax revenues are Europe’s own fault, since it has allowed Ireland and others to operate as tax havens within the EU. European countries’ answer has been taxes on online advertising and other digital services, which allow governments to get their hands on some of the web titans’ revenues. The effort to reach a global deal on such taxes is in abeyance, since Mr Trump does not support it. So individual European countries could raise their tax rates or the EU as a whole could dust off a proposed levy that it had shelved. An EU-wide tax would require unanimity among member states, which is usually a tall order but which might materialise if the diplomatic weather became stormy enough.

The European Commission also has enormous regulatory power over American tech firms. It can curb anticompetitive behaviour, order the removal of harmful content and stringently enforce privacy laws. Fines for firms that violate these rules can run into the billions of euros. Although European authorities will be keen to show that they still adhere to the rule of law and therefore do not initiate politically motivated prosecutions, a more exacting stance by regulators across the board could still have the desired effect.

American financial firms are also at the mercy of European institutions. In fact, some of the tools at the EU’s disposal are so potent they could probably never be used. For example, the central nervous system of global payments is SWIFT, a cooperative based in Belgium which transmits some 8bn electronic messages among 11,000 financial institutions every year. European regulators have great sway over SWIFT’s operations. But interfering with American banks’ access to the system would be financial Armageddon, hobbling global transfers in a manner as calamitous to European banks as to American ones.

Competition rules provide a less cataclysmic way of needling American financial firms. Regulators in the EU and Britain are already investigating the dominant position of Mastercard and Visa, two American firms, in Europe’s payments market. Prudential regulation is another lever. Foreign banks and asset-managers might be required to provide more capital to fund their European operations. There could be tighter local storage requirements for sensitive data and so on, notes a forthcoming report from the European Council on Foreign Relations, a think-tank.

Although America could retaliate in similar vein, it stands to lose more from a fight over services. Overall it exports about €100bn more in services to the EU than vice versa. That is the inverse of the trade in goods, in which Europe posted a surplus of almost €200bn last year. (Britain is different: it runs a surplus in services with America but a deficit in goods.)

Moreover, Europe’s market heft is not its only source of economic leverage. It could also curb America’s access to goods or services that it dominates. A recent report by CEPII, a French think-tank, identifies many categories of goods that are produced mainly in Europe and that America imports lots of, chiefly in pharmaceuticals and chemicals. The EU will not bring America to its knees by restricting sales of Wegovy, a weight-loss drug made by Novo Nordisk, a Danish firm. But there is at least one critical input to a strategic industry over which the EU has a near-total lock: the machines used to make the most sophisticated computer chips.

ASML, based in the Netherlands, is the only firm in the world to make devices that can produce chips of seven nanometres or less—the sort used for cutting-edge artificial intelligence (see Science & technology section). Even for machines to make slightly chunkier chips, of 14 nanometres, ASML has a 90% market share.

Restricting ASML’s exports would not be unprecedented. In 2023 the Netherlands barred it from selling its most sophisticated kit to China. But America’s relations with Europe would have to become extremely frosty for it to receive the same treatment as China. What is more, much as with SWIFT, disrupting the semiconductor supply chain could have horrific and unpredictable consequences that might hurt Europe just as much as anywhere else.

An alternative choke-point might be Europe’s domination of another industry: the global commodities trade. Europe is not nearly as big an exporter of most raw materials as America, but it is an indispensable middleman. Its scant natural resources, central location and long history of relatively open trade have helped to foster all the activities that are crucial to the movement of goods, such as shipping and insurance. A grave rift with Europe could make it much harder for America to sell its resources anywhere, not just in Europe.

Europe is the home of the world’s biggest commodity traders. Switzerland alone counts around 900 such firms, including giants such as Glencore, Gunvor, Mercuria and Vitol. Its share in global trading is estimated at 35% for oil, 60% for metals, 50% for cereals and 40% for sugar. Britain and the Netherlands are also big trading hubs, reinforcing Europe’s dominance.

Over the decades Europe’s trading houses have established a vast web of suppliers, storage facilities, transport infrastructure and banking relationships that allow them to link producers to consumers in every part of the globe. Connecting remote mines and farms to distant cities and factories in this way is a complicated task that is not easily replicated.

Bulk bulk

The largest container-shipping firms—Maersk, MSC and CMA CGM—are European. Oldendorff, the world’s biggest bulk-shipping company, is German. Greek companies own more than 30% of all oil tankers and more than a fifth of the world’s LNG fleet by capacity. Although many Asian countries also have big shipping industries, Europe enormously exceeds America’s market share (see chart).

Europe’s financial firms, meanwhile, lubricate the commodity trade in a way that America’s do not. London, with its network of brokers, underwriters and reinsurers provides more than 40% of the world’s marine and offshore-energy insurance. The 12 protection and indemnity “clubs” that form Britain’s International Group insure the overwhelming majority of the global oil-tanker fleet. European banks loom large in commodity-trade finance—a market from which American ones are mostly absent. On March 10th Trafigura, a commodity trader based in Singapore, said it had raised $5.6bn to fund its operations. European lenders made up five out of the seven banks that arranged the deal. ING, a Dutch one, led the group.

Europe has recently tried to put this clout to use to punish Russia for its war on Ukraine. It has banned European commodity traders from dealing in Russian oil, European banks from financing trade in it, European ships from carrying it and European insurers from underwriting it unless the oil is sold for less than $60 a barrel. Although Russia has found ways around this price cap, the mechanism has raised costs for Russian firms and thus succeeded in sapping Russia’s oil revenues.

Whether Europe would ever want to use such tactics against America is another matter. It is possible to imagine a system of surcharges or levies of a less Draconian nature than the Russian sanctions which would make it more expensive for American firms to trade internationally. But it would be such a sweeping and hostile step that it seems conceivable only in the midst of an across-the-board breakdown in relations. Even in response to a no-holds-

► barred Mr Trump, Europe would surely not treat America as it does Russia, no matter how vicious any trade war might become.

The most lopsided facet of the transatlantic relationship is defence. Europe relies heavily on America’s military support. It has far more to lose from any breakdown of this arrangement than America, which is, as Mr Trump pointed out recently, protected by “a big, beautiful ocean”. But that protection is not absolute. And the fact that Europe has more to lose does not mean that it has no leverage at all.

Start with that big beautiful ocean. America cannot protect it without European help. Russian submarines entering the North Atlantic from their Arctic bases must pass through a series of choke-points known as the Greenland-Iceland-United Kingdom (GIUK) gap. For decades America and its allies have jointly monitored this zone with a string of underwater acoustic sensors connected to onshore facilities, as well as radar-towing frigates and maritime-patrol aircraft flying out of Britain, Iceland and Norway. Much of the data gathered by these missions is thought to be processed at NATO’s maritime headquarters in the suburbs of London.

If these arrangements were to fall apart, it would be far harder for America to track Russian submarines. It would have much less chance of detecting them on their way to America’s east coast. That would allow Russia to put many more missiles within range of American targets. Even if Mr Trump got his wish and America were somehow to annex Greenland, which is currently a self-governing dependency of Denmark, American forces would not be able to plug the geographic gap fully. And if American naval vessels were to be sent to the Pacific to cope with a crisis or war there, America’s dependence on collaboration with Europe could grow deeper still.

The GIUK gap is an illustration of a wider phenomenon: American military power depends on access to European territory. At Pituffik Space Base on Greenland, for instance, America’s Space Force maintains a radar station to track Russian missiles which would approach North America over the North Pole. Without access to that radar, America would have less warning and a poorer understanding of missile threats. On NATO’s southern flank, in the Mediterranean, the US Air Force has been pondering whether to expand an air base on Cyprus. It has been vital for American operations in the Middle East, such as its recent delivery of aid to Gaza.

Who’s helping whom?

Perhaps America’s most important foothold in Europe is in Germany, which hosts more than 50,000 American troops. The Pentagon’s European and African commands, which oversee every soldier, tank, warplane and naval vessel in their domains, are located in Stuttgart. The US Army’s European headquarters are in Wiesbaden, and Germany hosts five of its seven European garrisons, including Grafenwöhr, its largest base outside America. Ramstein, a large airbase, was for many years a hub for directing drone strikes in Afghanistan, Pakistan, Somalia and Yemen. The Landstuhl military hospital treated 95,000 American soldiers wounded in Iraq and Afghanistan. At least 40% of American activity in Germany is thought to support operations in other parts of the world. The American special forces team that killed Osama bin Laden in 2011, for instance, flew to Pakistan via Ramstein.

Europe’s leverage comes not only from access to its territory. European firms are integrated into American defence supply chains. About a quarter of the F-35 jet’s components are made in Europe. Britain provides niche capabilities in America’s nuclear programme. Then there is intelligence. Britain is a member of the Five Eyes spy pact, in which America, Australia, Britain, Canada and New Zealand collect and then share signals intelligence, such as intercepted communications. America generates around 75-80% of the intelligence; it is clearly the first among equals. But the 20-25% produced by allies is still valuable, allowing American spies to be more efficient, to run operations around the clock and to snoop from places that would otherwise be inaccessible, such as British bases in Cyprus. British findings often feature in the President’s Daily Brief, an intelligence summary produced by America’s spies.

American spies also work closely with continental Europeans. In the early 2010s, for instance, America’s National Security Agency collaborated with Denmark to spy on prominent European politicians by tapping the fibre-optic internet cables that pass through Danish territory. In 2015 it was the Dutch intelligence service that alerted America to the fact that Russian hackers had penetrated the Democratic National Committee with the aim of interfering in the presidential election of 2016.

To be sure, much of this collaboration would survive even a serious transatlantic breach. Intelligence services work with everyone, even adversaries, in areas such as counter-terrorism. European spies would resist political demands to cut ties; indeed covert contacts and co-operation could become all the more important in a period where overt diplomacy had become toxic.

Europe could, however, make use of its leverage over America without a full breakdown in transatlantic ties. It has done so before. In 1973 Britain refused to allow America to fly U2 spy planes from bases in Britain and Cyprus during the Yom Kippur war. In 1986 France, Spain and Italy all barred America from flying over their territory or using their air bases during a bombing raid on Libya. That forced American jets to take a longer and more convoluted route. And in 2003 Turkey prevented America from using its territory to launch an invasion of Iraq, preventing America from attacking Baghdad from the north.

These sorts of irritants are routine in any alliance. But in a world where allies themselves choose to mirror Mr Trump’s transactionalism, such acts of veto might introduce considerable friction into the cogs of American power. As with its economic might, Europe is likely to shrink from exerting its military leverage to the full. Almost all the steps it could take would be self-harming, even if they inflicted even greater damage on America. For that reason among others, getting European leaders, a fissiparous bunch at the best of times, to agree on a concerted response to American bullying would be a feat. But if they resolved to fight back, they have plenty of ways to do so.