8 min read — Geopolitics | Economy | Environment | Global Europe | Security

The European Transformation: A Test of Political Will and Economic Imagination

As debt soars, alliances fracture, and climate pressures mount, the world faces a fundamental reckoning over how prosperity is built and who gets left behind.
Image Credit: Euro Prospects

Edited/Reviewed by: Nikki van Arenthals

September 7, 2025 | 15:40

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In the last forty years, total debt ballooned to 350 per cent of global gross domestic product. Our global monetary system is entirely reliant on growth that can generate the returns and justify the borrowing necessary to sustain these obligations.

In a fractured global economy, the end of an era of low-interest “free money,” and while the once widely embraced  belief in the idea that free trade guaranteed peace  retreats, growth will not take the same forms as it did past decades . As we move away from a multilateral system towards a patchwork of regional blocs, there is enhanced scrutiny upon the security implications of economic relationships. Competitive advantage necessitates leverage, emphasizing access to key resources, supply corridors, or technologies.

Europe is looking towards a new competitive ‘self-reliant’ model of growth driven  by strong security and technology capabilities. The “Joint White Paper for European Defence Readiness 2030” white paper, published by the EU in March this year, clearly states: “The international order is undergoing changes of a magnitude not seen since 1945.” This is an economic transformation, not adaptation.

The Politics of Debt

One need not look beyond the European Systemic Risk Board’s (ESRB) macrofinancial risk report for a stark warning about today’s mounting vulnerabilities. Whether geopolitical tensions, economic coercion, supply chain disruptions, increasing risk costs of climate change — almost every issue in some way is, or will, impact the trust investors, companies and governments hold believing central banks can pay back their debt. 

This is particularly relevant considering the borrowing arrangements central to funding EU defense spending. The Commission’s central proposition is to raise 150 billion in capital markets and loan it to member states who agree to joint procurement efforts. The Commission estimates it could mobilize  650 billion if all member states fully used their expanded  borrowing limits.

Spain’s Pedro Sanchez has heavily resisted meeting the 5% NATO spending obligation. France and Italy have been similarly cautious about taking on more debt. Europe’s security roadmap, and strategic autonomy agenda now depend heavily on flexible financing . 

America’s volatile situation further poses risks which could carry global consequences. America’s Generation Z will have to manage the roughly $4 trillion dollars of national debt added under  Trump’s Big Beautiful Bill. Investors are losing trust in the United States’ “safe haven” status amid rising geopolitical tensions. Global investors are pulling billions out of US equities and moving into European and emerging-market assets.

A debt-straddled and democratically devolving America is experiencing immense and irreversible capital flight. America’s interest repayments are around the same as they spend on their entire healthcare sector. Put plainly, America is in an unsustainable position, and seems to be betting on dismantling the global economy before imposing budgetary constraints.

The Self-Reliance Dilemma

Unsurprisingly, global trade has slowed in 2025. Countries’ risk appetites are shifting amid tariff restrictions and policy uncertainty. The EU has historically neglected manufacturing and production. In the wake of the Covid-19 pandemic (highlighting risks of long supply chains) and decoupling from Russia’s industrial economy, the EU is attempting to strategically reshore and reduce vulnerabilities  where necessary.

As part of its rearmament efforts , Europe is producing more and more of its own ammunition, arms and parts. Yet, this defense push is still import-reliant. The euro area remains deeply embedded in global supply chains, significantly more than the United States and China.

European self-reliance is not a matter of reshoring manufacturing or production at any cost, but about recalibrating trade networks to reduce vulnerabilities, and forging durable partnerships capable of withstanding global risks . Being even more difficult to absorb costs of such a regional transformation in a low-growth environment, Europe can’t forgo the world to save itself. It must  find a new position and strategy within it.

Redefining Europe’s Role

This problem of Europe’s overstretched global position gestures to possibility. The EU can, albeit at great costs, detach from major rivals like China and the US. It can then compensate with diversifying through partnerships elsewhere while advancing its development agenda

China has reduced foreign direct investment in Africa over the past six years, largely due to slower growth and mounting debt. In 2021 the EU launched its Global Gateway initiative, an alternative to China’s Belt and Road Initiative that prioritized sustainable development goals while mobilizing private sector investment. At a time when China is facing structural constraints, and the US has left a soft power vacuum, developing economies are now receiving less foreign direct investment than ever. At. the same time, the US has gutted its international aid program. Europe has followed suit, cutting official development assistance as well. These cuts are leaving wounds. Underserved and rural communities will be dispraportionately effected, and key public services like education and healthcare will be negatively impacted.

Economic resilience means more than self-sufficiency; it requires forging new connections and unprecedented partnerships with developing and growing economies. The EU has an opportunity to distinguish itself from the U.S. and China by avoiding transactional or strategically opaque economic arrangements, instead fostering non-zero-sum partnerships anchored in transparency and mutual trust, untethered to vague promises or fickle assurances. Diverse and agile alliances with developing economies are essential for the EU to disentangle and reduce its vulnerabilities  in the global economy.

False Promises of Prosperity

The main critique of partnerships between Global North and South countries is the functional establishment of two-tier systems where value is siphoned from weaker economies through unequal exchanges and price differentials.

No matter one’s economic worldview, it remains that there was a world promised to the global working majority of the planet that never came to be. These were promises of development enabled through the supposed self-corrective and innovative nature of the market, backed by the US dollar, delivered through international institutions. Despite representing 21% of the world population, countries in the Global North own 69% of global wealth.

An experimental solution could manifest in debt forgiveness. It must be remembered that given current risks, developing economies are prone to be disproportionately affected by debt obligations. Increasing a debt ceiling is a privilege not available to many nations. Interest repayments are becoming a bigger part of GDP in developing countries, seriously risking concerns of debt distress.

Debt Forgiveness as Strategy 

Austerity and privatization, pillars of the IMF’s financial consolidation strategy, cut debt at a great social cost, stifling development in favor of a stability appealing to investors and creditors instead of citizens. Preventing debt distress and pursuing debt forgiveness (particularly by holding private creditors accountable) would be both ethical and strategic, and could deliver mutual benefits with lasting political dividends.

Low-middle income countries are disillusioned  by the perceived hypocrisy of the West calling China’s foreign investment a debt trap while private Western creditors sit entitled to three times the amount of debt. Notably, many of these firms are also based in the United Kingdom and United States. Nevertheless. The EU’s best path forward in building partnerships with emerging economies. This will require bold economic measures grounded in goodwill, aimed at easing hardship and delivering real development gains.

America’s retreat from the world stage and China’s rising influence signal a deepening power split and growing divisions over international law and human rights. Europe now has an opportunity now to bring a critical perspective and fresh ideas to its diplomatic approach — a reflexivity that allows self-critique and adaptability, that is experimental where need be, open to radical solutions, and grounded in collectively pursuing the same principles this union itself abides by — human dignity.

An Age of Anxiety

Automation, specifically with AI, is exacerbating anxieties of job insecurity throughout the labor market, encroaching upon skilled or trained labor segments once thought un-automatable. The EU has been a long-time leader in social mobility, but even this is jeopardized as growth slows, automation ramps up, and university budgets are cut. Home ownership is no longer a normal milestone – young people are living at home longer and renting more than ever.

A growing number  of people face uncertain job and housing prospects. Groups facing systematic economic challenges have become targets of widescale political marketing that scapegoat vulnerable communities. The rise of the right is a reminder that economic grievances become political wounds if not treated. When one is anxious, they are also prone to tunnel vision: a condition conducive to channeling rage and teasing false nostalgia, not imagining solutions.

This is well underway in the US, where we have seen America shred itself of global respect and standing. At this point, there is no daft optimism, no single economic orthodoxy guiding the world economy. We are grasping anew, and deeply uncertain. If a new international economic mode were to emerge, it could not tolerate severe wealth inequality or blind faith in economic equilibrium.

The Climate Reckoning

The IMF warns that damage wrought by climate change upon developing countries will plunge many into poverty, completely reversing gains of previous decades and drastically worsening inequality. We no longer have the luxury of complacency, nor can we promise a better future without action. In a perilous world, successful diplomacy is less about craft and cunning, and more a test of sincerity and willingness to act. Nobody wins if we all lose.

We are also approaching a tipping point where talk  of conscious consumption and environmental activism are actually confronted by the real consequences of climate change: heat waves, flooding, and wildfires are now undeniable realities in Europe and the United States.

If we truly could not grasp an issue without seeing it directly in front of us, the evidence is now there. This is all to show that rearmament, debt obligations and slow growth all impact our capacity to pursue radical climate goals. It is at this moment that our definitions of ‘growth’ and envisionments of our future must contend with the limits of our planet and faults innate to economies obsessed with efficiency at all costs.

A Blueprint for Reinvention

We need not just another world, but a different way to build it. The current situation laid out here demands some degree of compromise between ideals, international development and security. Debt distress turned defaults at a critical moment of borrowing could, trigger an international crisis at best, and financial contagion at worst.

The question of debt is a question of how we spend — and managing the demand for security and militarization with the imperatives of green investment are growingly increasingly, not just difficult, but irreconcilable. A rising far-right is taking advantage in the midst of this to divert blame and find haven in nationalist fantasy .

The question is if we can configure an EU ready to do both what it deems necessary and what it professes it believes in. Would the EU be ready to offer radical solutions for new economic architecture invested in resilience, capacity-building, human potential and dignity?

To be accomplished effectively, this will require new approaches to building partnerships. Amidst all the issues outlined in this piece, one could argue the most insidious of all will be our own orthodoxies. Blind spots aren’t dangerous on their own—but refusing to confront them certainly is.

Disclaimer: While Euro Prospects encourages open and free discourse, the opinions expressed in this article are those of the author(s) and do not necessarily reflect the official policy or views of Euro Prospects or its editorial board.

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