Europe must wake up and face security and economic challenges

Marc El-Lazidi, Chief Investment Officer at Jesmond Mizzi Financial Advisers Limited, discusses why the future of Europe hinges on bold moves – not just in defence, but in structural reform, innovation and energy independence.

You’ve spoken about Europe’s real economy decoupling from its stock market. What’s driving this divergence – and how sustainable is it?

That’s the big question right now. We’re seeing rising debt levels across the eurozone. France, for instance, has passed the 100% debt-to-GDP mark. Normally, the eurozone guidelines call for 60-80%, so we’re already stretching it. Southern Europe – Italy, Spain, Portugal – used to be the ‘bad students’, but now they’re showing more promise than the core economies like Germany and France. Spain, in particular, is growing faster than the US in some quarters. The big issue is whether that growth is structural and sustainable. I think it is, especially in Spain’s case.

You highlight Spain and Portugal as bright spots in Europe. What are they doing right, and can others follow suit?

Absolutely. Spain is integrating immigration very effectively. A lot of new workers are coming from South America, so cultural assimilation is easier. That’s important when you consider Europe’s demographic crisis – particularly in Germany, where there are real questions about who will fund the pension system in 10 or 20 years. The south has also been investing in renewables and infrastructure for years now. Portugal, Greece, Italy – they’re putting in the work. Ironically, the countries that almost brought down the eurozone in 2011 are the ones carrying growth today.

With €800 billion earmarked for defence, is Europe finally waking up to its security responsibilities – or burdening itself further?

It’s both a wake-up call and a burden. The number is huge, but the shift is necessary. Poland has already responded robustly, ramping up its military. France is a major weapons exporter, and Germany is playing catch-up.

Defence spending can have economic benefits too – look at Russia’s 4% GDP growth, largely driven by its military- industrial complex. The question is whether Europe is psychologically ready to shift from soft power to a harder stance. That’s still open.

You’ve suggested Europe needs to stop relying on NATO and build its own strategic autonomy. What would that look like in practice?

We can’t count on the US anymore. Trump made that clear. The UK is trying to bridge the gap somewhat, but it’s no longer in the EU. Europe needs to strengthen its defence and security capabilities to face threats in a polarised world. Merkel built Germany into an economic power without focusing on the military. That era is over. If we want to protect the world’s largest free trade zone, we need to start acting like it.

Do you think Russia’s economic resilience under sanctions has changed the calculus for Europe – economically or militarily?

Definitely. Russia’s ability to weather sanctions is largely thanks to its natural resources. That’s a wake-up call. Germany gave up nuclear energy due to political pressure. France went the opposite way and is better off for it. Europe needs to get real about energy: nuclear and renewables combined have a role to play if we want a secure and stable energy supply in the long run. Spain has done an excellent job building its energy infrastructure over the past two decades. We need that kind of long-term thinking across the board.

Let’s talk banks – are European financial institutions finally finding their footing after years of stagnation?

The cyclicals, especially in the south, are doing very well. Spanish banks like Santander and BBVA are having fantastic runs. They’re also close to Latin American markets, which gives them an edge. Meanwhile, the ECB needs to act. We’re seeing other central banks cut rates, and Europe should follow. Germany is already showing signs of recession, but the south is still growing. That divergence tells you a lot.

Which sectors – or specific companies – best represent the kind of future Europe should be investing in?

ASML stands out as a leading European company in the semiconductor sector. Then you have Novo Nordisk, although we’re cautious with pharma right now due to political risks from the US. Luxury goods are another bright spot. Brands like Hermès and Louis Vuitton still command global demand. And of course, renewables and infrastructure remain key, especially as we avoid defence stocks due to ESG constraints.

If a recession hits tomorrow, what areas do you believe are best positioned to withstand the storm?

Utilities and consumer staples are the usual safe bets. We’re very cautious on duration right now – many fixed-income funds got that wrong in 2022. Tech is no longer cyclical; it’s foundational. European tech might even be oversold compared to the US. What’s important is to separate tactical from strategic thinking. Strategic patience and active management are key in this environment.

This interview does not intend to constitute an offer or agreement to buy or sell investments or give investment advice, and the contents therein should not be construed as such. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. The company is licensed to conduct investment services by the MFSA under the investment services act and is a member of the Malta Stock Exchange. The directors or related parties, including the company and their clients, are likely to have an interest in securities mentioned in this article. For more information, contact Jesmond Mizzi Financial Advisers Ltd of 67, Level 3, South Street, Valletta VLT 1105, Malta on tel: 2122 4410, or e-mail info@jesmondmizzi.com.