The making or end of NATO?

European nations are now ramping up spending, but will it be too little, too late to save NATO?

Today – February 24th 2025 marks the third anniversary of the war in Ukraine. 

European leaders were furious at being excluded from last week’s peace talks between America and Russia but have now been stunned by Trump’s latest outburst branding President Zelensky a ’dictator!’. Trump seems to have forgotten it was Putin who won an uncontested Russian election, following the death of his main political opponent in prison, and was the one who invaded Ukraine.

More alarmingly, it has brought into question Trump’s commitment to NATO.

In the event of a peace deal, Ukraine and European NATO members could not hope to stand up to Russia, without US security guarantees. Putin wants all of Ukraine – do not forget he invaded from the north as well as the east and will not be satisfied with just 20% – the Crimea and the Donbas. Without a US security guarantee, the risk is he re-arms and attacks Ukraine again.

So, besides wanting to win the Nobel Peace Prize, what does Trump want?

The answer appears to be something in return for America being the biggest supplier of military aid to Ukraine – its valuable rare earth minerals, over which China currently has a global monopoly. Media reports suggest Zelensky has turned down Trump’s demand for 50% of Ukraine’s rare earth minerals, which might help explain the rapid deterioration in relations. Trump also carries a historic grudge against Zelensky concerning Joe Biden’s son Hunter, and his Ukrainian interests.

Trump also wants European NATO members to increase defence spending, as well as buying more American weaponry. He does have a point.

Over the last 50 years, defence expenditure has been shrinking across the EU. Whilst higher than many of its European counterparts, UK defence spending is just 2.3% of GDP, and while Sir Keir wants to increase this to 2.5%, the UK’s public finances are stretched mighty thin. The advent of the war in Ukraine has changed the mood and peace dynamic. European nations are now ramping up military expenditure, but with likely long production and political lead times, will it be too little, too late?

Given the onset of Spring, the EU needs to provide more funding fast within weeks, not months, to enable Ukraine to buy more US ammunition and weapons. A relaxation of EU and German fiscal rules to exempt additional military spending from deficit limits will be required, but Germany’s election over the weekend creates uncertainty.       

It may be very early days regarding a peace deal for Ukraine, but the ball is rolling, albeit Trump has conceded a lot upfront. Russia has not made any concessions, and Trump’s rhetoric may embolden it to push for more.

From a humanitarian, market, and economic view, a peace deal would be very welcome news.

Russia would presumably be allowed to sell oil and gas again legally, forcing down energy prices, which is something Trump also wants, and would feed into lower inflation and interest rates. The reconstruction of Ukraine’s infrastructure would also boost Europe’s construction sector. Meanwhile, heightened tensions and a threat of a fresh attack would boost military spending, which would also be supportive of European defence companies. However, European governments would need to borrow more to fund higher defence spending, albeit borrowing costs should fall if inflation cools.

Is Ukraine joining NATO the making or breaking of a peace deal?

More alarmingly, if Trump does not back European NATO members, what message will this send to Kim Jong-Un regarding South Korea and Xi Jinping and Taiwan?

Sir Keir Starmer is due to meet President Trump in the White House on Thursday. Seeking to remain everyone’s friend, will he get caught in the crossfire between Washington, Kyiv, and Moscow?

What have we been watching?

Trump’s tariff threats were overshadowed last week by Trump’s Ukraine peace plan. Markets have long awaited a potential ceasefire and peace deal in Ukraine, but in previous Alpha Bites we had warned of a risk that Trump might throw both Ukraine and NATO ‘under the bus.’ Even so, Trump’s latest outburst was quite extraordinary!

Trump is still making tariff threats with talk of potential 25% tariffs on cars, pharmaceuticals, and semiconductors. Trump has also increased economic and trade action against China, introducing a series of policies that restrict Chinese investment in key US strategic industries such as technology and critical infrastructure. While Europe will need to increase defence spending, in America, Trump and new Defence Secretary, Peter Hesgeth, want to cut US defence spending by 8% or $50bn to focus on border control and China. Overall, the constant flow of Executive Orders and posts on Truth Social cannot be helpful for US business or consumer confidence.

Israeli PM Benjamin Netanyahu said he is ‘committed’ to the US proposal to take over Gaza and displace its Palestinian residents. The Gaza ceasefire is once again in doubt as the first phase nears its end. The threat of military action, this time in the West Bank, has increased after forensic autopsies showed that two young hostages had been killed while in Hamas captivity.

 

UK headline inflation came in ahead of expectations with January CPI at 3%, up from 2.5% the previous month. Higher food prices were one of the main drivers. Core inflation increased to 3.7% while services inflation was up to 5%. The Bank of England (BoE) expects inflation to tick up to 3.7% in the summer given energy prices are set to rise by 5% in April. However, the latest CPI figure is already above its estimate, and some economists are forecasting inflation might hit 4% by September. The chances of further BoE interest rate cuts have been pushed out to the second half of 2025, with two or possibly three 0.25% cuts anticipated. The 10-year Gilt yield is just under 4.6% while Sterling moved above $1.26. It also goes from ‘bad to worse’ for Chancellor Rachel Reeves, with the fiscal surplus for January falling £5bn short of expectations due to weaker self-assessment tax receipts. This leaves the Chancellor in the unenviable position of needing to raise taxes or cut public spending to meet her fiscal rules at the OBR’s 26th March forecast. Meanwhile, the ‘flash’ PMI business activity indicator for February was flat at 50.5 with weak manufacturing at 46.4 countered by better service sector activity at 51.1.  

 

Germany’s election saw the far-right AfD take almost 21% of the vote, while the Conservative CDU failed to hit it’s hoped-for 30% target. As no party will work with the AfD, the CDU leader Friedrich Merz could find it difficult to form a two-thirds coalition majority to make constitutional changes. With no clear majority, coalition negotiations could take some time, meaning Germany will not be able to take decisive action. Not good news for the German economy, the EU or Ukraine! Meanwhile, the ‘flash’ PMI business activity indictor for February for the Eurozone recorded marginal growth with weak manufacturing at 47.3 cushioned by the service sector at 50.7.

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Brent oil remained around $74 as the ceasefire in Gaza continued to hold and talks between the US and Russia over Ukraine commenced. There were reports that OPEC+ may postpone the gradual unwinding of its 2.2million barrels per day production cut, set to begin in April.

Finally, Elon Musk has set his sights on Fort Knox and its fortified vault of gold. He has questioned why America’s supply of gold is not audited every year! One hedge fund manager on X said, ‘It would be great if Elon Musk could look inside Fort Knox and make sure there are 4,580 tons of American gold there. Last time anyone looked was 50 years ago in 1974.’ That no doubt followed Goldfinger’s attempt to render it radioactive by detonating an atomic bomb inside Fort Knox, which was thwarted by James Bond! Well done 007 -perhaps when they meet this week, Sir Keir should remind Trump he owes Britain a favour?

Last of all, one final plea! Alpha Bites has been nominated once again, for the COLWMA Best Market Newsletter. For those of you who have already voted – many thanks. For those of you who haven’t had a chance yet, we’d appreciate your support as voting closes this Friday. If you enjoy reading Alpha Bites, please click here or tap on the link contained in the image below:

 

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