Europe in the Geoeconomic Era: Building Resilience in Energy and Defence

The importance of guaranteeing the resilience of supply chains has not escaped anyone’s notice in Europe. On the contrary, after the disruption caused by the pandemic, politicians, analysts and researchers have spent hours discussing the importance of de-risking supply chains, especially around so-called Critical Raw Materials (CRMs). But in focusing on the trees, we risk missing the forest. The true geoeconomic value of CRMs lies in the industries that need them to function: Technologies for the energy transition and the defence industry. This article therefore looks at the vulnerabilities in the European supply chain, particularly in these two areas, and how Europe can work to build a resilient chain that starts with the extraction of raw materials and concludes with high-technology manufactured products.

Tomorrow's technologies: Europe, China and the energy transition

It is clear that the world is entering a new era of competition between the great powers. In this context, three elements will determine whether a power has sufficient capacity to protect itself and exert political influence: a dynamic economy, leadership in cutting-edge technologies and sufficient military power to protect itself and act internationally when necessary. At the moment, the European Union is lacking in all three areas.

In this regard, Europe has long lagged behind China and the United States, failing to create a competitive environment for business innovation and advanced research. As we move into an era dominated by artificial intelligence, quantum computing, electrification and digital technologies, the EU is not a leader in any of these areas. On the contrary, it is heavily dependent on China and the United States for new technologies, making the European economy vulnerable to actions by other powers that could potentially disrupt its supply chain.

Europe’s vulnerability is clearly exemplified by the supply chain that goes from Critical Raw Materials (CRMs) to final products. Take the energy transition: building a clean and reliable energy supply is one of the European Union's key strategic goals. This would ensure independence from fossil fuel producers such as Russia and lower energy prices on the continent, as renewable energy is cheaper than fossil fuels. However, to make this transition, Europe needs products such as solar panels, electric vehicles and lithium-ion batteries, whose supply chain, from the extraction of raw materials to the manufacture of these technologies, is completely dominated by China.

Currently, China owns 75% of the global production of electric vehicle batteries, 70% of electric vehicles and more than 80% of photovoltaic. China also dominates the processing of the raw materials needed to produce these new technologies. According to the International Energy Agency, China has an average market share of 70% for 19 out of 20 strategic energy minerals analysed. A control that extends directly to mining activities, where the Chinese government supports national companies with subsidies and loans to invest in resource-rich countries such as the Democratic Republic of Congo or Indonesia. In this way, China establishes control over all sectors of the supply chain and integrates them in such a way as to strengthen the competitiveness of its own businesses, which can offer lower prices than any other company in the world.

This situation affects Europe's ability to build its own autonomous supply chain for advanced technologies. Firstly, it limits the opportunities for European companies to enter these sectors, where they cannot possibly compete with the heavily subsidised Chinese companies. Secondly, it slows the accumulation of knowledge in advanced manufacturing technologies as private investment in research and development is concentrated in the Chinese industry. Finally, the threat of a geopolitical standoff between China and Europe threatens to restrict the supply of CRMs vital to new technologies, which has the potential to disrupt the supply chain of these industries, as well as other sectors such as defence.

Defence and raw materials

With the end of the Cold War, a period of peace began in Europe, which was used by governments to reduce investment in the military sector and focus on other areas deemed more important. This period ended in 2022 with the Russian invasion of Ukraine. Suddenly, all European decision-makers realised that a conventional war on the continent was possible again. And now that Donald Trump has once again assumed the presidency of the United States, US support is no longer guaranteed. If war breaks out, Europe will have to rely on its own military power.

An autonomous European Defence Industrial Base (EDTIB) must therefore be created in order to build up a resilient supply of war equipment for the European armies. This is no easy task, as the fragmentation of the EU market with different procurement processes and priorities among Member States prevents the interoperability of equipment from different sources and the creation of economies of scale in an already underinvested sector.

This is understood by many European leaders who are beginning to promise significant increases in defence spending, including an €800 billion plan under the EU's "ReArm Europe/Readiness 2030” initiative and an “unlimited” monetary compromise by the new German government to increase its defence budget. If implemented, this could be the initial spark for an independent European defence industry. However, the sector faces significant weaknesses in its supply chain that could derail the whole project.

The most important of these vulnerabilities is the supply of CRMs. According to NATO, there are 12 defence-critical raw materials that are of strategic importance to the security of the Alliance, as they are widely used in the manufacture of military equipment. These materials include rare earths, which are heavily used in all technological and sensor systems central to modern warfare, as well as aluminium, cobalt, titanium and tungsten. The processing of these materials is dominated by China, giving its government a geoeconomic weapon against Europe. In the event of a conflict, China could easily block the export of CRMs to the EU, disrupting its defence industry and thus its ability to defend itself against its rivals. Something China has already done against the United States by controlling the export of rare earths to that country in retaliation for Trump’s trade war.

All at the same time: Why Europe shouldn’t focus solely in CRMs

The importance of energy transition technologies and the industrial defence base for Europe's economic and military security and the vulnerabilities affecting the supply chain of both sectors are well known. Therefore, policy measures such as the Critical Raw Materials Act, which aims to maximise the location of the extraction, processing and recycling of CRMs in Europe, make sense. The possibility of supply chain disruption from competitors such as China or Russia (which account for 28,4% of European rare earth imports) makes building resilience a security priority.

However, the fact that these sectors are important for the security of the European Union does not automatically mean that there is a business case for companies to invest in CRMs. Extracting these materials is a very costly endeavour, taking up to 17 years to start production in the case of mining, and much more to recover the initial investment. Added to this is the volatility of CRMs market prices, which are affected by dumping and export controls from countries like China, as well as the risk associated with investing in resource-rich countries with poor governance. Similarly, processing facilities need a reliable supply of raw materials for refining and an existing industry that demands the processed materials.

This highlights the importance of considering CRMs as part of an overall supply chain, instead of targeting them in isolation. In other words: Focusing too much on mining and investing European capital in extraction operations outside the continent will result in these materials flowing to China for processing anyway. But focusing only on processing will result in buying these materials from mining operations that are largely owned by Chinese companies that have invested $22 billion in overseas mining activities in 2024 alone under the Belt and Road Initiative. Finally, creating an industrial complex to produce defence equipment and technologies for the energy transition without securing the supply of CRMs would lead to dependencies and inefficiencies that will make them vulnerable to external shocks and less competitive than highly integrated Chinese industries.

Therefore, the key for Europe is to encourage European capital to invest in sectors that increase resilience across the supply chain. There are many policy measures that the EU and Member States could take to do this, starting with utilising strategic partnerships with countries rich in critical raw materials to create investment frameworks with dispute resolution mechanisms and guarantees for European private companies. Combined with financial support in the form of tax credits, loans from multilateral financial institutions and risk insurances, this would reduce the risk of investing in mining outside Europe and give the continent control over its supply chain.

At the same time, Europe needs to invest more in the green transition and in military equipment at home. This would create the necessary demand for these products so that European companies can invest in expanding their production capacity, creating economies of scale and increasing their competitiveness. Not to mention the multiplier effect such an investment programme would bring by creating thousands of jobs, supporting new business development, modernising Europe's ageing physical and digital infrastructure and even reducing the continent's energy costs. All while creating demand in all areas of the supply chain from CRMs to end products.

Finally, a holistic European strategy to achieve resilience in the energy transition and defence supply chains should necessarily include a governance dimension. For many resource-rich countries, repeating the extractivist dynamics of the colonial past is simply not an option. Therefore, investment in resource extraction should go hand in hand with the creation of higher value-added industries to process the materials and support important investments in infrastructure, healthcare and other areas. This is not only morally right, but also the basis for a strong partnership of equals that provides stability to European capital and resilience to its industry supply chain.

Conclusion: The European geoeconomic challenge

The task facing the EU is not an easy one. In a multipolar world based on geopolitical and geoeconomic competition, Europe must strengthen its internal capacities to ensure its security and the continuity of its political system. This means that it must simultaneously develop its technological, economic and military capabilities in order to defend itself against the actions of other major powers such as China, Russia and now the United States. At the centre of this effort should be a clear and multi-layered policy that goes beyond CRMs to strengthen its most critical supply chains: new technologies and defence. Today, Europe has the technological and financial capacity to take up this challenge and secure its autonomy. However, it must start as soon as possible so as not to run the risk of losing momentum and falling victim to the geopolitical desires of other players.