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Lenovo, Lenovo Empowering creators everywhere Hello and welcome to World Business Report from the BBC World Service.
I'm Roger Hearing and on this edition, European leaders meet after the bombshell change in US policy on Ukraine.
But are they willing or able to up their spending on defence enough to take back the initiative on peace talks?
Also, China's president holds a highly unusual meeting with the country's tech bosses.
What does this tell us about the direction of the country's economy?
And how US small businesses are dealing with the challenges of the Trump administration's planned tariffs.
But first, Europe's leaders are gathering in Paris, somewhat shell -shocked by the pace of Washington's moves to talk to Russia and negotiate an end to the Ukraine war.
US Vice President J .D.
Vance startled his audience last week at the Munich Security Summit with his rhetoric about the continent and its failures on defence.
And this week, Europe and Ukraine do not have a seat at the table as US -Russian talks get underway in Saudi Arabia.
So the EU and British leadership are getting together to chart their next move.
What seems inevitable is a ramping up of defence spending to fill what could be a US -sized hole in support for Ukraine and Europe's protective armour.
The Polish Prime Minister, Donald Tusk, on his way to the Paris summit, said he and his fellow leaders must show they are capable of much greater investment in their defence capabilities.
It has to happen now in a very massive way.
I'm talking about decisions, about financing, logistics, political decisions when it comes to the defensive capabilities of the European Union and the European countries.
and not in confrontation or competition with the United States, but we as Europe have to fulfil these obvious obligations.
Because our security depends on them, on fulfilling these obligations, we will not be able to effectively help Ukraine if we do not immediately take practical actions on self -defence capabilities.
Donald Tusk there. But can the continent's cash -strapped economies afford it?
Joining me is Guntram Wolf, Senior Fellow at the Bruegel Think Tank in Brussels.
Thanks so much for being with us, Guntram.
I suppose this is a situation in which the money is not really there.
You think of Germany's economy, you think of France's economy, think of the U .K.
economy. There's not much room for spending more on defense.
Well, I'm afraid I disagree with that analysis.
I mean, let's first of all look at the numbers.
The US has supported Ukraine since the start of the war in February 2022 in the order of magnitude of some 60 billion euros over these two, almost three years.
And, you know, that's the military support.
And Europe has actually done the same, has also supported Ukraine by around 60 billion.
So we are talking about 20 billion of military support for Ukraine, which is in percent of the EU GDP, just 0 .1 percent of GDP.
So, frankly speaking, that number isn't really the issue.
I think the bigger question is the rearmament of the European continent as a whole, so as to be able to provide a strong deterrence to Russian aggression.
And that requires, I would say, much more significant investments in the short term.
I would estimate we need around one and a half or two additional percent of GDP.
Which is an enormous, that's an enormous amount, isn't it?
I mean, you're talking about that.
And I mean, let me just quote to you what the German finance minister, in fact, has said in the last 24 hours, Jörg Cookies.
He said it will be a targeted reform, but German fiscal rules would need to be reformed if higher defence spending was agreed amongst European partners.
So they'd actually have to change their own fiscal rules even to go near this.
Yeah, absolutely. I mean, so Germany is, in fact, key.
Germany is the biggest economy, and it has, in fact, a very big shortage in its defensive capabilities, and it needs to invest a lot.
the 100 billion one -off debt fund that was put in place to rearm after February 2022 is already largely used up.
And frankly speaking, there will have to be another German debt fund together, ideally with some European debt funds.
So indeed, in the short term, we will need European and national debt.
This will not be funded by just shuffling around existing budgets.
But the debt is already substantial.
We know that Germany, for example, has great headaches economically at the moment, France also, and the UK.
It's going to be a hard sell to get their taxpayers to say, yes, we'll buy tanks, we'll buy missiles, not necessarily ambulances or materials for schools.
Yeah, I mean, you're right.
Defense spending is not very popular.
On the other hand, crises do focus minds.
And I do think there is a pretty wide -ranging understanding also in the German public, but also in other countries, that Russia really is a threat and is a major threat.
And when you are asked and confronted with a choice of really running the risk of being directly attacked or investing into deterrence, then I'm sure additional debt funding in the order of magnitude of one or two percent per year over the next five years is totally feasible and in fact even welcome
and i can see that the german probable next chancellor friedrich merz who is from a conservative party that actually typically opposes debt raising is actually now openly speaking in favor of changing the german domestic debt rules so i'm pretty sure this will come but if the debt rules are changed
and again this would apply to france and Britain as well, a bigger debt, are the international money markets going to welcome that?
Are we going to see a problem with bunds?
Are we going to see a problem with gilts?
I mean, is it going to be a difficult thing to actually borrow this money?
So for the German case, I'm pretty sure it doesn't make a difference.
German debt to GDP is around 60 % of GDP, so that's really manageable.
You're right. For some countries in the Eurozone, it might be more difficult.
France actually has already pretty high spending and has high debt levels.
So for France, we will probably need some joint and several European debt and in particular also for Italy.
As regards to UK, indeed, the UK has an issue and has certainly be very mindful of its rating and has to probably show if it raises additional debt, has to show how it's going to fund in the medium term its debt levels, meaning that there needs to be structural and budgetary reforms.
Could be a tall order.
Gundrum, thanks so much for being with us.
Gundrum Wolf there of the Bruegel think tank in Brussels.
Well, if there is this money, if it gets put through, does Europe have the capacity to build up its armament production to take advantage of it?
Joining me now is Jan P, who's Secretary General of the Aerospace and Defense Industries Association of Europe.
Jan, thank you for being with us.
The amount of money that we're talking about here is very substantial, the increase, if it comes through.
Does Europe have the defense industry capable of using that and producing the weapons that are needed?
Well, first of all, thanks for inviting me.
I think it's certainly a challenge for Europe to live up to if all of that money would now be allocated to Europe.
And it all relates to what timelines, what products, where to be delivered, etc.
What capacity have we got?
I mean, for example, I suppose one thinks traditionally of tanks, but of course there's a lot more high -tech weaponry, drones being the most obvious form.
Is there the capacity to produce those and the numbers required?
No, I would say that the capacity that you get with an industrial base is the capacity you pay for.
There is no reason whatsoever to believe Europe won't be able to deliver in all technology areas.
We can certainly handle that.
It's just the timeframes that we speak about.
And if you look at a couple of examples in terms of how quick the industry can respond, so Rheinmetall is an excellent example, which had 70 ,000 rounds of 155 -millimeter artillery ammunition production in 2022.
And they are now up to 1 .1 million targeted by 2027.
Another example is Saab, who has net increased 6 ,300 employees over two years.
And they are net increasing another 1 ,000 to 2 ,000 next year.
And the list could be made long.
So my point here being that what the politicians need to do is they need to place the orders and they will get a rapid response from industry in all technology areas.
Certainly it will take more time in areas where we don't have a huge production today.
Well, that's what I wanted to pick up on you and the time factor in all this.
I mean, what are the areas where there needs to be more development in order to produce these things quickly?
Because there's a sense in which all this needed to have happened a year ago, not now.
And it needs to be urgent.
Well, actually, to be quite frank here, I think it's almost in all areas.
I'll give you one example from my side here.
I think that what we've seen in terms of where there's a huge demand right now is really on artillery ammunition and different kinds of ammunitions and drones, as you pointed out.
But we speak about a Europe that should be war ready maybe in three years or four years or something like that.
And still today, we have not seen orders placed on increasing number of tanks.
What we've seen is orders for the tanks that have been sent to Ukraine to be replaced from those countries that have sent them.
But the overall number in terms of the tank capacity in Europe has not been increased.
So my point here is being that if Europe goes to war, if that would be the case and we go to war in five years or six years, and we would then need an additional 1 ,000 tanks because they start being shot down, then, of course, the order for those should not come then.
It should come yesterday.
So the problem is that we're not responding on the political level.
We're still very, very slow.
Well, Jan, the other issue, I guess, and probably not welcome to your ears or those of your members, is that they could always buy this stuff from other places.
I mean, America being the most obvious way to do it.
Absolutely. And I think one key evident thing that you can notice right now is the European dependency on non -European players.
And if you want to grow that dependency on non -European players, just continue to buy US and we can see what that leads to, especially days like today.
So I think there is a threshold.
It's very evident. You grow the industrial base where you invest your money.
And as soon as European member states start to invest their money in Europe, the industrial base in Europe will grow significantly.
It will grow alongside with the investment you make.
And it will be just if you push that further down the line, It will just be trickier the longer you push it.
Jan, thank you very much for talking to me.
Jan P there, Senior Secretary General of the Eurospace and Defence Industries Association of Europe.
Well, let's cast our thoughts across the world to China, where tech leaders haven't always been in the government's good books, it's fair to say.
The Alibaba founder, Jack Ma, spent several years out of favour with the government and the whole industry was the subject of regulatory clampdown only four years ago.
So a lot is being read into the meeting that took place in Beijing on Monday, hosted by President Xi Jinping for the bosses of Alibaba, Huawei, DeepSeq, Xiaomi, BYD and CATL.
The meeting could signify that Beijing is now adopting a rather more supportive stance towards China's private companies as concern grows over the country's slowing economic growth and increasing competition, of course, with the United States.
Let's speak to Duncan Clark, the investor and advisor on technology, finance and entrepreneurship, and also, of course, the biographer of Jack Ma.
He joins me now. Thanks so much for being with us, Duncan.
Do you get a sense, then, that perhaps the meetings with people like Jack Ma, who have not always been in favor, as I said, does mark a turnaround in terms of the relationship between the Beijing government and the tech sector?
Yes, I think we can conclude that just from the images alone.
And we're actually relying mostly on images, actually sort of video footage.
But the famous handshake now between Xi and Ma, two men who had really been diametrically opposed since moreover four years ago, the crackdown on Alibaba, as you said.
There's actually no clear transcript from the meeting.
There's been some sort of quotes.
But generally, you have this sort of silent video of applause and then some sort of taking of notes from Xi.
But the theatrics aside, it is a symbol that the big tech sector is back in the good books in China.
Well, let's pick up on that because you said about Xi and Ma, the handshake, and they had been very much at loggerheads a little while ago.
What were they at loggerheads over?
What has changed? Well, I think, you know, the IPO that Jack Ma was on the verge of sort of anointing in late 2020 of Ant Financial, Ant Group, his financial empire, would really have started to put pressure on the state enterprises, particularly the banks in China.
So tech, in a sense, was reaching a level in society and the economy that the Communist Party was just not comfortable with.
And a lot of the quotes that we have seen today are about, you know, private sector is part of the socialist economy in China.
It's well regulated and, you know, any problems will be dealt with.
But it's sort of saying, OK, you exist.
We're watching you.
But the level of sort of fear that followed Jack Ma's almost disappearance for a few months and relatively very low profile last several years is over, I think.
So essentially the government, Xi Jinping, think they've got a handle on tech.
It's not out of control.
It's not overreaching.
And maybe, I mean, on the list of the companies represented, of course, is DeepSeek.
DeepSeek has been, I guess, hugely successful in appearing to be a Chinese breakthrough in an area which the West claimed as its own AI.
Is this a reward, do you think, perhaps, from President Xi?
Actually, tech can be rather good for us.
Yes, I think, you know, from Xi Jinping's standpoint, he was always emphasising the value of serious sort of deep technology.
and he was less interested in things like commerce and content.
But interestingly, actually, even though DeepSeek is obviously getting a lot of the headlines, Alibaba itself has been making quite some progress in AI and actually even now working with Apple in the Chinese market.
So I think Alibaba's sort of focus on deeper tech, science, et cetera, has sort of helped them, you know, get back into the good books.
But overall, we saw also robotics companies, you know, it wasn't just about the big famous names we know, there's a lot of sort of deeper tech companies emerging in China And that's very useful to the government in its rivalry with the US.
Useful and not threatening, as they once perhaps thought it was.
Yes, I think the, you know, Ant was, this financial empire was really beginning to impinge on the party's ability to control banks, which is ultimately how they control the economy, is the flow of finance.
And, you know, Ant actually illustrated there were problems with that capital allocation, but that was just an uncomfortable truth.
and Jack Ma's sort of famous speech in October 2020 was really a bit sticking it to the regulators.
So now there's humilities in the air.
But also, don't forget, you know, as you said, the economy is really the primary focus now.
China's laboring under huge problems of the property sector, you know, local government debt.
And they need that optimism to come back.
They need consumers to get their mojo back.
And without that, it can be very difficult.
And then, you know, the U .S.
rivalry is only increasing.
So it's time to sort of get moving on this stuff.
So, yeah, that's an interesting thing about the nature of the economy itself.
I mean, do you get a sense that the government is seriously worried about where they are in those terms and that this meeting, very symbolic as it clearly is, might also be concrete in terms of support for this sector of trying to encourage them, in fact, perhaps even with hard cash as a way of going
forward? Yes, they haven't yet got to the idea of sort of transferring cash to consumers.
They just seem, you know, this government seems to be not able to contemplate that.
But anything they can do to at least encourage private sector entrepreneurs to have another go, you know, innovate and not fear, frankly.
I mean, some of these entrepreneurs had left the country.
I mean, Jack Ma was more in Japan and elsewhere than in China.
So I think now the idea is, look, stay, you know, we'll give you your sandbox here in China and maybe you can innovate.
and consumers can start to get their comfort or confidence back, which they lost some of it during the zero -COVID crackdown.
But also the property crash has been, you know, very detrimental to people's sense of optimism and faith in the future.
And we have deflation as well.
So lots of issues that need to be solved.
If they can, you know, kick -start the entrepreneurs again, maybe they can kick -start the consumers again.
Well, maybe I heard there, Duncan.
I mean, you've been observing this place for a long time.
Is it going to turn around because of that?
Well, you know, what's interesting, one will say, I mean, China has massive human capital.
So, you know, probably half of the AI engineers and STEM graduates, as we call them in science and tech, come from China.
What we've had in the last few years is inadequate capital.
We've seen a big drop off in foreign investment coming and also listings overseas.
So if you're able to stimulate the capital markets and then get capital into the hands of these productive entrepreneurs rather than, you know, banks propping up property companies, et cetera, that could really help.
So, you know, we've already seen the markets move up quite a lot.
And if you look at the big seven tech companies in the US, there were something like 17 times the big tech companies in China.
And if we saw with DeepSeek, maybe they're a bit overpriced in the US, and China may be a bit of a cheap buying right now.
Well, let's see, Duncan.
Thank you so much for being with us once again, Duncan Clark there.
Well, what are investors making of the way the Chinese economy is going at the moment?
I've been speaking to Zelina Zeng, who's head of Asia Strategy and East Asia Corporates with the financial analysis company Credit Sites in Singapore.
She told me about investors' concern about the direction of the Chinese economy.
I think a lot of Asian investors are looking at the next growth engine in China and private sector has been branded by the government as the next bright spot.
But a lot of policy implementations are still lacking detail.
And if we look at exact economic data, there's still a lot of momentum still need to be supported by the government.
This is just one meeting.
If we don't see policy follow through, it will be hard to see the market confidence to sustain.
And I suppose the confidence issue is also reflected in the story that's certainly been running on Bloomberg in the last few hours about Chinese corporates and households increasing their foreign currency deposits in January.
People are really putting deposits into the bank at the start of the year.
And if we look at the deposit rate from U .S.
dollar versus the Chinese yuan, definitely there is a very attractive spread pickup.
And Chinese households are finding very limited investment options.
Look at the property market as well, you know, the stock market.
I think the U .S. deposits, the Chinese households think it's a good diversification from their existing Chinese yuan in financial holdings.
Zelina Zeng there. Well, let's pick up on some of those themes with Jane Sydenham, Investment Director at Rathbone's Investment Management.
Thanks for being with us once again.
Jane, in fact let's pick up first of all actually with what we were talking about at the beginning of the programme which was defence because I guess and certainly from the evidence I've seen defence companies doing rather well on the markets at the moment purely because people think there is going
to be more money because of this meeting in Paris.
Yes, I mean it's a continuation of a trend that actually started a little while ago but certainly the meeting in Paris this weekend has pushed it further But the European defence companies, or indeed any British or European defence companies, have had a pretty strong run over the last 12 months.
And that's obviously just pushed on further today.
I mean, stocks like Rheinmetall, which is the sort of, I guess, leading German companies, up 10 % today.
So there's some big moves.
Yeah, it's interesting.
And I was talking earlier, of course, about the potential that people could buy the defence stuff, I suppose, outside Europe.
But you say Rheinmetall is doing well, but also Saab and Sweden, of course, Britain's BAE systems.
It's a tide that's lifting all boats, isn't it?
Yes. I mean, and as one of your previous guests said, I think given that the trade environment we're in and the security concerns, it's difficult to see the UK buying huge amounts outside, or rather Europe buying outside its own borders.
You know, there's a strong reason to support domestic businesses.
And let's turn our thoughts to what we were talking about just now, which was, of course, this tech meeting in China and the sense that we got that perhaps investors from outside China looking at this thinking, well, maybe things are turning around.
This might be the best way forward, embracing the tech sector by the government.
Is that the way they're reading it?
Certainly. I mean, you know, there's been a pretty sharp rally in China in the last sort of month or so.
In particular, you know, the market has jumped, the Chinese market has jumped, you know, about a third.
And that's really because it was so heavily sold.
Everybody's been so gloomy about the property bust, you know, the lack of consumer confidence, etc.
And all of that's been very, very negative.
And sometimes all you need is even just a slight positive to cause quite a significant rally.
And a sense that particularly with the Deepseek announcement, you know, perhaps China has actually got some real substance to their AI industry.
Maybe they have. Jane, thank you for being with us.
Jane Sydenham there of Rathbone's Investment Management.
I remind you, you're with World Business Report from the BBC World Service.
Now, American small business owners are trying to keep up with the latest tariffs announcements coming from Washington.
They survived COVID, a recession and a spike in shipping costs.
But while many haven't seen prices on materials rise yet, they are getting anxious about what's to come.
Monica Miller reports from New York.
The past five years have been a roller coaster of economic ups and downs for small business owners.
It really was a certain strange time.
Sarah Hollenquist is the co -owner of Dyke Beer.
She and her partner pulled together their own funding to make their first ale at the height of the COVID pandemic.
We were going from bar to bar that were pretty much empty or not quite sure how to have guests, if they were supposed to be inside, outside, if we could be open, if it was through a window.
The costs of materials and delivery are still high.
But Sarah says the business is growing, and they now serve over 150 bars, like the cubbyhole here in the West Village of Manhattan.
But then, President Donald Trump announced tariffs.
She says they're starting to slightly panic.
What is tomorrow going to look like?
What's the next step?
It's really difficult as a business owner to really see the future, and it really feels dark right now.
An additional 10 percent tax on paper from China and a 25 percent tariff on aluminum cans from Mexico will force them to squeeze their budget tighter.
We would love to have our own taproom someday or really, you know, increase the production of the beer.
But right now we're really going at such a small scale and we're barely making a buy.
Small businesses across the U .S.
are just much more vulnerable to tariffs than large firms.
Joe Foudy is an economics professor at New York University.
Remember, small companies have tight profit margins.
They don't have armies of attorneys and staff to handle any kind of administrative rules or areas like that.
They have, in general, just less purchasing power, fewer suppliers and alternatives.
And so they're just exposed if they're importing across the board.
He says one option is to stockpile essential materials in the event that they're hard to get and prices go even higher.
The problem for a small company is even if you can stockpile, there's a cost to that.
You know, if you take on an extra $100 ,000 in inventory and, you know, that's money that otherwise would be in the bank, you're paying interest on that.
That's just cutting margins even greater.
These are the color tiles that they looked at?
Yeah, so these just went to the...
Across the bridge in Brooklyn, the owners of the design and construction firm Mammoth are picking out tiles for their client.
Mariana Grinchbaum says business has been strong so far this year.
She says that they haven't seen any price increases from the wholesale companies that they use to purchase materials like plywood and electrical wiring.
But they expect costs could go up over the next few months.
Materials come from third -party vendors, so we're not going to China, we're not going to Canada.
I don't know exactly which portion of our business relies on products, but I would imagine some reasonable percentage does.
and we'll see what the direct impacts of those costs are.
But there is a psychological cost that's hard to quantify.
A lot of what we do is sort of contingent on consumer sentiment, right?
So it's not whether or not people have the money or don't have the money to spend on construction and renovation.
It's whether or not they feel confident about being able to make more money and that that is a wise decision.
And so I'm almost more worried about that being disrupted as opposed to like any direct impacts on raw materials.
The first 100 days of the Trump administration will be remembered for its flood the zone strategy.
And it's unclear whether US tariffs on goods from abroad will bring manufacturing back to America.
But for some small businesses, the uncertainty of the future will make it harder for them to succeed.
Monica Miller there reporting on the challenges for small businesses in the US on dealing with tariffs and other items.
And just a reminder that summit in Paris is going on as we speak.
Of European leaders, you'll be hearing more about that, of course, in the news.
But that's it from World Business Report.
Bye -bye.
