The end of luxury rules

Europe's response to the Trump win

This morning the world wakes up to a Trump victory. It seems urgent that Europe is able to stand on its own. 

But actually achieving ‘strategic autonomy’ requires more than just spending on armies. For decades, Europe has lived beyond its means in a more damaging way than by skimping on defense. The continent has indulged in luxury rules — virtuous policies that hurt growth — from shutting nuclear to exhaustive consumer protections, while relying on others for protection and innovation. Leaders today face a choice: if they want to rapidly build security they will have to give up on other priorities.

What are luxury rules? 

Introduced by Rob Henderson in 2019, luxury beliefs are those that confer status on elites while being harmful for marginalized groups, such as "standardized testing is bad" (easier when you have access to good schools and tutors), “the police should be defunded” (safe to believe if you live in a nice neighborhood) or “marriage is outdated” (fine if you still have a stable household).

Luxury rules are similar: they are laws that make us feel good about ourselves and only privileged societies can afford. They are the choices which, absent the security provided by America, Europe could not safely make. 

European policy has been a luxury product. Not in the sense that European policies are expensive (though they are), but because they serve the same social function as luxury goods. They're elaborate, pleasing to certain people, but disproportionately harmful for a state facing actual (security) challenges.

Consider the following examples from the European energy sector:

• Germany’s decision to close its nuclear plants in 2011 consciously increased its reliance on (imported) gas

• Europe's ban of fracking means energy is more expensive and makes it more dependent on Azerbaijan/Qatar/US for LNG

• The rapid switch to intermittent solar and wind power, without adding more nuclear plants, means that a huge increase in capacity has not led to much more generation or cheaper energy.¹

• The EU is trying to achieve 55% emissions reduction from 1990 levels by 2030, while the US has a soft target of 50-52% reduction from higher 2005 levels, and China only aims for emissions to peak (!) in 2030.²

Opening Nord Stream. Source: Deutsche Welle

These choices were known to weaken Europe's economy. What made them possible was the ability of other countries to pick up the tab. It was America's shale revolution (e.g. its willingness to actually drill), as well as gas extraction in (amongst others) Azerbaijan and Qatar that played a significant role in staving off a true crisis in 2022. 

The policies become much more dangerous without foreign partners. This isn’t a surprise to some. The country with the most new nuclear construction in Europe, and the only one that has explored for shale — Poland — is also the major member state most vulnerable to external threats.

Luxury rules are prevalent in every sector. The EU's GDPR and AI Act hurt European innovation by imposing huge compliance costs, making data handling expensive, and creating multiple regulatory layers and rules (often at the level of  each country).  As we wrote a few weeks ago:

“Web traffic and online tracking fell by 10-15% after GDPR began. EU firms store 26% less data on average than US firms two years after the GDPR and reduce computation relative to US firms by 15%.”

These laws protect privacy but make it nearly impossible to build new tech companies. That's fine if you don't need innovation and are happy to rely on American to lead the way. But it is much more dangerous if Europeans fear the US may not answer its calls.

Some cases are more egregious still. The 2035 Internal Combustion Engine ban is a good statement about climate, but has the potential to destroy European industry.  Defense spending in Europe has long prioritized protecting domestic industry in individual member states, rather than maximizing its bang for its buck. As a result, the EU builds 12 different types of battle tanks, while the US manufactures only one. Every sector — from Europe’s restrictive labor laws to its approach to building — has cases where policymakers chose restrictions over growth (and in turn security).

Facing reality

These choices were inefficient but bearable if Europe could count on American security, Russian energy and Chinese manufacturing. The difference now is that, as with all overindulgence, we are approaching a point where Europe can no longer afford its luxury rules, at least not if it wishes to achieve ‘autonomy’

Here is Lee Kuan Yew, founding father of Singapore and famously luxury-averse politician speaking to Spiegel in 2005: 

The [European] social contract that led to workers sitting on the boards of companies and everybody being happy rested on this condition: I work hard, I restore Germany's prosperity, and you, the state, you have to look after me. I'm entitled to go to Baden Baden for spa recuperation one month every year. This old system was gone in the blink of an eye when two to three billion people joined the race -- one billion in China, one billion in India and over half-a-billion in Eastern Europe and the former Soviet Union.” 

We were told industrial policy would fix this. But industrial policy today has often done the opposite: undermining our manufacturing base, such as in the case of the ICE ban, or leading to misallocated spending as with Germany’s hydrogen obsession. It also mistakes the nature of the gap: Europe’s deficit in innovation is in private sector activity, not government spending.

Moving away from luxury rules would not lead to an isolationist Europe, but a more realistic one. A ‘non-luxury’ approach would recognize that a continent that wishes to be independent cannot also kneecap its energy industry and manufacturing base. There are solutions that can fight climate change and support European security: CBAM gives price signals about the true cost of carbon, while not harming Europe’s industry to the benefit of the rest of the world. Destroying its car makers does not have to be a decision the bloc voluntarily makes, and is certainly incompatible with achieving ‘strategic autonomy’.

Cultural change

The result has been a continent that leads the world in compliance frameworks and is unable to protect itself. Europe has not created from scratch a single company with a valuation over €100 billion in the last 50 years; in the same period the U.S. has created six companies worth over €1 trillion.

This approach is fine if the continent trusts others to handle security and innovation.  If European leaders feel this is no longer reliable, they need to make hard choices.

There are moves away from luxury rules that could be relatively costless. Take energy. We discussed a few weeks ago how Europe could easily reopen closed nuclear plants. But real benefits come with a bit of pain: instead of just reopening shuttered nuclear plants, Europe could make it much, much easier to build new reactors — even if that comes with minimal risks. Similarly, while exploring for new oil and gas in Europe is ugly and directly conflicts with its environmental goals, it is important if the continent is seriously trying to be autonomous — especially if the alternative is to rely on drilling abroad.

Luxury rules are not just about individual policies — although some laws fail the cost-benefit more obviously than others. It is about a culture that has rushed towards more regulation rather than less, even as it ends up with perfectly governed industries that don't actually exist. During 2019-2024 sessions, the EU passed around 13,000 acts compared to only about 3,500 pieces of legislation and 2,000 resolutions at the federal level in the US during the same period.³

To move away from luxury rules wouldn’t be surprising. It brings Europe in line with the rest of the globe (and the rest of its history), back to a world where trade-offs exist and an unwillingness to grow is punished by the societies that do. Luxury rules accelerate their own decline — like luxury beliefs they undermine the societies that are prosperous enough to hold them. The continent's previous priorities were set during a period of unprecedented security and prosperity. That period has now ended, and many of the rules it has are a luxury it can ill afford. 

1.  Eurostat. "Electricity and Heat Statistics." Statistics Explained. Accessed November 5, 2024.

2.   Draghi, Mario. 2024a. "A competitiveness strategy for Europe”, 35.

3.   Draghi, Mario. 2024a. "A competitiveness strategy for Europe”, 65.