This has caused concerns among investors fearing a possible global recession. In a televised interview, President Donald Trump did not rule out the possibility of a US recession this year and acknowledged the short-term economic turbulence activated by his trade and fiscal agenda. His theory is that globalisation, as opposed to Mercantilism, was not great for American trade balance as more manufacturing jobs were lost to cheap imports from Europe and Asia.

By the time the term "mercantile system" was introduced in 1776 by Scottish philosopher Adam Smith, European states had been trying for two centuries to put mercantile theory into practice. This system was gradually replaced by rampant globalisation. A similar degradation happened in Britain, where cheap imports from ex-colonies gave way to global competition, itself resulting in millions of workers, who felt shortchanged by globalisation. Now Trump policies in the US have actively embraced measures that increase trade barriers and implement protectionist tactics.

On a related subject, notice how Europe with a low contribution towards defence, has woken up to announce major defence and infrastructure spending, while two Omnibus bills are being discussed with a scope of reducing up to 25% in the cost of bureaucracy and to foster simplification. In the meantime, the EU has been discussing the concept of "strategic autonomy", which emphasises the need for Europe to be more self-reliant in defence and security matters. This includes increasing investment in defence capabilities and fostering deeper cooperation among EU member states. However, after President Trump's inauguration, consumer and business sentiment soured as economists are now pencilling in a higher chance of the American economy entering a recessionary period at some point this year.

This has been brought about by the Trump administration's imposition of high tariffs on imported goods, which will inherently lead to a slowdown in economic activity and an uptick in inflation given the tariff's effects of higher consumer prices. It seems that the old protectionist Mercantilism policy is gaining favour. These factors, and others, have been the main drivers behind the jittery performance seen in the American equity and bond markets thus far this year. After two years of lacklustre economic growth, linked to the pangs of a pandemic, one notices how Germany has initiated plans to substantially ramp up spending on defence programmes.

This follows the now infamous meeting between President Trump and President Volodymyr Zelensky, and the indicated intention of the US to play a lesser role in supporting Ukraine. Many recall how the ongoing conflict in Ukraine has heightened security concerns in Europe, leading to increased calls for greater defence-spending and military readiness. But money is scarce; given that some European economies are still recovering from the impacts of the Covid-19 pandemic, which has influenced budgetary priorities, including defence-spending. Again, Malta and Austria proclaim their neutral status and are not keen to contribute financially to building a stronger arsenal.

Starting with the UK, which is now projected to have modest growth of just 1% in 2025, it still plans to increase defence spending to 2.7% of GDP. Whereas countries meet economic constraints which may limit their ability to significantly increase their defence budgets in the short term, yet the harsh realities of a strike from Russia is not to be underrated. Of late, following the Ukraine/US spat in Washington, this has suddenly awakened Europe to take a more focused angle on its own defence.

All of the EU members have only recently collectively consented (Malta also signed under some reservations) to ratchet up defence budgets. Several factors contribute to this trend, including geopolitical tensions in Ukraine and the Middle East, security threats in Yemen and inconsistent US support to NATO. European nations have belatedly recognised the need to bolster their defence capabilities in response to the cruel invasion of Ukraine by Russia. NATO members have committed to spend at least 2% of their GDP on defence but many agree that this is only a start and may go up (possibly double this amount).

Russia currently spends 7% of GDP on maintaining its formidable arsenal. But, as many European countries have historically fallen short of this target, the current security environment has led to renewed discussions about beefing up security budgets. The efficacy of collective defence under NATO reinforces the importance of higher defence-spending among its member states. European nations are increasingly aware that a strong NATO is essential for their security.

In fact, Germany has committed to a substantial increase in its defence-spending, including a special fund of €100bn to modernise its armed forces. With some aplomb, the EU's 27 leaders approved a plan drawn up by the European Commission that aims to mobilise €800bn to "re-arm Europe". Realists agree that Europe faces a clear and present danger, and therefore in the absence of the US shield, the EU must be able to protect itself. So stated the European Commission chief Ursula von der Leyen calling it "a watershed moment" for Ukraine and for the continent.

The defence plans allow states to spend much more - at a time when Germany's chancellor Friedrich Merz is embracing radical reforms to fund the country's rearmament. Public sentiment in some European countries has shifted in favour of increased defence-spending, yet some, like the UK can only do so by reducing budgets on social programmes and foreign aid. Public sentiment is increasingly in favour of investing in welfare rather than allocating excessive funds to national security and defence. But one may ask - what is the effect of increased defence budget spending at a time when the US is threatening the imposition of new tariffs on global commerce? How disruptive are tariff wars to Europe?

At their core, tariffs are detrimental to markets because they distort the natural allocation of resources and disrupt global production efficiency. In an ideal economic landscape, capital flows to where it can be deployed most efficiently, ensuring lower production costs and higher-quality goods.

Tariffs, however, artificially inflate prices of imported goods, forcing businesses to shift towards domestic production even when doing so is economically suboptimal. The question of whether Europe is "braced" for US tariffs and its ability to ratchet its relatively low defence budgets involves several interrelated factors, including trade relations, defence spending, weak economies and geopolitical dynamics.

Could mercantilism gradually make a comeback, displacing globalisation and potentially paving the way for a global recession?

George M. Mangion is a senior partner at PKF Malta

gmm@pkfmalta.com