Wwith Vladimir Putin With threats being made and Donald Trump musing about withdrawing aid, everyone agrees that Europe needs to spend more on its armed forces. What is less widely recognized is how dramatic the shift will be for a continent that has become accustomed to outsourcing its defense to America. Over the past thirty years, politicians have enthusiastically spent the peace dividend on everything except pilots, sailors and soldiers (see graph).
Some European leaders are already making commitments. Germany has created a 100 billion euro fund to strengthen its armed forces and aims to meet the NATO target to spend at least 2% of expenditure GDP immediately on the defensive. In France, Emmanuel Macron has promised to achieve the target this year. Compared to their pre-pandemic average, that of the continent NATO members (and Canada) have already increased defense spending by about 0.26 percentage points GDPtogether reaching a new average of 1.7% GDP last year.
However, in most cases even 2% will not be sufficient. Decades of avarice are taking their toll: many armed forces across Europe are in a sorry state. According to calculations by Marcel Schlepper and colleagues at the Ifo Institute, a think tank, the EU‘S NATO countries have accumulated an underinvestment in equipment of around 550 billion euros (or 4% of the bloc’s total expenditure) GDP) since 1991. Boris Pistorius, Germany’s defense minister, has said his country’s spending may need to reach 3.5% of total spending. GDP so that the armed forces can rebuild their combat capabilities.
Spending needs would be lower if there were no fragmentation among Member States EU‘s 27 armed forces, each with a preference for different equipment and different ways to purchase it. Manufacturers will struggle to get attention. As Christian Mölling of the German Council for Foreign Relations, another think tank, notes: “Europe’s bonsai armies have fueled the bonsai industry.”
How will countries meet their more ambitious commitments? Those currently not reaching NATOThe 2% target, which also includes Belgium and Spain, but also France and Germany, usually already has higher taxes. They will therefore have to rearrange their priorities and shift spending from, for example, health and welfare to defense. According to the calculations of the Ifo Institute, to spend 3% of GDP on defense, spending on everything else will have to fall by 3% in Germany and Italy, and by 2% in Britain and France. Voters may object to their pensions being reduced to buy more tanks.
Another option is borrowing. While few economists would normally support financing the armed forces through debt, the current shock could justify larger deficits since this is exactly the kind of regular spending that taxes are designed to do. The eurozone’s budget regulations could even take this into modest account. In theory, borrowing would not be a problem in low-debt countries such as Germany and the Netherlands. But there are obstacles: the Dutch coalition talks just failed due to spending differences; German reformers encounter a constitutional debt brake. And additional borrowing would not be wise in much of southern Europe, including Italy and Spain, both of which spent more on interest payments than their armed forces last year.
That leaves one last option if expenses need to increase: EU financing. Kaja Kallas, Estonia’s prime minister, is advocating that the bloc should set up a debt-financed defense budget, along the lines of its Covid-19 recovery fund. The logic underlying the fund: commonality EU spending in return for mutually beneficial reforms – would now apparently also apply, perhaps with reforms this time in defense procurement. Yet there is a problem. At the moment, finance ministers in the north and south of Europe still need to be convinced of a fund that would mainly benefit the east. The sad truth is that it may take another shock to spur them into action. ■
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