Europe juggles fiscal priorities, fearing future war with Russia

Europeans will have to spend €380bn on defence to get fighting-fit for whatever Moscow does next, yet Brussels also insists they abide by its fiscal rules. For many, it will be a choice.

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Twin fears of an inward-looking Donald Trump and a westward-looking Vladimir Putin have left officials in Europe's treasuries urgently revising their budgets to make room for more defence spending.

Europe juggles fiscal priorities, fearing future war with Russia

Mohamed Sharki

last update on 24 Feb 2024

With Joe Biden’s ratings so low, and with his predecessor seemingly unruffled by the many legal cases stacking up against him, analysts are starting to predict that the White House will be Trumpian once again next January.

Europeans fear Donald Trump 2.0 will make good on his threats to abandon allies. Indeed, he withdrew America from many multinational institutions when he was in power from 2016-20, presumably to 'Make America Great Again'.

An American withdrawal from multilateralism and its adoption of isolationism and protectionism would be good news to the world’s despots who, until now, had been held back by the thought that America might have intervened to stop them.

Any second Trump administration will likely be characterised by the same chaotic and destructive style as the first. He doesn’t seem to do de-escalation diplomacy. If Europe seems concerned about future US backing, it has every right to be.

Paying for security

Trump recently suggested that he would let Russia do “whatever it wanted” to US allies whose defence spending did not amount to 2% of their GDP. The US spends about 6%, yet Europe and the United States face different circumstances.

AFP — A truck transports a military vehicle towards Warsaw outside the town of Garwolin, Masovian region in Poland, on February 20, 2024.

There is high indebtedness in the eurozone—more than 83% of the GDP— and an average budget deficit of 4% of the GDP. Likewise, the old continent did not race out of COVID-19, unlike the US. Growth remains weak, at less than 1%.

More importantly, Europe—unlike America—has an ongoing and very spreadable war in its backyard. Ukraine’s armed forces did not capitulate to their much stronger Russian invaders, but neither have they dislodged them.

The European Union agreed to give Ukraine €50bn in aid last month. Moreover, Berlin and Paris signed security and military agreements with Kyiv. It was designed in part to show that Europe remains committed to Ukraine financially and militarily.

Yet Europe cannot live as luxuriously as it once did.

It used to rely on natural resources from Africa, energy from the Middle East, tech and investment from China, and a military security blanket from NATO — all for less than the going rate.

Alas, no longer.

There is high indebtedness in the eurozone—more than 83% of the GDP—and an average budget deficit of 4% of the GDP.

A dwindling force

Europe prospered under conditions of global stability, but the guns have not been silent for a while. Another Trump presidency would be a green light to those who want to bite off bits of the world that aren't theirs.

For Europe, the wars in Gaza, Ukraine, and Sudan in recent months have just shown how the continent now plays a minor role internationally owing to its dwindling influence. This, in turn, owes much to its lack of firepower.

The International Institute for Strategic Studies (IISS) in London recently showed that the number of European combat-ready battalions had not increased from 2015-13, despite the threat from Russia.

France and Germany added one each, and Poland added two. Britain, meanwhile, lost five over that period. NATO generals privately think that most countries could now only field one full-strength brigade.

"How did we get to this situation after having aspired for 15 years to compete with the United States?" asks Lucie Robequain, a French journalist for Les Echos.

Over that period, the EU's economy grew by 6%, while the US jumped 82%, she says.

Reuters — Spanish frigate ESPS Almirante Juan de Borbon, before it departs Southampton Docks to continue in the NATO major training exercise Exercise Steadfast Defender 2024.

"Consumption in the eurozone declined, while American household consumption increased by 9%. This forces us to live less affluently and more dependently on others when it comes to our security and livelihoods."

Extra pressures

From January, eurozone governments will also have to abide by fiscal and budgeting rules, keeping budget deficits below 3% of GDP and debt below 60%.

Fiscal orthodoxy was abandoned in 2020 during the pandemic to allow governments to spend and borrow to keep their economies going. This continued into 2022-23 to deal with Russia's invasion of Ukraine.

Now, fiscal orthodoxy needs to return.

Donald Trump's evident dislike of NATO and other multipolar systems seems to stem from a lack of understanding that NATO's Article 5 (an attack on one is an attack on all) protects America as much as it protects Europe.

Still, deterrence only works if enemies believe it will work.

At recent summits and conferences in Brussels and Munich, there was much apprehension and confusion. There was also a greater understanding that Europe needs to be ready.

Eurozone governments will also have to abide by fiscal and budgeting rules: budget deficits below 3% of GDP, debt below 60%.

"We should expect that one day Vladimir Putin will attack one or another NATO country," said German Defence Minister Boris Pistorius.

His boss was of a similar view.

"The Russian threat and the uncertainty surrounding NATO if Trump reassumes power puts the EU in a state of emergency," said German Chancellor Olaf Scholtz.

German newspaper Der Tagesspiegel predicts a new war in Europe in the next 5-6 years. For Europe, this means a major increase in military spending, even at the expense of balancing the books.

Spending needed

The threat is pushing Germany—Europe's biggest economy by far—to rearm itself and spend 2% of GDP on defence, up from 1.46% in 2022. The federal government has allocated an additional €100bn for rearmament by 2027.

Berlin will need to raise the budget annually from €25-30bn to reach €82bn in 2025. This is its largest military spending since the fall of the Berlin Wall and German reunification in 1990.

Germany's extra spending on weaponry can be sustained through industrial expansion and technological exports, but its economic growth remains feeble.

Berlin's debt amounts to around 66% of GDP, but for France and other Mediterranean states, debt is nearer to 100% of GDP. For them, a huge injection of additional defence spending is not as easy.

A further consideration for cash-strapped southern Europe is the rise of far-right parties, some of whom are close to Moscow. Diverting money to defence at the expense of social programmes would play into the nationalists' hands.

Eastern Europe has mixed stances on the Ukraine war. Many find that they can either stick to Brussels' financial rules or pay their NATO dues.

In any case, analysts suggest that EU countries must collectively inject around €380bn ($410bn) a year into the defence and NATO's budget if it wants to keep up.

Berlin's debt amounts to around 66% of GDP, but for France and other Mediterranean states, debt is nearer to 100%.

The European Union's founders envisaged a new post-war era of security, stability, and peace in which to develop the continent's economy and establish conditions for prosperity.

Today, however, the Union is being challenged and buffeted.

The summer's European Parliament elections will reveal the mood of the continent, just as November's US presidential elections will tell us what the American people think.

For NATO, however, the Russian threat goes far beyond the ballot. It will be there despite whoever is elected to power —and whatever they choose to spend on defence.

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