A certain optimism grows that the weak growth of the EU can end thanks to the economic power of war. Trump is pressing NATO countries to Elevate its military expenditure above the objective of the alliance (up to 5% of GDP). While this happens, the Ukraine War and Peace Conversations, which can favor Putin, are leading the region to rearm more than ever before the threat that comes from the east. The same European Commission has affirmed that it is studying a common debt mechanism and freezing fiscal rules to favor this process. From the hand of the same there are those who think that the GDP of the region can be favored by a great expense towards the military industry with more orders, jobs and activity. However, the fear that all this investment tsunami generates a very limited impulse grows.
While the Institute of Kiel and the London School of Economics recognize in a recent report that the EU would need to increase by 300,000 million euros a year the defense spending and that, potentially, potentially, can add between 0.9% and 1.5% to GDP of the region. Ethan Ildetzki, one of the study authors acknowledges that this calculation is the ideal scenario and that, in fact, there are great problems that can even give a negative impact. “If it is financed with higher taxes or governments do not find a correct indebtedness formula, GDP growth will be lower or there will even be a contraction.”
However, it also points out the main problem, beyond financing: Europe is not the US and investing massively in arms can easily imply that money has an impact on other regions and Do not have a real impact on the EU. “At present, 80% of purchases in defense come from suppliers outside the EU and the impact on GDP would only occur if it occurs thanks to investments in the countries themselves instead of purchases to the United States.”
From S&P global go further and they say it is very complicated that a small European sector is able to absorb all that public demand and that, therefore, the impulse in GDP would be condemned to dilute. “The multiplier remains very modest, below 0.4-0.5 in the largest countries. This is because Europe used an intensive expense in exports and only one third is dedicated to investments.” Therefore, “the fragmented industry of the region, It only uses 0.3% of the workforce European and the structure of the same favors only a few national champions. “Only 19 of the 100 largest companies in the world are European (compared to 45 of the United States).” In short, this factor is key since having the region “inefficiencies and structural weaknesses that do not make them competitive” is more difficult than the huge expense has an impact on the GDP of the region.
From the World Economic Forum, he comments that “European economies are not designed to spend large sums in the army, but have progressively designed to offer social benefits that encourage stability.” From ING they pay special attention to the fact that 80% of the expenditure of strength from European borders. “Although European leaders are becoming aware of the need to generate their own supply chain, the reality is that it is something that will require years and, therefore, any increase in the short term of the gas will be largely outside the borders of the region “. In summary, “that additional expense will probably not give the European economy the impulse that needs so much if the additional expense in defense means austerity in other areas, we could actually see the opposite.”
The Dutch Bank explains that this mega issuance of debt with which to pay the weapons can be A true headache for the ECB. “The emission of bonds seems condemned to increase and the concern that sovereign debt problems will return to the surface, with an increase in differentials between European countries.”
“There is a dangerous state of the finances of many governments with a growing fiscal burden of an indefinite population”
They coincide from capital economics that comment that “most likely The economic impulse is very small “ and that really the course of the debt that can increase military spending can be even more decisive to the region. “There is a dangerous state of the finances of many governments with a growing fiscal burden of an indefinite population.” In that sense, there are only two ways to finance this expense “more substantial cuts that would be more complicated”, something that “will unleash debt market problems.” To this is added a greater debt whose damage “can be very reduced by a joint debt.”
Currently the deficit is a problem in general, because according to the latest European Commission report, “the deficit is gradually 3.0% of GDP in 2024 for go to 2.8% in 2026 “. This places the region to the edge of non -compliance (3%) but in key countries such as France the situation is critical, with a deficit triggered over 6.1%. From Istat they see the deficit of another key country such as Italy in 3.6%, Spain is at 3.2%and Poland in 9.1%.
“The highly indebted EU countries, such as France, Belgium or Italy, all with liabilities greater than 100% of GDP, They have difficult trajectories with persistently high deficits, “they comment from Fitch. These problems led to last summer the European Commission opening formal procedures against several member states for their high deficit. These included Belgium, France, Italy, Hungary, Malta, Poland and Slovakia.
Brussels money … for Detroit
However, the problem of deficits can be aggravated with military spending and adds to the aforementioned fact that much of that investment will favor factories and jobs in Detroit and not Madrid, Brussels, Paris or Berlin. “European industry has no sufficient capacity To accept the commitment of this investment “they comment from Capital Economics. Consequently,” we believe that even in an optimistic scenario, a higher defense expense could add only 0.1% or 0.2% to the GDP of the Eurozone in the coming years. “
This problem can be exacerbated by the trade war since more and more analysts see that this great expense in defense becomes a currency by Brussels to increase US orders and avoid a transatlantic escalation. This is what happened in 2018 with gas orders, which were shot within the framework of a tariff ‘truce’. From Gavekal Economics they emphasize that “EU leaders will seek American weapons To deactivate a war with Trump “. While France has pointed out that everything (or almost everything) must be spent in Europe “Paris seems to be isolated and the rest of the countries are willing to buy more from Washington.”
“Military spending does not clearly reduce unemployment and can have an even negative impact”
In that sense, they conclude that although the main European companies such as “Rheinmettall, which already shoot 50% this year in the stock market, will be the great beneficiaries of the increase in military spendingthe reality is that the US are there. “It may not spend much time before European manufacturers have to compete for the budget of the old continent with newcomers from Silicon Valley.”
From Munichre they explain, in reference to the increase in spending that has already occurred in Germany in recent years, which is a loss of opportunities regarding what it means investing in other sectors. “Investment in Germany have generated about 86,300 positions of I work in the decade with extra investment in defense “if this had been used in, for example, the environment, the firm believes that the German country would have generated 140,000 jobs. In that sense, they conclude that in the case of the EU and its current structure “military spending does not clearly reduce unemployment and can have an even negative impact on growth since it diverts funds that other fronts, something that is harmful to GDP” .
The Europe’s rearme
The figures are not yet known but the European Commission speaks of a joint investment of 500,000 million euros For the next decade. To achieve this, he would be exploring a joint debt issuance and the suspension of fiscal rules. However, this is a very hot issue in which countries do not agree. The Netherlands and Germany, for example, have come to completely rule out the option of a community debt something that Spain and Belgium have supported with fervor.
The French Minister of European Affairs, Bejamin Haddad, has acknowledged that in the next few days “joint debt issuance” will be raised, given the importance of this moment for the Eurozone. “You have to think about how we are going to allow ourselves to take a step forward In our security, “said Haddad. The minister himself has indicated that there is another option, and is to use the rescue fund, the European stability mechanism (MEDE). This option is also on the table, the fund created In 2011 to save the euro and that, in this case, it would serve to reactivate the army with a potential injection of 700,000 million euros. Annual extra of between 230,000 million and 800,000 million.
Regarding less compliance with the deficit path, at a conference in Munich the Ursula von der Leyen, president of the EC, commented on the option of “an escape clause” that allows Include additional defense spending. That is, these megainversions completely leave the calculation of 3% of GDP deficit and 60% for the debt imposed by its institution. Whatever the solution, all have consequences for a European economy that will have to face a great expense in weapons and defense assuming a clear reality: there will not be an equivalent economic return and will have to pay a high price for their safety.
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