The European Union has experienced quite a few shocks over the past two decades. The most significant one was not Covid, or Brexit, or the Ukraine war. It was the sovereign debt crisis. The fairytale story is that Mario Draghi single-handedly ended the crisis when he told the world that he would do “whatever it takes” to save the euro. He was the president of the European Central Bank when he announced a backstop. It is a convenient explanation because it assumes that the crisis is over.
I am going to put my head on the block to predict that this crisis could come back sooner than we think. Last time, it was the southern Europeans who triggered it. This time, it is the northern Europeans with their relentless push for an increase in defence spending to 5% of GDP.
In 2010, a Greek deficit, overshot by some $20 billion, triggered the worst financial crisis in Europe since the Great Depression. But this is a tiny amount compared to the extra defence spending European countries are about to commit: $500 billion, by my calculations, every year. The Greek deficit was a finance minister taking his eye off the ball, but our increase in military spending is a life sentence. After 10 years, we will have spent a cool $5 trillion. This is on top of what we are spending already.
People get easily fazed by large numbers. Let’s put this into perspective. When the Labour government in the UK cut off the winter fuel payments to pensioners, that saved them less than $1.8 billion. We all remember the furious political reactions and the botched U-turn. If the UK was really serious about meeting the Nato 5%-of-GDP target, the UK government would have to spend a cool $100 billion each year. That’s 55 times as much as the savings on the fuel subsidies. In fact, it is more than half of the UK’s entire welfare budget, excluding pensions.
It is not just the UK. You are looking at numbers that are off the charts for every Western European country. This week, Nato leaders are about to descend on the Hague to agree the fiscally most impactful decision that politicians have ever committed to in modern history. They do so without an electoral mandate. None of them campaigned for this, including those who came to power in recent elections, like Keir Starmer or Friedrich Merz. None of them received a formal mandate from the parliaments, which are ultimately responsible for fiscal expenditures in Western democracies. They are doing this because Donald Trump just pulled this number out of a hat. It was just a number. He could have said four, or six. Nobody did a study beforehand on what Nato actually needs, and how the needed capabilities are best acquired. We are talking about the biggest fiscal programme in human history — because Europeans are dead scared that Trump will feed us to the Russian bear.
This is now how military investments are normally done. The right way to do this is to start identifying the threat, and the options available to counter it. Europe will undoubtedly have to purchase capabilities it does not currently have — especially in areas such as electronic warfare, cybersecurity, satellite-based systems, and drone technology. What stands out about European defence spending is not how little we spend compared to the US, but how inefficiently we spend it. Europe has six times as many weapons systems as the US. Our drones, tanks, missiles and warships are incompatible with each other. Nato-Europe has 178 weapon systems, compared to 30 in the US. European countries have a dozen different types of howitzers, a type of artillery gun designed to fire projectiles on a high-arching trajectory. According to Reuters, the Europeans spend some €6-11 million on each one of them, while the US spends €2 million.
Would a rational security planner not start with that kind of consideration? If you were really serious about raising Europe’s defensive capabilities, you would pool this. Europe does not need a single army, but it does need a single defence procurement agency. It cannot be the EU, if only because the UK and Norway are not members.
You may accuse me of being a bean counter. We live in some of the richest countries in the world, and we are facing an existential threat. So who cares about the cost? I would agree that the threat is for real. Russia is fighting wars in Europe. It is implicated in hostile activities in the Baltic Sea. It interferes in elections and is behind cyberattacks against Western digital infrastructure. Putin has ordered the use of chemical weapons in the UK to hunt down former spies. I also believe it is important that we bolster our defences to disabuse Russian leaders of any idea that they could test Nato’s security guarantee with impunity. We should not talk ourselves into a war, as some hotheads are doing now. But we should be in a position to fight one.
I doubt that our new Nato target will help us do this. Given the lack of any political willingness to pool our defence purchases, what will Putin make of our newly announced 5% spending target? He is already spending 6-8% of Russia economic output on defence, but the impact is much higher than those numbers suggest. He does not have a dozen different howitzer systems. Through presidential diktat, he redirects private-sector industrial production to defence. He pays a fraction of the cost of defence equipment that we do. His technology may not be as advanced as ours. But unlike Western countries, Russia is capable of scaling up production quickly. Putin also gets supplies of weapons and soldiers from North Korea, drones from Iran, and dual-use advanced technology from China. The West, and especially the so-called Russia experts that keep popping up in the media, persistently underestimated the resilience of Russian military supply chains. Putin has been a much more formidable warrior than Western experts believed he would be.
So how would a leader, who has been in power for a quarter of a century and who has fought several wars, react to the Nato announcements of an increase in defence spending that avoids any painful decisions? Worse still, many Nato countries like France or Germany will have to fund this through debt because they do not have the political majorities to raise taxes or cut spending. Germany would have to spend $130 billion per year extra on defence. That’s about the size of the federal government’s social budget. They are not going to replace their welfare systems with food stamps, are they? That is the kind of thing Putin might do.
If Nato goes down the road of debt-funded defence spending, chances are that the bond markets will attack us before Putin does. The infamous bond market vigilantes will fight on the side of the Russians. They were the ones that brought the sovereign debt crisis to the eurozone. Their job is to attack countries that aren’t financially sustainable. Low-growth Western European economies are not going to grow out of this debt as they did after the Second World War. A debt-funded increase in defence spending of that magnitude could push some Western countries over the brink. Pedro Sánchez, the Spanish prime minister, is the only Western leader to come out openly against the Nato defence spending programme for exactly this reason. It would destabilise his country, he said. But Spain is not the only country in trouble, or even the main one. Sánchez is the only guy who admits this.
Putin knows that Western countries do not have political majorities in favour of making sacrifices to support such high levels of defence spending. A debt-funded defence programme will reinforce this view.
He raised his own defence spending by seizing foreign assets. He also tapped Russia’s sovereign wealth fund. He increased company taxes, and income taxes for higher earners. And he is about to do something that we Europeans are struggling with: intensify defence cooperation with friendly countries, especially China. One of Russia’s and China’s strategic advantages is their large supplies of important commodities. What has become clear in the US-China trade dispute is that China is willing to use its monopoly of rare earths as a geopolitical weapon. These magnets are a vital component not only for electric car engines but also in military aircraft. Russia will have unlimited access to these magnets.
China will not cut off the West completely, but it will discriminate. The West has already started to lose its technological dominance which it enjoyed since the Seventies — the time when the Soviets started to fall behind. In AI, for example, China has caught up with the West and is the world leader in solar technology. The Chinese have more people. And their purchasing power is getting bigger than ours.
Perhaps the best thing that can happen to the West is that they will cheat themselves out of the new defence spending target — so that the 5% will end up like just another Western phantom spending programme. Keir Starmer wants to reclassify £5 billion of investments in rural broadband rollout as a key military priority. I am hearing that the Germans are thinking of counting an electricity-price subsidy as a military investment. The truth is that we do not want to give up our creature comforts, let alone our national sovereignty, for defence procurement.
We are spreadsheet warriors. Putin knows it.
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Author: Wolfgang Munchau
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