Defense with Debt
The Rearm/Readiness 2030 Plan presented by the President of the European Commission, Ursula von der Leyen, comprises five points with the aim of mobilizing 800 billion euros for defense investment over the next four years. However, this figure alone can be misleading as it is split into two parts: €150 billion from joint borrowing with the European budget as guarantee and €650 billion from potential new borrowing by member states, which would be exempt from the EU’s usual rules of budgetary discipline.
This means in first place that while the plan opens up the possibility for a rapid increase in defense investment in the EU, this ultimately depends on the ability of the member states to incur in more debt. For countries like Germany or the Netherlands with a lower budget deficit, this would be easy, but for countries such as France and Italy, which are an integral part of the European defense industry but already have a high deficit, this will be more difficult in the long term.
In other words, although this measure will increase defense spending in the short term, it is doubtful that it can be a permanent solution for countries with an important budget deficit. The only way to make this move sustainable is to either increase government revenues through higher taxes or reduce spending in other areas. Both options will depend on the economic situation of the Union and the political capacity of national governments to act, which is quite limited at the moment.
What is Going to Happen to Ukraine?
The second difficulty facing the Rearm plan is the situation in Ukraine. Among Europeans, the idea that the defense of Europe is inevitably linked to the defense of Ukraine is generally accepted. However, as the United States seems ready to stop military aid to Ukraine, the rest of Europe now finds itself in the situation of replacing American money with European money. This is neither easy nor cheap, especially considering that Europe is unable to produce much of the equipment Ukraine needs in the quantities required and that some governments are unwilling to make massive new expenditures for the war.
The governments of the Union have so far agreed that investment in defense must be increased. At the emergency summit in Brussels on 6 March, all the member states signed a declaration supporting the mobilization of financial resources to improve the Union’s defense capabilities. But, the part of the declaration concerning increased support for Ukraine was not adopted by consensus, as the Hungarian government of Viktor Orban, who has in the past made clear his sympathy for Putin’s Russia, rejected it. However, it is not the first time Orban has done something like this and is therefore not the most worrying outcome for Ukraine.
More concerning is the fate of the emergency package of 20 billion euros in military aid for Ukraine, proposed by the EU’s foreign policy chief, Kaja Kallas, at the beginning of the summit. This package was discussed and rejected by the European leaders behind closed doors. Even though Zelenskyy was received as a hero, and 26 out of 27 member states expressed their support for Ukraine in the declaration rejected by Hungary, the priority of European governments is to strengthen their own national defense capacities. Therefore, even if Rearm is presented as a European initiative in response to the withdrawal of US support for Ukraine, there is a risk that the resources mobilized by the plan will not be deployed quickly enough or in sufficient quantities to help Ukraine.
Defining Priorities for the European Defense
This brings us to the elephant in the room when it comes to Rearm. It is clear that the European Commission intends to promote spending that follows the Commission’s motto “spend more, spend better, spend European”. But in reality, the influence of the Commission on how governments use the €650 billion potentially borrowed at the national level is limited. While countries like France will certainly spend this money on European (and French) manufacturers, other countries like Poland and the Baltic states may prefer to continue buying off-the-shelf equipment from the United States.
A situation like this would diminish the expected positive effect of Rearm on the European economy, as a lower number of orders would mean that defense manufacturers would not be able to use the economies of scale to increase production and reduce costs, so that European defense equipment would continue to be much more expensive and produced at inadequate levels compared to Russian ones. Not to mention the interoperability problems caused by the use of a variety of different equipment.
Even the 150 billion euros in joint borrowing are not free of problems. Before these funds can be mobilized, the member states have to agree on how the loans should work. In other words, who will receive the money and what kind of equipment will be purchased. This could give the Commission some leverage to force the use of the funds in European products. However, such a policy should first be approved by the member states, and the example of the European Defense Industry Programme (EDIP), which has not yet been approved due to disagreements over the use of the funds, shows us that such discussions can take a long time.
Conclusions: Too Many Things to Do
There is no doubt that Rearm Europe/Readiness 2030 is a step in the right direction. Used properly and in a coordinated manner, this program could serve the triple function of preparing Europe to defend its own security, supporting Ukraine in its heroic effort to defend its sovereignty, and giving a boost to the European economy. However, this presupposes that European leaders are able to coordinate investment, not only in the areas where they are urgently needed, such as air defense, drone defense, artillery and ammunition, but also in other areas that are less mentioned but equally important for European defense, such as raw materials (from TNT to critical raw materials). If this is achieved, Europe will be able to protect its territory and its democracy in the medium term, otherwise we will see further fragmentation, waste and insecurity on the continent.
Follow the comments:
|
