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Less European Butter, More Guns

Less European Butter, More Guns

If Europeans want to keep their continent safe, they'll need to make different choices over what their tax euros are spent on.

Dalibor Roháč

There is something puzzling about Russia’s war against Ukraine. Russia’s economy is smaller than Italy’s—and a tiny fraction of that of the collective West. Nevertheless, the Kremlin has been able to unleash untold destruction on its neighbor. What is more, it has kept much of the world on its feet in doing so.

For example, Russia seems able to produce 250 thousand artillery shells per month, far outstripping existing production capacities in both Europe and the United States. If it weren’t for the Czech initiative that has identified and tapped into hitherto hidden stockpiles around the world, Ukraine’s munitions shortage would already have had dramatic repercussions on the battlefield.

How is this possible? Depending on the metric, the EU’s economy is seven-to-ten times as large as Russia’s. Making 155 mm shells (currently the most in-demand shell globally), even at a large scale, is not a pursuit that requires cutting edge technology, novel expertise, or rare materials. The extent to which Europe is lacking some of the critical inputs, such as high fragmentation steel or guncotton, simply reflects previous and current political choices to neglect the defense industrial base. Of course, in an autocracy, it is easier to put the entire economy on a war footing by dictatorial fiat than it is across a consortium of rambling, democratic societies. 

Some critics, however, are keen to blame the problem on European “austerity” and see any progress as inescapably linked to abandoning the supposedly failed dogma of balancing budgets and reducing public debt. In this version of the story, European countries responded to the Great Recession with excessively tight macroeconomic policies, gutting their defense spending and eroding the continent’s industrial base. And now, existing fiscal rules, enforced by the European Commission and sometimes embedded in national constitutions, are making it difficult to reverse those developments. Simultaneously, EU institutions lack their own fiscal capacity, although that arguably could be built up by using EU-level debt instruments or asserting a power to tax.

The path to a more effective EU thus lies, the argument goes, in abandoning the commitment to low deficits and fiscal rules, as well as in giving the EU a greater ability to raise money and spend it. A success story already exists in this regard: In response to the pandemic, the EU set up its Recovery and Resilience Facility (RRF), part of which (€350 billion) was financed by EU bonds, and thus breaking the taboo against debt mutualization. 

There is a kernel of truth to this narrative. For one, fiscal choices made by European governments—and by the EU at large—fall short of addressing the threat posed by a revanchist Russia. It is also true that efforts to return public finances to a sustainable path in the wake of the global financial crisis, or “austerity,” have been pursued in sometimes questionable ways. In some countries, such as Germany (or the UK), it has involved cuts to defense, the foreign service, or public investment at large—all with detrimental long-term consequences. 

“Austerity,” however, is not the main culprit, nor is more debt the get-out-of-jail card that some imagine it to be. While Europe’s fiscal choices need to change to prioritize hard power, deter Russia, and Trump-proof Europe’s future security, such change must also be economically and politically sustainable.

Cutting defense spending and weakening the defense industrial base is not a necessary by-product of “austerity.” The United States has lived under a far laxer fiscal and macroeconomic discipline after 2008. Nevertheless, America’s defense capabilities are still arguably outstripped by the challenges that Washington faces in different theaters. Germany’s Rheinmetall alone, to provide an example, currently produces more 155 mm shells than the whole of the United States. 

What is more, European governments already spend a lot of money, controlling anywhere between 40 and 60 percent of GDP. As their populations age, they face the prospect of having to spend even more to maintain existing levels of old-age pensions and healthcare. To impose some rules-based limits on spending levels and debt to ensure that public finances do not spiral out of control is entirely reasonable. Unlike the United States, European countries do not enjoy the “exorbitant privilege” of having a global reserve currency, and countries such as Greece, Portugal, and Ireland have tested the limits of patience of the financial markets in a way that the United States has not. 

Spending more is not costless. True, there are countries in Europe that have managed to sustain large levels of public spending, with generous social safety nets and robust defense budgets, like the Nordic countries. They have done so, after their financial crises in the 1990s, by embracing structural reforms and economic flexibility. Thanks to economic dynamism, their large public budgets do not translate into debilitating debt burdens; rather those remain at very modest levels—about 30 percent in Denmark, for instance. 

Could those countries just increase their defense spending and their debt without harmful consequences? Sure—but the debate is not about them. Instead, it is primarily about the EU’s largest economy, Germany, which is also the main villain in the conventional story of European “austerity.” With a debt-to-GDP ratio of merely 64 percent and an unwillingness to go on a major spending spree, Germans are harming themselves and other Europeans by enforcing, as the Federal Constitutional Court did last year, the constitutional brake on new public debt. 

Over a longer horizon, however, the main problem of Germany’s public finances is not restraint but rather an unfavorable demographic outlook. In the 1960s, there were six actively insured workers contributing to the pension system for every retired German. Today, the ratio is close to 2:1, and worsening. Without significant reforms—kickstarting economic growth in a country at risk of deindustrialization, raising the age of retirement, cutting benefits and increasing contributions—the system faces the same prospect of bankruptcy as America’s Social Security or other pay-as-you-go systems across the Western world. 

Make no mistake—Germany’s current defensive crouch is far from ideal. Nonetheless, the alternative cannot be to ignore the country’s constitution or to abandon all commitment to fiscal probity. Even if Germany could get away with it for a while, the consequences of similar policies in other economies would be disastrous. Following a decade and a half of putative “austerity,” debt levels of countries such as France or Belgium are close to 100 percent of GDP; in Italy’s case it is 137 percent. France, to pick just one country, has both the highest tax-to-GDP ratio in Europe and also a heavily overregulated economy. With a deficit at 5.5 percent of GDP, Macron cannot just spend more. Instead, the French economy will need a mix of cuts to entitlement spending and structural reforms.

The European Central Bank has notably stepped in to help governments on the Mediterranean periphery through its large-scale asset purchase programs—but these have also been seen as problematic in light of Germany’s constitutional order. Those interventions might continue, yet the Bank’s primary, legal mandate to fight inflation may need to take precedence in the coming years, translating into an environment of higher interest rates.

How about using the precedent set by the RRF to issue more EU-level debt dedicated to strengthening Europe’s industrial base and helping Ukraine win the war? There is no doubt that the EU could raise hundreds of billions for such a cause. But European debt is not a free lunch. Not only have the costs of debt grown in the new environment of higher interest rates, yields on European bonds are stubbornly high even when compared to national debt instruments. Politically, getting the entire EU to back such a move would require placating its Putin contingent, not to mention the nominally neutral Austria.

There is also a deeper, conceptual problem with giving the EU greater leeway to conduct fiscal policy, and to pile supranational debt on top of heavy debt burdens across member states. Debt and taxation rely on the existence of appropriate, accountable, and legitimate political institutions—it is the main reason why parliaments were invented to begin with. Simply assigning further responsibilities to European institutions, without institutional reform, will deepen the bloc’s perceived or existing democratic deficit and strengthen those who wish ill to the integration project. 

The problem that Europe faces is not one of fiscal rules, but one of political leadership. If Europeans are to help Ukraine achieve its victory and render Eastern Europe safe from Russian aggression, they have to make different choices over what their tax euros are spent on: less butter, more guns. They need to adjust their social models (including through spending cuts) to make them sustainable for the next generations of retirees. They need to complete the single market and pursue structural reforms that will grow the tax base needed to fund the military build-up the current moment calls for. 

In short, there are no clever, technocratic shortcuts to get Europe to the desired destination, just hard work. While the EU budget accounts for a small fraction of the EU’s economy, it is the obvious place to start. The multi-annual financial framework for 2021-2027, or the EU’s seven-year budget, is over €1.8 trillion (if one includes the one-off post-pandemic recovery fund, the RRF). The amount of funds dedicated to defense in any shape or form is a rounding error—the European Defense Fund is worth €8 billion over the same period of time, or 0.4 percent of the EU budget. The “Peace Facility,” grown in response to the war outside of the budget’s framework, provides €17 billion, mostly reimbursing governments that donate their military kit to Ukraine. Thierry Breton, the internal market commissioner, speaks of a possible “huge” fund of €100 billion.

Color me unimpressed. The Russian threat to Europe is the most serious challenge to Europe’s security since 1945, far outstripping the importance of decarbonization, support to the EU’s underdeveloped regions, or even income support for farmers, which collectively account for the bulk of the EU’s spending. At the root of Europe’s current problem is the fact that there is essentially zero willingness to revisit the fiscal choices made collectively in 2020. The same is true, with some caveats about those governments that have stepped up, at the level of member states. 

The complacency is puzzling. Given the massive discrepancy in the sizes of Russia and the EU’s economies, defeating Putin can be done on the cheap, without throwing fiscal probity out of the window. Protracted wars, after all, are decided by relative economic and industrial resources that the two sides can bring to bear. Russia’s official defense budget is $38 billion (a little more than Poland’s) and Moscow has thus far spent around $211 billion to keep its “special military operation” going. We in the West can easily match, and even exceed, that amount. Just by itself, following the Estonian plan of ringfencing 0.25% of GDP for Ukraine assistance would yield around $130 billion a year if other Ramstein countries followed suit, without raising any questions about fiscal sustainability. 

To those wielding the anti-austerity hammer, everything looks like a nail. But that framing obfuscates the debate about Europe’s defense spending and level of support for Ukraine instead of clarifying it. Worse yet, it forces Europeans into a debate that is unlikely to mobilize support to throw their collective weight behind the continent’s security. 

Dalibor Rohac is a senior fellow at the American Enterprise Institute in Washington, D.C. and a contributing editor at the American Purpose. X handle: @DaliborRohac. 

Image: Butter carved into the shape of Euros, created via AI. (Canva)

AuthoritarianismDemocracyEastern EuropeEconomicsEuropeRussiaUkraineU.S. Foreign Policy