The article centers on the economic ramifications of Europe's potential shift towards increased defense spending. Driven by a perceived withdrawal of US security guarantees and Russia's actions in Ukraine, Europe faces the challenge of funding its own rearmament.
A major obstacle is Europe's commitment to fiscal conservatism, with strict rules limiting budgetary deficits and public debt. These rules, while occasionally bypassed, hinder the funding of increased defense spending. The debate revolves around whether to abandon this fiscal conservatism or to cut spending in other areas.
If borrowing isn't an option, a major consequence could be the reduction of funding for social welfare programs. This could lead to a dismantling of Europe's established welfare state. The lack of willingness to increase taxes on the wealthy to fund the military further complicates the situation.
The shift in US policy under President Trump, characterized by a willingness to negotiate with Russia and a perceived lessening of commitment to European security, is the catalyst for this debate. This shift has forced European leaders to reconsider their spending priorities and to deal with the economic implications of independent defense.
With US President Donald Trump leaning towards Russia when advocating a stop to the war in Ukraine and making clear that the US will no longer foot the bill to ensure Europe’s security, talk of “Russian expansionism” in Europe has become louder. This has fuelled calls for Europe to rearm itself. However, there is little appetite among the continent’s current rulers for enhanced taxes on the rich to fund the increase. The fallout has been a discussion on the need for Europe to shed its fiscal conservatism, institutionalised in the form of “fiscal rules” capping budgetary deficits and setting public debt ceilings. However, though those rules have been diluted in practice, there is strong opposition to rethinking the conservative macroeconomic policy framework that a Europe led by Germany has embraced. If borrowing is not an option, defence will have to be financed, it is argued, by diverting funds from welfare spending, accelerating the process of dismantling Europe’s famed “welfare state.”
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Accustomed over the last 75 years to relying on the United States (US) to ensure its security and back-stop on the North Atlantic Treaty Organization (NATO), Europe is coming to terms with an American president who has said that European governments must find the wherewithal to defend themselves. This turn in US policy following the return of Donald Trump was in itself, in the words of Frech President Emmanuel Macron, an “electroshock” (Khalaf et al 2005). But coming at a time when NATO’s effort to contain Russia and defend a Europe-influenced Ukraine faces defeat, the Trump administration’s pivot to negotiating with the Russians, admonishing Ukrainian President Volodymyr Zelensky for persisting with war, and withdrawing American defence support to Europe, is forcing a rethink of spending priorities in Europe.
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