There is a parallel between the United States of America’s attitude toward defense and Europe’s stance vis-à -vis the environment and social matters.
This proposition may be surprising but consider the table below along the following dimensions: a long-term objective to fend off a threat, a contribution to a global public good, a free-riding issue, extraterritorial policies, and fiscal policy.
From that angle, both the US and Europe have been in active risk management mode, working towards a form of sustainability (albeit in an unsustainable way from a fiscal policy perspective.)* The only significant difference is the nature of the perceived primary threat.
To reconcile Europe’s and the US’s objectives and address geopolitical dynamics, Europeans could redefine ‘sustainability’ to include defense activities, including in its sustainability-related regulation (e.g., SFDR), as heretic as it may be to many. Si vis pacem para bellum.
The EU would also have to come off its high horse. The US, too often accused of short-termism by Europe, has demonstrated a steady ability to take a long-term view on defense. Meanwhile, Europe has reaped a $1.8 trillion peace dividend relative to the NATO 2%-target since the end of the Cold War. Finally, the Old Continent has evidently underestimated the military threat at its door.
Now, how could Europe finance an increase in defense spending? In ‘European Defense Spending in 2024 and Beyond’ (2024), the Ifo Institute tries to answer that question, but in an overly simplistic manner, which makes me doubt the soundness of its conclusion.
To be fair to the authors, there does not appear to be any public study running various scenarios (quantum, financing sources) to assess the net implications from an increased EU defense spending for the economy. Significant decisions must be made by politicians without any ability to evaluate their macroeconomic consequences.
In this vacuum left by economists, the stock markets may offer a clue about Europe’s ability to support its defense industry (see ‘The Market-based Truth’.) Over the last three months, the STOXX European Aerospace and Defence sector is up 19%, marginally behind the performance of the STOXX Global Artificial Intelligence (AI) Index (and outperforming the broader European index by 12 percentage points.) For market participants, the EU will one way or another be able to finance a significant, lasting increase in defense spending.
As a silver lining, a renewed focus on defense might help the European Union regain the credibility required to have a broader discussion on sustainability matters with the US.
* While Europe has a lower government debt/GDP ratio than the US (90% vs. 120%), it has been taxing its economy significantly more, leaving it with much less room for a trend reversal.