Europe's Defence Dilemma

What are the economic consequences of increased security spending in Europe? Euronews examines both the advantages and disadvantages of increasing defence budgets following the Ukraine crisis.

Russia's invasion of Ukraine in 2022 sent shockwaves across Europe, prompting a reassessment of security priorities and defence strategies in all countries.

In response to escalating tensions and a changing geopolitical landscape, most European countries have embarked on a path of increasing defence spending, and the EU is trying to organize and facilitate joint efforts to solve the continent's security dilemma.

European nations cut back on spending as the threat of war receded

After the end of the Cold War, European countries reduced defence spending in favour of social, infrastructural or technological investments. According to the International Monetary Fund, the total defence spending of advanced economies, which includes the members of the Eurozone, has almost halved since 1991 (as of 2015).
By 1991, advanced economies were spending more than 3% of their gross domestic product (GDP) on military purposes. By 2015, this figure had declined to 1.6% of GDP. Only after Russia annexed Crimea in 2014 did defence spending in Europe begin to increase, though not sharply across the board. As of 2019, Europe was still not investing the nominal 2% of GDP required under NATO rules.
A new sense of urgency gripped Europe as Russian advances in Ukraine brought back largely forgotten memories of the confrontational Cold War.

Russia's forces in Ukraine show that the potential for war remains

Mina Alander, research fellow at the Finnish Institute of International Affairs (FIIA), explains to Euronews: "It is clear that wars are no longer a distant phenomenon and that European countries cannot choose when and where to get involved. That is why the small armed forces that remained in most European states from the expeditionary era are no longer sufficient, either as a deterrent against the expansion of Russian aggression or especially as a defence against it.
The projected increase in European defence spending, which today has reached that of the final phase of the Cold War, according to data published by the Stockholm International Peace Research Institute, is also related to the offensive war that Russia is waging against Ukraine.
Edward Hunter Christie, NATO official and FIIA Senior Research Fellow lay out the facts in his commentary for Euronews: “European countries cannot sustainably supply Ukraine without increasing their defence industrial capabilities and capacity. At the same time, to prepare against future, broader Russian threats, European countries themselves need to increase their defence capabilities and their readiness to fight."

Defence spending must be increased

Given the growing threats in various regions, not only in Eastern Europe but also in Northern Europe, sub-Saharan Africa and the Middle East, even spending 2% of GDP will not be enough to provide Europe with a sufficient defence capacity in the foreseeable future.
Liana Fix, a research fellow for Europe at the David Rockefeller Research Program, said: "It is possible that the continent could be heading towards Cold War defence spending levels, which for many European countries were between 3 and 4% of GDP."
These levels of spending will provide new industrial and technological opportunities for the European economy, but will also cause tensions as budget spending shifts towards defence.
As Christie says, “Such training is, of course, expensive. It requires higher national defence budgets across Europe, as well as greater funding of existing or new supporting policies at both national and EU level, for example, to support the European defence industrial base."

Defence spending can spur economic growth

Increased defence spending can act as a significant driver of economic growth, particularly in sectors related to defence manufacturing and technology. Defence contracts and procurement projects create employment opportunities, stimulate innovation and promote the development of high-tech industries. In addition, defence investments often have a multiplier effect, generating additional benefits for suppliers and local communities.
Defence spending facilitates technological innovation and scientific research, spurring advances in areas such as cybersecurity, artificial intelligence, and space engineering. These technological breakthroughs not only enhance military capabilities but also have wider applications in civilian sectors contributing to overall national competitiveness and industrial sustainability.

On the other hand, increased defence spending necessitates the diversion of resources from other areas of public spending, such as health, education, and infrastructure. This can lead to compromises in the funding of essential social services and investments that are critical to long-term economic development and public well-being. Balancing competing priorities becomes especially difficult in times of budget austerity or economic downturns.

A rapid increase in defence budgets could put a strain on national finances, deepening budget deficits and public debt levels. Keeping military spending high over the long term requires careful fiscal planning and can lead to difficult choices, including raising taxes, cutting spending, or borrowing. Failure to effectively manage budget pressures can undermine economic stability and investor confidence.

Currently, European countries that are geographically closer to Russia have adopted a more proactive approach to defence spending. They are at the forefront of the increasing spending trend.

Alexander Lanoshka, associate professor at the University of Waterloo, told Euronews: "Poland, the Baltic countries and Finland have been preparing intensively for a different period. Partly because of their proximity to Russia, they generally have a broad social and political consensus about the nature of their strategic environment and what to do about it."
It also means that increasing defence spending in democracies is often a controversial topic that needs to be discussed within the political process. Dictatorships have it much easier in this regard - they don't have to consult their citizens while planning hostilities. Democracies must be considered even as they defend themselves.

Politicians in Germany are still hesitant about the level of spending

Europe's largest economy - Germany - is not doing all it can do in the field of defence.
Liana Fox pointed out: "Germany has the greatest potential, both financially and with its defence infrastructure, to become the new pillar of Europe, but the seriousness in the debate about the German Zeitenwende has been lost - by next year defence spending will reach 2% of GDP, but remain limited due to infighting in the government coalition and the debt brake".

Recently, France has emerged as a leader in the defence sector, as Mina Alander explains: “Macron seems to have understood what is at stake if Ukraine loses this war, and has begun to consciously move the conversation in Europe. France has also taken a leading role in the new multinational NATO battlegroup established in Romania."
A negative factor is the distancing from the European security trend coming from Washington, regardless of whether Donald Trump loses the upcoming presidential election or not.

As Christie stated, "There are two main trends in US discourse, namely a retreat or even isolationism and a greater focus on Asia to contain China." Both pose a threat to the current level of European security.
The decision to increase defence spending in response to Russia's invasion of Ukraine involves complex trade-offs and considerations for European countries. While strengthening military capabilities can enhance deterrence, stimulate economic growth, and fulfil international commitments, it also poses challenges in terms of fiscal sustainability, opportunity costs, arms race dynamics, and diplomatic engagement. European nations will need to simultaneously increase their defence spending levels and watch carefully the rise of populist political options. /BGNES