The ‘Peace Dividend’ Is Over in Europe. Now Come the Hard Tradeoffs.
  • 4.05.2023
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Defending against an unpredictable Russia in years to come will mean bumping up against a strained social safety net and ambitious climate transition plans.

In the 30 years since the Iron Curtain came crashing down, trillions of dollars that had been dedicated to Cold War armies and weapons systems were gradually diverted to health care, housing and schools.

That era — when security took a back seat to trade and economic growth — abruptly ended with Russia’s invasion of Ukraine last year.

“The peace dividend is gone,” Kristalina Georgieva, the head of the International Monetary Fund, recently declared, referring to the mountains of cash that were freed up when military budgets shrank. “Defense expenditures have to go up.”

The urgent need to combat a brutal and unpredictable Russia has forced European leaders to make excruciating budgetary decisions that will enormously affect peoples’ everyday lives. Do they spend more on howitzers or hospitals, tanks or teachers, rockets or roadways? And how to pay for it: raise taxes or borrow more? Or both?

The sudden security demands, which will last well beyond an end to the war in Ukraine, come at a moment when colossal outlays are also needed to care for rapidly aging populations, as well as to avoid potentially disastrous climate change. The European Union’s ambitious goal to be carbon neutral by 2050 alone is estimated to cost between $175 billion and $250 billion each year for the next 27 years.

“The spending pressures on Europe will be huge, and that’s not even taking into account the green transition,” said Kenneth Rogoff, an economics professor at Harvard. “The whole European social safety net is very vulnerable to these big needs.”

After the Berlin Wall fell, social spending shot up. Denmark doubled the money it funneled to health care between 1994 and 2022, according to the latest figures compiled by the Organization for Economic Cooperation and Development, while Britain increased its spending by more than 90 percent.

Over the same period, Poland more than doubled funding for culture and recreation programs. Germany ramped up investments in the economy. The Czech Republic increased its education budget.

Military spending by European members of North Atlantic Treaty Organization and Canada reached a low point in 2014 as the demand for battle tanks, fighter jets and submarines plummeted. After Russia annexed Crimea that year, budgets started to rise again, but most countries still fell well below NATO’s target of 2 percent of national output.

“The end of the peace dividend is a big rupture,” said Daniel Daianu, chairman of the Fiscal Council in Romania and a former finance minister.

Before war broke out in Ukraine, military spending by the European members of NATO was expected to reach nearly $1.8 trillion by 2026, a 14 percent increase over five years, according to research by McKinsey & Company. Now, spending is estimated to rise between 53 and 65 percent.

That means hundreds of billions of dollars that otherwise could have been used to, say, invest in bridge and highway repairs, child care, cancer research, refugee resettlement or public orchestras is expected to be redirected to the military.

Last week, the Stockholm International Peace Research Institute reported that military spending in Europe last year had its biggest annual rise in three decades. And the spendathon is just beginning.

On Wednesday, the European Union announced a plan to upgrade and expand weapons production, and provide 500 million euros ($551 million) to manufacturers. While the proposal seeks to ramp up weapons production for European militaries, it could help the bloc’s member nations meet a deadline to deliver a million rounds of ammunition to Ukraine this year, said Thierry Breton, the European Union’s trade commissioner.can be increased.

Poland has pledged to spend 4 percent of its national output on defense. The German defense minister has asked for an additional $11 billion next year, a 20 percent increase in military spending. President Emmanuel Macron of France has promised to lift military spending by more than a third through 2030 and to “transform” France’s nuclear-armed military.

Some analysts argue that at times cuts in military budgets were so deep that they compromised basic readiness. And surveys have shown that there is public support for increased military spending, pointedly illustrated by Finland and Sweden’s about-face in wanting to join NATO.

But in most of Europe, the painful budgetary trade-offs or tax increases that will be required have not yet trickled down to daily life. Much of the belt-tightening last year that squeezed households was the result of skyrocketing energy prices and stinging inflation.

Going forward, the game board has changed. “France has entered into a war economy that I believe we will be in for a long time,” Mr. Macron said in a speech shortly after announcing his spending blueprint.

But the crucial question of how to pay for the momentous shift in national priorities remains. In France, for instance, government spending as a percentage of the economy, at 1.4 trillion euros ($1.54 trillion), is the highest in Europe. Of that, nearly half was spent on the nation’s generous social safety net, which includes unemployment benefits and pensions. Debt has also spiraled in the wake of the pandemic. Yet Mr. Macron has vowed not to increase what is already one of the highest tax levels in Europe for fear of scaring off investors.

Debates over competing priorities are playing out in other capitals across the region — even if the trade-offs are not explicitly mentioned.

In Britain, on the same day in March that the government unveiled a budget that included a $6.25 billion bump in military spending, teachers, doctors and transport workers joined strikes over pay and working conditions. It was just one in a series of walkouts by public workers who complained that underfunding, double-digit inflation and the pandemic’s aftermath have crippled essential services like health care, transportation and education. The budget included a $4.1 billion increase for the National Health Service over the same two-year period.

Romania, which has been running up its public debt over the years, has pledged to lift military spending this year by 0.5 percent of national output. And this month it agreed to buy an undisclosed number of F-35 fighter jets, which have a list price of $80 million a piece. While the increase will enable the country to hit NATO’s budget target, it will undercut efforts to meet the debt limits set by the European Union.

The shift in government spending is perhaps most striking in Germany, where defense outlays plunged after the reunification of the former East and West German nations in 1990.

“Defense was always the place to save, because it was not very popular,” said Hubertus Bardt, the managing director of the Institute of the German Economy.

Germany, the largest and most powerful economy in Europe, has consistently devoted less money to the military as a percentage of gross domestic output than either France or Britain.

It’s a “historic turning point,” the German chancellor, Olaf Scholz, said when he announced a special $112 billion defense fund last year. Yet that pot of money did not include any spending for ammunition. And when the fund is depleted, Germany will need to find an additional $38 billion to level up with its NATO partners.

Mr. Rogoff, the Harvard economist, said that most Europeans have not yet absorbed how big the long-term effects of a fading peace dividend will be. This is a new reality, he said, “and governments are going to have to figure out how to rebalance things.”

 

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