How Europe has outlived the post-WWII peace dividend

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 people’s 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 $175bn and $250bn each year for the next 27 years. medium99959524“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.”Before war broke out in Ukraine, military spending by the European members of The North Atlantic Treaty Organisation (Nato) was expected to reach nearly $1.8trn by 2026, a 14% increase over five years, according to research by McKinsey, spending is estimated to rise between 53% and 65%.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.Defence spendings riseLast 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.The demand for military spending will be on display Wednesday when the European Union’s trade commissioner, Thierry Breton, is expected to discuss his fact-finding tour to determine whether European nations and weapons manufacturers can produce 1mn rounds of 155-millimetre shells for Ukraine this year and how production can be increased.Poland has pledged to spend 4% of its national output on defence. The German defense minister has asked for an additional $11bn next year, a 20% 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. medium99959583But 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,” Macron said in a speech shortly after announcing his spending blueprint.How will govts pay?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 $1.54trn, 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 spiralled in the wake of the pandemic. Yet 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 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 $6.25bn 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 $4.1bn 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% of national output. And this month it agreed to buy an undisclosed number of F-35 fighter jets, which have a list price of $80mn apiece. 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. medium99959647The 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.“Defence 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,” German Chancellor Olaf Scholz said when he announced a special $112bn defence 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 $38bn to level up with its Nato partners.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”.