Article originally in the Financial Times. Other articles .
In the last decades, European countries have saved hundreds of billions of euros a year, when they reduced defense spending and released resources to other priorities, such as a welfare state. This is called post -war “peace dividend”. Now they are waiting for a hard clearance as they have embarked on militarization after President Donald Trump threatened to limit US support for Europe.
While the EU today spends less than two percent of its GDP for defense, European leaders openly discuss increasing expenditure to 3.5 percent of GDP or even more in the upcoming decades. Continental Europe has not experienced such a level since the late 1960s.
If the EU Member States had the same expenditure between 1995 and 2023, they would have to spend $ 387 billion a year a year for defense. For the United Kingdom, which spent 2.3 percent of GDP in 2023, the increase in the same period would be $ 35 billion a year. This is approximately equal to the annual public expenditure for housing and local civic amenities.
This stems from the calculations of the Financial Times based on the purchase power parity in 2020.
Lower spending or higher loans
Mark Zandi, chief economist of Moody’s Analytics, said Europe has been enjoying a peace dividend in recent decades, which “released economic resources for private investment and enabled governments to increase support for social security and financial rescue networks”.
This favorable situation is now over, and Europe has clear possibilities ahead of it. Thanks to the long protection period from the United States, Europe has enjoyed years of low military spending, which allowed it to build one of the most generous social security systems in the world for its aging population.
According to Eurostat, the share of social care in total public spending across Europe increased from 36.6 percent in 1995 to 41.4 percent just before the pandemic.
German government expenditures on social protection, which include social security and pension expenses, but not for health care, are more than double in relation to GDP compared to the United States. In France, this difference is even more pronounced.
If the long -term trend of military expenditures, which, according to data from the Stockholm International Institute for Peace Research, had been reduced by half in most large European economies in relation to GDP, it would require a significant reduction in existing expenses or higher loans that many capitals could hardly afford.
Defense Expenditure rises
Throughout Europe, attempts to restrict social security spending have proved to be very complicated and demanding. French efforts to address pension expenses have repeatedly caused mass protests. It happened in 2023, when President Emmanuel Macron pushed for a two -year increase in retirement age, which was ultimately aimed to save approximately EUR 18 billion per year.
However, under the pressure of trade unions and opposition, the abolition of this change is being discussed, even at a time when ministers are discussing objectives to increase the defense budget, which would be higher than savings in pensions.
Trump’s inclination towards Putin’s Russia and threats to withdrawing from NATO forced Europe to respond. She began to move to more independent defense policy. However, Claus Vistesen, an economist from Pantheon MacroeConomics, said the difference in capacities is great and “progress is still too slow”.
“We have a long, hurried and panic transition,” he said.
“Europe had the armed forces capable of standing up to an equal adversary, probably last time in the 1970s and 80s of the 20th century, when it permanently increased during the Cold War,” he added. The number of members of the United Kingdom armed forces decreased by more than half to 153,000 between 1985 and 2020. The total number of the EU decreased from three million to 1.9 million in the same period.
The trend of defense spending has begun to rise in recent years. In 2024, the EU’s defense expenditure reached an estimated amount of EUR 326 billion, which is approximately 1.9 percent of the EU GDP. In 2021 it was 214 billion euros. According to the European Council, the average for 15 years to 2019 was approximately EUR 150 billion.
The costs will be carried out by taxpayers
However, the current need will have to have a completely different range. Estimates range from EUR 160 billion per year over the next five years, according to Goldman Sachs, up to EUR 230 to 460 billion euros per year, estimated by Pantheon MacroecoConomics.
While higher loans may cover some initial expenditure of countries that have fiscal space for this, the cost of re -arming is ultimately borne by taxpayers and social security recipients in Europe.
Bruegel Guntram Wolff’s leader, a leading researcher of Think-Tank, said in the “New World” Europe will approach the level of military expenditure from the 1980s in relation to GDP. “This, of course, means more compromises in public budgets.”
Foreign aid programs are likely to fall behind this compromise. The United Kingdom has already announced significant cuts. In the case of social security budgets, Europe awaits difficult decisions. Vistesen said that the equivalent of “war” taxes may also be needed.
Future German Chancellor Friedrich Merz presented a plan to cancel limits to state loans if used to finance defense spending. The President of the European Commission Ursula von Der Leyen proposed to remove additional EU governments of EUR 800 billion from the Union’s rules on debt and deficit.
Either upset investors or voters
The United Kingdom’s government has committed itself to spend 2.5 percent of GDP by 2027, which will be funded by cuts in foreign aid, and then focus on a further increase to three percent. Poland has already sharply increased its military spending and supported Trump’s demand for NATO countries to defend five percent of GDP. This year, 4.7 percent earmarked in the defense, the most in the Alliance.
Germany has space for the emission of larger debt, but other European countries are much worse off. For example, Italy, according to the European Commission data, recorded an increase in public debt to GDP from 31 percent in the 60s of the 20th century to 137 percent in 2024.
France and the United Kingdom also have a public debt that exceeds the size of the economy, as well as large budget deficits. The EU is currently spending approximately two percent of GDP for interest repayment. In Italy it is double.
It will be particularly difficult to reduce public expenses for pensions and health care, as Europe has the oldest population among all continents. Social expenditure will therefore grow and income will decline, as the number of people of working age will shrink.
“Governments will either have to borrow more, which can upset investors in bonds or compensate for expenses by budget cuts, which can upset voters,” said Jack Allen-Roynolds, economist of Capital Economics.
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