Military Strengthening Across Europe: Potential Impact on Social Welfare Expenditure
EU Must Swiftly Increase Defense Spending Without Sacrificing Public Services: A Closer Look
As the political dynamics between Donald Trump and Vladimir Putin continue to evolve, the European Union finds itself in a predicament, requiring a significant boost to its defense budgets. This shift, however, does not necessarily mean a decrease in investments in public services.
The preferred solution by influential voices to meet these increased financial obligations is via deep cuts in social spending and public services, a strategy they have long advocated. Yet, this approach carries substantial risks, as it may inadvertently drive more citizens towards extreme right-wing political factions, risking Europe's independence in aligning with the agendas of Trump and Putin.
Fortunately, solely slashing social spending and weakening public services proves unnecessary. Alternative methods exists, such as borrowing and joint borrowing at the European Union level. Historically, nations have relied on debt in times of necessity, though this may present challenges for countries like France, already burdened by high debt due to Emmanuel Macron's budgetary policies.
The most promising solution would be collective borrowing at the EU level. Currently, the EU carries negligible debt. Additionally, the untouched Russian assets could be mobilized, with the argument against this measure no longer holding water given the United States' diminished status as a safe haven for foreign capital.
However, the EU's ReArm Europe plan, introduced by Ursula von der Leyen and adopted by the Council on March 6, does not incorporate either of these two measures. The €800 billion total announced is impressive, but closer examination reveals no additional funds come from the EU level, with military spending still managed at the national level, straining the public finances of individual member states.
The exemption of military spending from the Stability and Growth Pact rules is a positive development. However, the increase in military budgets that this reform aims to facilitate will continue to place a burden on the public finances of member states. Enhancements to the European Investment Bank's (EIB) lending capacity for defense projects were expected, but without a corresponding increase in the bank's capital; the impact of this change will likely remain limited. Diverting the €150 billion in loans earmarked under Next Generation EU towards joint defense projects might undermine investments in the energy and digital transitions, and reallocating cohesion funds could weaken efforts to combat territorial inequalities.
Significant new borrowing at the EU level would make strategic sense, as effective rearmament requires coordinated efforts on a continental scale to address gaps in national armed forces, avoid redundancies, and ensure interoperability of equipment. Such a collaborative initiative would also strengthen the EU's military industries, which have been weakened over three decades of silent disarmament since the fall of the Berlin Wall. Encouraging European defense firms to collaborate would be far more effective than relying on national efforts.
Additionally, this extraordinary situation offers an overdue opportunity to finally tackle intra-European tax havens. If France and Germany were determined, limited political capital would be required to bring Luxembourg or Ireland into compliance. The persistence of tax havens within the EU remains an enduring scandal, particularly given the near-total tax exemption enjoyed by major technology firms and other multinationals operating in Europe, many of which are now closely tied to the United States, an increasingly assertive economic adversary.
Lastly, Europe's wealthiest citizens, who have profited significantly from economic policies implemented in the EU over recent decades, must contribute substantially more. Aiming for a tax rate similar to Franklin Roosevelt's United States during the 1940s, with a 94 percent marginal rate, would enable significantly greater contributions from Europe's wealthiest citizens to fund the collective effort.
In conclusion, the rapid military build-up needed to counter the Trump-Putin axis imposes substantial pressure on European public finances. However, cutting public services is not a viable solution. Indeed, such austerity would be politically disastrous, precisely when Europe must avoid handing a victory to Trump-Putinism.
The digital transition could be funded without sacrificing investments in public services, as alternative methods such as borrowing and joint borrowing at the European Union level could be utilized.
The European Union's wealthiest citizens, who have benefited significantly from economic policies, must contribute substantially more to fund the collective effort, much like Franklin Roosevelt's United States during the 1940s, with a 94 percent marginal tax rate.
