Engineering A Surge In Defence Expenditures

Other EU countries, with defence budgets close to 1.5% of GDP on average, are in similar situations and are likely to follow suit. France is an exception with 2.1% of GDP already. But this includes the cost of nuclear forces. France also will need to increase the budget for conventional forces. Assuming no direct military involvement in the conflict in Ukraine but a gradual ramping up of the defence effort, additional military spending in the EU could easily reach €20 billion in 2022 and twice as much in 2023.

The cost will certainly be higher in the medium term. The likely minimum increase in defence spending should be 0.5% of GDP or €70 billion, from 2024-2025 onwards. Significantly more is a distinct possibility: in many European countries, the defence budget represented about 3% of GDP in the 1980s. It remains to be decided which part of this surge will be financed by taxes, and which by debt. As things stand, most of this cost will be borne by national budgets, but the EU will also need to step in, at least for the financing of research and development programmes.

Tackling The Refugee Crisis

Public finances will depend on Uganda phone number  decisions on whether and how to establish a common European defence policy. 5. A significant transformation and a major budgetary impact In response to an acute security crisis, the EU and its constituent member state now need to: Alleviate the price and income consequences of a new and major supply shock; Start reducing imports of Russian gas, while rebuilding inventories for next winter; Launch an emergency energy resilience plan to increase non-Russian energy supplies and distribute them within the Union.

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Integrate energy systems much more strongly and build a collective energy security doctrine; Mutualise the cost of welcoming refugees from Ukraine; Ramp up defence spending and lay the foundations for a common defence policy. These tasks only are only part of a major endeavour that will test the capacity of Europe to act swiftly and decisively, but also to embark on the provision of new public goods it previously had no responsibility for, and to organise solidarity. The medium-term implications are also of a first order.

Potentially Stronger Involvement Of Eu

So far, the expectation in the EU was that decarbonisation, digitalisation and resilience investments would dominate the medium-term agenda. Security – both economic and defence security – is now added to this agenda. A rough, back-of-the-envelope assessment of the corresponding short-term direct budgetary cost for the EU and its members could sum up to: An additional €50 billion to contain the domestic price consequences of an aggravated supply shockand twice as much in 2023.

All in all, total discretionary spending and tax cuts could represent €175 billion or about 1.1/4% of GDP in 2022. Further expenditures are called for in the medium term, especially on energy security and defence. They could represent at least half a percent of GDP per year. Part of the burden will fall on the member states (especially for price interventions, targeted transfers and defence). Together with the adverse macroeconomic shock, these additional costs will disturb the structural consolidation planned for 2023 and beyond. In its 2 March fiscal policy guidance, the European Commission remained cautious.

 

 

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