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A European War Economy?

Written by Elena de Mitri

With the ongoing war in Ukraine and recent comments by the US presidential candidate Donald Trump signaling a decrease in US military support to European allies, governments have sought to extensively improve their defense capabilities so that they will be able to autonomously defend the continent. Many European countries have announced increased defense spending for 24. The increase will likely include additional military aid to be delivered to struggling Ukraine, in a time where Russian industrial capacity hasn’t faltered despite the sanctions. Some politicians have called for an industrial focus on defense capabilities, dubbing it as a ‘war economy.’ But what would a “war economy” look like?


While in 2023 only 9 European countries were meeting the 2% spending target set by NATO, it is expected that this number will increase in 2024. NATO secretary general Jens Stoltenberg has announced that 18 countries will meet the spending target 2024 and it is highly likely that many European countries will be among them. These initiatives point to a possible future change in the continent’s economic and industrial landscape as the defense industrial base is adapting to address the potential security threats posed by Russia’s destabilizing activities in the continent. 




Financial changes


With the start of the Russian invasion of Ukraine, many European countries sought to support Ukraine by supplying military equipment and ammunition. As a consequence, their stockpiles have been severely depleted. Current defense expenses are mainly targeted at replenishing stockpiles and updating outdated equipment. But in order to permanently expand their military capabilities, European countries will have to rethink how they allocate their finances. 


The increased spending on defense will certainly require additional funding. With tax increases and issuing debt considered by economists as unfeasible options, the additional funding will likely come with cuts from other areas, such as climate transition and social spending. Social spending in particular has benefited from the European reliance on US defense spending to protect European territory. Widespread defense cuts after the end of the Cold War contributed to the establishment of the European welfare states in their current form. In order to enact the necessary cuts governments will need to convince the population of the necessity of more defense spending, especially in the more skeptical western parts of the European Union. Another option might be the establishment of a debt-funded European defense budget similar to the Covid-19 recovery fund. While this option seems quite appealing, it might take a longer time to materialize due to the slow decision making process that characterizes the European Union.


The European Commission is seeking to play a role in this matter, with talks of a future Defense Commissioner post being established after the next European elections and an announced defense industrial strategy proposal. A key point of this proposal is an expansion of the joint procurement mechanism already set with the short-term European defense industry reinforcement through common procurement act. Joint procurement will likely be a critical part of this policy shift as it allows European countries to purchase military equipment and ammunition in bulk while keeping prices down. Nevertheless, unless member states decide to grant more powers to it, the European institutions will only be able to play a supporting role, subject to the member states’ desire to cooperate and harmonize on defense matters. Defense still is primarily a matter of national policy and it will likely remain dependent on the will of individual governments, especially considering the differences in threat perceptions among western and eastern Europe. 


A European defense industry?


European countries are still very much dependent on the US defense industry for their military supplies. Nonetheless, European companies are benefiting from current geopolitical events. For example, German company Rheinmetall is currently expanding and opening new factories in European countries to face the increase in demand for its products from 2022. This trend will likely continue, especially considering the European Commission interest in strengthening the local defense industry. Buying from European companies will return the investment and contribute to the growth of the continent’s economy. An expansion of the defense sector will eventually provide new jobs and increased tax revenue. Moreover, in the long haul European security will be even stronger due to the autonomy provided by a strong local defense industry. 


In order to more effectively reap the benefits of this growth European governments will need to plan cooperatively their purchases, keeping in mind the importance of interoperability and possible future security challenges. While the European defense industry is on average more homogeneous than the US industry, many states still have different priorities when it comes to planning for defense purchases. National armies also retain different rules for equipment and logistics that will likely need to be standardized at a European level to improve interoperability. Cooperation is expected to remain widespread in the field of research and development, which will be fundamental for the future of defense in the continent. Cooperation mechanisms that are already in place, such as the European Defence Fund and the European Defence Agency, will likely be strengthened. 


Attracting investments will also be important to help the defense sector to expand and support the continent’s defense needs. As Germany has announced an ease on regulatory hurdles for investments in defense companies, it is likely that other governments will follow soon. Even the European Parliament has called for a change in the rules of the European Investment Bank so that it would be able to invest in defense companies. Joint procurement may provide increased predictability and push companies to expand production lines. Nonetheless, the changes affecting the defense sector will be subjected to the desires and objectives of individual governments. European countries have already been arguing about where to buy military supplies, with disagreements over a focus on European companies. But even if European countries agree on buying European weapons, there will likely be lengthy discussions as they need to decide which national companies will be prioritized. 



The human side of defense


A considerable expansion of European military capabilities engenders many questions. But among them, one really makes a difference: if security threats materialize, who will be fighting? Only eight European countries still retain active compulsory military service, with some considerably easing the commitment required from citizens. Other countries are considering reintroducing it in the wake of the war in Ukraine, with lighter formats being tested. However there is a wide skepticism that conscription would still work considering the increasing complexity of the equipment currently employed in European armies and the little time that conscripts spend in training. Moreover, young Europeans tend to be less willing to accept conscription in case of a war compared to previous generations. 


On the other side, countries that rely on professional armies have seen a decrease in the number of troops for the last few years. Most European armies are currently struggling to meet their recruitment targets. While defense investments are important, governments would also need to increase the appeal for joining the military. The private security sector is competing to attract new recruits with higher salaries, higher living standards and better benefits, making the army increasingly unpopular. 


An uncertain future


With defense being a prerogative of European Union member states, it is very likely that there will be an increase in multilateral cooperation on defense related matters, in line with the recent trend of joint procurements and research financing.


Nevertheless, the changes required to push further the European defense industry require political will and public approval to enact them. Getting public approval will be especially complex in Western Europe, as the perceived threat is weaker than in Eastern Europe. While European institutions are seeking to play a more central role in this matter, some countries have perceived it as an unacceptable meddling into private affairs. National governments and politics will likely continue to be the main influence in future defense developments as defense is still considered a key national prerogative. 



 

 

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