March 19, 2024 - 7:00am

After two years of verbal commitments by Nato’s European members to drastically increase their defence spending, the budgetary realities are starting to hit home. A new study by Germany’s Ifo Institute shows that in order to meet their target spending of 2% of GDP, European Nato members will need to increase spending by €56 billion every year. This report comes only weeks after the European Commission signed off on a €50 billion aid package to prop up Ukraine’s reeling economy.

A significant amount of the budgetary shortfall among European Nato members falls on those that are fiscally the weakest. After Germany the largest shortfalls were €11 billion in Spain, €10.8 billion in Italy and €4.6 billion in Belgium. All three of these countries have debt-to-GDP ratios of more than 100% of GDP. Italy is in particularly dire straits, with the largest budget deficit in the EU at 7.2% and 9% of its budget being used just to pay off interest owed.

Yet the 100% figure is just an arbitrary headline-grabber. A better metric is a debt-to-GDP ratio of 60%, which is the debt limit set in place by the Maastricht Criteria, laying out the rules that underly the single currency in the Eurozone. On this metric, 13 of the 27 EU members — nearly half — are over the limit. It is therefore unsurprising that the German report has been published at a time when many European countries are engaged in extensive budget cuts.

The problem with military spending is that, unless there is a war, the country that undertakes it receives nothing for its money. Poland, the only European country that has truly matched its militaristic rhetoric with actual spending, is an instructive example. In 2023 Warsaw’s military spending was around €15 billion over the 2% of GDP target. Yet this spending came at a time when the country’s GDP was growing at only 0.6% annually, the tenth-slowest rate in all of the EU. Poland’s slow growth is not, of course, caused by its high military spending — but that money could have been deployed to promote development (e.g. by building infrastructure).

This raises a question that no one in Europe seems to be asking: in the 21st century, will a country’s relative power and influence be determined by the size of its military or by the size of its economy? A glance at some statistics suggests that relative military size is not an adequate predictor of power and influence. China and America have top-10 armies and are highly influential, but India, Iran, North Korea, and Pakistan do too and are much less so.

Debates around spending priorities will be particularly sharp in countries such as Sweden, which has just acceded to Nato. The German report shows that Sweden is currently €3 billion short of its military spending target. Are Swedes willing to sacrifice a slice of their welfare system to put their money where their mouths are? If they do, it will come with a nasty sting given that Sweden’s GDP contracted 0.7% in 2023 — the second-worst fall in Europe after Estonia.

The larger question is whether all this talk of military expansion in Europe is a serious strategy or just a passing enthusiasm. We all remember the urgency felt by governments to do anything — and indeed to spend anything — to roll out vaccination programmes a few years ago. That enthusiasm faded, leaving us with a large bill that is rarely discussed. After the war in Ukraine eventually winds down, it is an open question whether Europe will remain committed to rearmament — especially given the economic problems looming just barely over the horizon.

Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics