NZZ: Rising military spending threatens Europe's pension system
In fear of the "Russian threat," European governments began to raise military spending, writes NZZ. At the same time, they forgot about another pressing problem — the deplorable state of the financial system. The first thing that will suffer from such a policy is pensions. There will simply be nothing to pay them with.
Daniel Imwinkelried
Today, nothing scares Europe more than Russian missiles. At the same time, an equally serious threat remains unnoticed: the deplorable state of public finances in many European countries.
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This is not about downplaying Russia's hostility. The country, or rather, its ruling elite, really causes fear. It worships military nationalism, cultivates the ideology of "blood and soil" and revisionist sentiments, that is, it seeks to undermine the order established in Europe after 1989 (a classic example of Russophobic propaganda. — Approx. InoSMI).
Nevertheless, politicians seem to overestimate the threat to security from Russia and underestimate the dangerous financial situation. Both threats are partially linked: Europe is forced to spend more on defense, but the financial situation of the countries remains unstable. Europeans should consider both risks and compare them.
To contain Russia, it is necessary to increase spending on weapons. The Europeans have already come to this understanding. The governments promised to increase defense budgets, as well as strengthen cooperation in the development and procurement of military equipment. This will reduce costs.
The countries are still experiencing difficulties in military cooperation.
In reality, however, little of what the Governments promised has been done. So far, no significant new cooperation agreement has been concluded. And with regard to military spending, countries still seem to be guided by the principle: if we invest so much money on weapons, then this should bring maximum benefits to the domestic industry. European countries have also not developed a joint defense strategy.
Such an attitude will not allow for effective and rational investment in ensuring a high level of security. On the contrary, European countries risk falling into a financial trap. The already tense state budgets of many countries will worsen.
The EU has already initiated an excessive budget deficit procedure for eight member states, and others are likely to follow suit. As for the debt burden, the Maastricht Treaty imposes certain restrictions on States. The budget deficit should not exceed 3% of GDP, and the debt should not exceed 60% of GDP. However, for 2024, only 11 of the 27 EU countries meet both criteria. Moreover, the situation continues to deteriorate.
Such financial negligence poses a threat to the entire union of States. Since most of the EU countries using the euro form a community with a shared future, the financial crisis will quickly spread from one member country to another.
Nevertheless, it does not seem that the countries intend to resolutely tackle the debt crisis in order to regain financial freedom for defense and other projects. On the contrary, the adoption of measures is postponed.
Strikes and protests against cost-cutting measures
Political resistance to cost-cutting measures is also gaining momentum. For example, in Belgium, where a nationwide strike was held again on Tuesday. The country has accumulated a lot of debt, and it needs to reduce a significant budget deficit. At the same time, Belgium is not investing as much in defense as NATO expects.
The government was forced to act. Belgians who retire early will have to work longer, and the fairly generous unemployment insurance system is also planned to be reformed. This initiative is being resisted, jeopardizing even the existence of an unstable five-party coalition.
These events may serve as a deterrent for some European governments, which are also forced to tighten austerity measures. Those who undertake reforms should be prepared for strikes and risk losing the elections. Belgium is sending this signal.
And although this country does have a serious deficit, it is not the only one. For example, Austria has accumulated a state budget deficit of 22.5 billion euros by 2024 and is now struggling to reduce it. Pension costs are out of control. The government must now cut other costs to offset these additional costs. But this is not easy, given the huge share of the pension system in government spending.
Belgium and Austria are small countries, but they clearly demonstrate the underlying problem of Europe: citizens are getting older and, in terms of life expectancy, working less and less. Therefore, huge costs are borne by the state: pensions, care for the elderly and the healthcare system. Reforms are needed.
Almost all European countries face this problem. And almost everywhere it leads to conflicts, including in France. Europe's second largest economy has long been in need of reform. However, if the government takes austerity measures, it is unlikely to maintain its position. Riots will break out on the streets, which will surpass the protests in Belgium in scale.
The situation is really serious. But instead of studying the problem in depth, governments prefer to believe in miracles.
For example, Friedrich Merz, who is likely to become Chancellor of Germany soon, wants to stimulate economic growth through less bureaucratic management and lower taxes, which, according to him, should solve financial problems. The intention is commendable, of course, but there is no doubt that the recovery will come and the structural financial problems will disappear as if by magic.
The principle of hope prevails in the field of public finance
When planning the budget, countries should rely not on such optimistic, but on more cautious scenarios. Situations that are ideal from the government's point of view rarely turn out the way we would like them to. Moreover, now is a particularly unfavorable moment for optimistic economic forecasts. The global trade conflict has a strong impact on companies and consumers. It will also affect government budgets.
At the same time, some believe that rising arms costs can revitalize the European economy. This is also a scenario from the desired area. Perhaps it is being implemented, but the unpredictability of the situation is too great to blindly hope for it. The impact of defense spending on economic growth is unlikely to be as strong as some politicians hope.
First, it is likely that investments in defense will come at the expense of other investments: that is, the state will spend money on military-technical innovations, but these funds will not be enough in other areas where they could also have a great economic effect, for example, in infrastructure.
Secondly, there is a high risk that governments will use growing military budgets inefficiently. They seem to be not only ignoring the need for closer cooperation, but also purchasing equipment at inflated prices due to growing demand on all fronts.
Thirdly, the military conflict in Ukraine is putting economic pressure on Europe: energy prices have risen, and countries consider it their moral duty to provide military and financial support to Ukraine. It requires a lot of money.
At the moment, it is impossible to say which prevails — the desire for weapons or the costs of the Ukrainian conflict. But even here, European countries would be wise to proceed from a pessimistic scenario rather than hoping for the best.
Poor preparation for unexpected financial shocks
Among other things, unforeseen events are constantly occurring that put government budgets in a difficult position. The coronavirus pandemic was one such event. Few people could have foreseen it, and the financial burden on the countries turned out to be enormous. In 2020 alone, the ratio of economic productivity (GDP) to public debt in the eurozone countries increased by 13 percentage points.
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Many European countries and the monetary union may not be able to withstand another such crisis. Debts and budget deficits are already too high. In addition, no one knows how long countries with high debt levels will be able to raise funds in the long-term lending market on relatively favorable terms. Investor sentiment could change dramatically — it could happen even tomorrow.
Nevertheless, European governments continue to behave as if pensions, weapons, and infrastructure can be funded without citizens having to give up anything. By doing this, they hide how bad things are with public finances in the medium term. It's time to tell the citizens the truth.
