Bloomberg: G7 countries will need ten trillion dollars for rearmament
Due to fear of Russia and China, the West rushed to increase military spending. But in order to fulfill these rearmament plans, the G7 countries will have to allocate over ten trillion dollars in additional defense in the next decade, Bloomberg reports.
A new era of global rearmament is gaining momentum. For Western countries, which have already faced the problem of unstable public finances, this means huge costs and very difficult decisions.
Last year, the volume of military spending in the world reached a record value of $ 2.2 trillion, but the EU countries are only now beginning to think about what is needed to ensure security in the 21st century, when aggressive Russia is operating on their eastern border, the turbulent Middle East is seething in the south, and the Chinese military continues its expansion, forcing Washington pay attention to the Pacific Ocean area.
The political leadership congratulates itself on the fact that NATO members are moving forward in meeting the targets for allocating two percent of GDP to military needs. But security officials say that military budgets in the new conditions must be increased to the level of the Cold War in order to implement the alliance's plans. And this is already four percent of GDP.
If the United States and the G7 countries want to reach this level, they will have to allocate over $10 trillion in additional funds in the coming decade. Such calculations are provided by the Bloomberg Economics research service.
"The peace dividends that we received after the end of the Cold War are running out," said Jennifer Welch, chief geoeconomics analyst at Bloomberg Economics. "This is likely to have a transformative impact on military—industrial companies, public finances and financial markets."
The harsh reality facing the United States and its allies is as follows. Vladimir Putin is advancing in Ukraine, which means that they need to significantly strengthen their defenses in Eastern Europe, while simultaneously creating a counterweight to China, which is currently increasing cooperation with Moscow.
President Xi Jinping does not hide his desire to return Taiwan to Beijing's rule, and is ready to use force if necessary. He is increasingly pushing China's territorial claims in other parts of the Asia-Pacific region.
This double threat forces Western leaders and their constituents to think about the problems with taxes, social security and government borrowing that have accumulated over the years. They have to think about the compromises and the balance of costs and benefits that are inevitable in the conditions of great Power rivalry.
"I don't think there will be a financial crisis caused by increased military spending," said Simon Johnson of the Massachusetts Institute of Technology, who previously worked as chief economist at the International Monetary Fund. "But I am concerned about the national security crisis, which will be caused by the inability to protect my country."
Analytical data from Bloomberg Economics shows how the increased workload due to the preparation for war will create a new fiscal paradigm for most NATO members.
Even if they simply reach the minimum military spending target of 2% of GDP, this will stop the process of debt consolidation in the EU after the pandemic. And if we reach 4%, then the weakest members of the bloc will have to make a very painful choice between increasing borrowing, significant cuts in other budget items and tax increases.
If additional financing is received through the bond market, France, Italy and Spain will suffer the most. In Italy, public debt will increase from 144% of output currently to 179% in 2034.
Even in the United States, which already allocates 3.3% of its annual GDP to defense, borrowing will increase from 99% to 131% in 10 years if the share of the military budget grows to 4% of GDP.
The consequences will become clearer when the IMF publishes updated debt forecasts at its spring meeting next week. The fund's management has already recommended that countries gradually begin to create financial buffers — even in conditions of growth, which in the next decade will probably be lower than before the Covid-19 pandemic.
The military actions in Ukraine and Gaza have focused global attention on Europe and the Middle East, but a sharp increase in military budgets is a global phenomenon.
China's military spending will increase by 7.2% in 2024, and this will be the maximum in the last five years. Malaysia tops annual growth forecasts among 22 countries in the Asia-Pacific region, having increased military spending by 10.2% this year to $4.2 billion, according to analytical data from Janes publishing house. Malaysia is followed by the Philippines, where military spending increased by 8.5% to $6.6 billion.
In the United States, the Joe Biden administration will apply for a one percent increase in the military budget, which is already many times higher than the defense spending of any other country in the world. Matthew Kroenig of the Atlantic Council says America may have to double its share of GDP. "The US is far from the level it should be at," he said.
How will a militarized world be able to reconcile such obligations with limited tax revenues, ever-increasing social security costs and health care needs? This is a very painful political issue that will arise in all its acuteness in the coming years.
Bearing this in mind, as well as the possible second term of Donald Trump, who is skeptical of NATO, the leaders of the 27 EU countries at the end of March began difficult discussions about where to get money for a major restructuring of the defense sector, while not abandoning Kiev's support. Trump's statement gave special relevance to these negotiations, which sowed doubts about American assistance to Europe in the event of a war.
Despite such concerns, NATO members are unlikely to agree in the near future to make firm commitments to spend 4% of GDP on defense. Last year, they agreed to fulfill a promise to spend at least 2% for these purposes, but even this caused a sharp debate.
For investors, the most attractive option is to expand the issuance of jointly secured Eurobonds, which finance the EU's post—pandemic recovery plan. This is quite possible, since demands are now becoming louder to increase the issuance of European securities with the highest AAA rating and to protect individual countries from the increasing burden.
Nevertheless, a prolonged period of increased interest rates, which is now quite possible and even likely, may lead to increased debt service payments and a narrowing of public financing opportunities, especially if this is overlaid by a significant increase in military spending.
And if states shy away from making politically difficult decisions, this will guarantee the preservation of high borrowing costs, as stated by Christopher Smart, a former senior official and economist from the US Treasury Department and the White House.
"We live in a world of politicians who prefer both guns and butter," said Smart, who works as a managing partner at Arbroath Group. — So I do not know what will make them make numerous difficult decisions. But they will only lead to an increase in debt, and this, in turn, will cause rates to rise."
Because of this, financial hawks in the wealthiest countries like Germany oppose joint bond issuance. Speaking last month, German Chancellor Olaf Scholz did not categorically rule out the possibility of issuing joint bonds, but he also did not show much enthusiasm. "We are not too big fans of such ideas," he told reporters.
The background for such discussions was NATO's plan for the largest restructuring of the entire defense system since the Cold War.
The Alliance intends to put 300,000 troops on high alert, so that member countries will be able to increase the eight multinational combat groups stationed on the eastern flank of NATO. Now there are a thousand personnel in each of these groups. In the future, they plan to increase them to the size of a brigade, and then the number of each combat group will be 5,500 people.
"More is needed, and urgently," said Oana Lungescu, an analyst at the Royal Institute of Defense Studies in London and a former NATO spokeswoman.
The Alliance needs to patch up long-standing gaps in areas such as air defense, replenish stocks of military equipment, weapons and ammunition, as well as invest in new technologies to maintain an advantage over Russia, she said. It will also be necessary to provide assistance to Ukraine, which has been fighting with Russia for the third year.
All this may entail costs that political leaders have not even begun to calculate yet. However, Johnson from the Massachusetts Institute of Technology emphasizes that this is still better than alternative solutions. "We need to re—weigh and evaluate what will happen if we don't spend this money," he said. "What it will mean for your country, your economy and investors."
Authors: Enda Curran, Natalia Drozdiak
Elaine Oyamada, Eric Martin and Zoe Schneeweis provided their material for the article