Blog: You, us, everyone

The recent change in the attitude of the US Administration under President Trump has highlighted, once again, the fundamental construct of the EU, particularly the absence of a coordinated and sustainable approach to mandatory sovereign tasks such as defense, taxes, social security, and health care. It goes without saying that the US attitude towards Europe has changed long before the take-over of the Trump administration, the actual President just made it evident.

Recent developments in the Ukraine conflict underscore the urgency for European countries to produce their military capabilities, enabling the region to defend itself independently.

Ever since WWII, only a few European countries have allocated significant portions of their budgets to defense, resulting in substantial gaps in equipment and infrastructure due to underinvestment by many others. While France and the UK look good from a material and technological point of view, they lack personnel (aka soldiers) while the opposite is true for Germany which banked on a strong US cooperation for the last 80 years. Remember, there are still some 35k active-duty United States military personnel in Germany.

Bridging these gaps may require more funding than merely increasing the defense spending share of GDP to the previously agreed 2% NATO requirement, with joint EU defense capabilities potentially adding further costs. It is anticipated that most additional funding will be managed at the national level and any amount spent will be neutralized for GDP/Debt calculations. With current debt metrics varying significantly, one can expect a heightened downgrade risk for Belgium, France, Slovakia, and Romania.

It is also expected that an overarching supranational funding source (EIB, ESM) to complement individual countries' initiatives. A new EU issuance program for defense appears politically challenging, while pooled funding by a smaller group of countries, possibly including non-EU members, seems more feasible and likely. The ECB and softer fiscal rules would be supportive of a well-balanced funding approach and would not materially increase the risk of a future debt crisis.

The additional spending will likely benefit European defense and related companies, potentially boosting economic growth, productivity, innovation, and reshoring, offering a counterbalancing effect on fiscal budgets.