Make Europe’s defense again well conducting

Another day, another exit to the US support for Ukraine and thus safety in Europe. While President Donald Trump pushes for mining with Russia, Europeans are in a hurry to equip Europe without American assistance. Europe is a rich continent, and the signs are that its leaders can move quickly when they have a knife to their throat. What Friedrich Merz, which, on the way is the German chancellor created a political agreement The exemption of protection from paralyzed debt in the country is not stunning.

There is also a lot of discussions about financing models. So, below I am experiencing questions that need to be asked about Europe’s financial protection and offer some orientation answers. What do the free lunch readers think? Send us your mind in Freeelunch@ft.com.

To solve my own confusion, I was useful to divide the questions into three. How much money do you need to raise and spend? Where from where? And whom? Let’s start with the first.

How much should Europe spend?

Europeans need to spend more on defense. But how much more? It depends on what you think you need to protect. But any plausible response to this entails a very large growth from the current (not up to 2022) levels, probably several percentage points of annual GDP for many countries. This can make as much as a doubling of modern levels, which is slightly higher for most Europe, and sometimes much lower, 2 percent of GDP.

As a good yard, take Poland, an outstanding student. In just three years, it has moved an average of about 2 percent of GDP to almost 5 percent. Poland, of course, is especially subjected to the potential Russian invasion and is very aware of it. So what about the rest of Europe?

Recent report Alyaksandr Burilkov and Shuak Wolf give a short but informed response. If the US cannot count, they claim that Europe will need another 300,000 troops and at least 250 billion euros. Then it is not so far from Poland’s extra effort.

Where can you find the money?

Such an increase in protection means the redistribution of several percentage points of real resources of the European economy from current use in defense equipment, staff, logistics and research and development. This economic reality is the main point of “financing”, and it should be kept in mind in any discussion on how the accounting numbers fall on the budgets.

There are only three ways to do this in economics that do not leave significant resources, creating less than their potential. . Government loans can persuade the private sector to save more resources, and the released resources are aimed at defense budgets; Either the government may cut other budget expenditures.

Johannes Martin and Christoph Trabesh at the Kiel Institute studied As the military extensions were funded. They find that on average and in important thematic studies, military extensions are not usually paid by redistribution of existing state expenses. Instead, they are financed by the combination of taxes and debt – and the more rigorous no, the more debt in the mix. It also corresponds to the current Polish case, which is largely funded by the debt.

Of course, history can be a bad guidance, but Marzin and Trabesh note that economic principles recommend it for sure. Any constant increase in protection costs should be paid by taxes or reducing other costs. But in the near future, it is good to smooth the tax over time, so it makes sense to borrow for the original explosion. In addition, if the extension involves a constant increase in the stock of materials, the needs of short -up to the average period will be slightly higher than the permanent level. This blow should also be fixed to avoid a tax level. (And in the case of economic slack costs for debt deficits are justified for standard Censian reasons.)

Who should make borrowings and costs?

So, we set (or we must be) for a quick borrowing explosion to spend on protection to partially replace the tax increase over time. The critical question in Europe is whether it is worth borrowing at the national level or at the European level. Often, this is a confused discussion, which, fortunately, has recently used some great enlightenment.

One of the sources of confusion is that many countries are against domestic and/or European rules for cost shortages. This is one of the reasons that there are calls for a common European borrowing or new institutions, such as the “defensive fund” (for example, in the EU Pandemic Pandemic Recovery Fund). But this is a bad reason. If the rules lead to poor economic policy (indeed, poor security and defense policy), these are the rules that should change.

This is exactly how this week happened. In a bold decision, two traditional German parties agreed to constantly exempt the cost of defense from constitutional debt in the country. Meanwhile, the European Commission has proposed to suspend the EU budget rules for defense costs. (As far as this will be done, it is not quite clear, because the “shooting provision”, which will be caused, is not specific to the sector, but suspends restrictions on the whole state budget. But the political decision is clear.) For Germany, neither the internal nor the European rules now impose restriction on financing.

However, there are other good arguments for joint borrowing and new objects. One of them is that joint borrowings will help a joint expense or at least spend, agreed and standardized between countries. According to many observers, different national characteristics are a high load on the efficiency of Europe’s military procurement (since the savings from scale are not used) and the efficiency of military struggle (since countries are not compatible and interchangeable).

Another reason is that joint procurement and interaction should naturally include non -EU members such as the UK and Norway. But there are any legal and political restrictions on the participation of these countries in the existing EU political and financial structures. (A working paper With Stiftung Wissenschaft Und Politik explains complications well.) Moreover, not all EU members are neutral, some friendly to Russian President Vladimir Putin-may want to join the necessary defense. Thus, some new designs may be required for joint financing and procurement by the “coalition of those who are not included in the EU.

However, no one should think that the defensive bank will somehow go into a political choice that is involved in the redistribution of real resources. Unlike other major initiatives, such as the Green Transition, it is impossible to “use” a small amount of state financing to get private finances to do the rest. Only governments buy tanks (and thank you for that). Lending to defense banks does not overcome the need for power to invest on the order to order if the tank must be built. European leaders should strongly avoid the temptation to think that the volume of creation of a new institution will somehow change this basic fact. Too much financial engineering send an unmistakable signal about weakness – still does not want to collect the necessary resources.

If this is to keep in mind, there is a case for general borrowing (Sander Tordar is helpful Taught How to think about common defense bonds) if it is designed to stimulate the streamlining of specifications and joint procurement across Europe. Burylkov and Wolf believe that half of the extra 250 billion euros needed in the year can be made at the European level half at the national level. During the seven -year period of the EU’s perennial budget, this corresponds to the size of the recovery fund: bold but doable.

This week’s president of the European Commission proposed Costs of 800 billion euros in defense of the EU and its member states – of which 650 billion euros will be spent on national capitals within four years, which is allowed to suspend financial rules. This is approximately the right amount. But the capitals will still have to do political work to solve more. Poland did this; Germany put itself in the position to do so but had not yet made the costs. And expenses must be supported in the long run to give confidence to the manufacturers of weapons to increase power. Back the Mertz is right When he says The suspension of the EU budget rule for protection must be securely on the spot over time.

As for the total borrowing, the receipt of 150 billion euros is too small, and is probably determined by less needs than that it could be transferred from unused debt without much fuss. Thus, although this week there were great steps in the right direction, there is much more financial and political work.

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