Brussels has quantified what the arms race costs Europe: 800,000 million euros. But its success lies in the political will of the capitals to carry it forward, because 650,000 million of that project must leave national budgets. And the passage that Germany is going to raise its constitutional limits to the public debt to finance defense and infrastructure projects involves a boost to that approach of the president of the European Commission, Ursula von der Leyen. Because Berlin takes that step, mainly, to revitalize an economy in setback since Russia invaded Ukraine. But, incidentally, in that project will also launch the great German rearme.
That it is Germany that ventures to leave behind its traditional austerity and the balance of public accounts to support this project gives a clear sign of support to Brussels. The support is symbolic and, of course, more effective than the one that has occurred this week in the European Parliament, when the MEPs supported the program that the Commission had presented at the beginning of the month. In this context, the German World Economy Institute, an economic analysis center located in Kiel (Schleswig-Holstein), predicted this Thursday that the German public deficit will exceed 3% of GDP next year. And he foresaw that the debt will rise in almost three points between 2023 and 2026, to an amount equivalent to 65.4%.
When these numbers are read, it is concluded that the parties that now negotiate the next German government, the democratians of the CDU (the formation of Von der Leyen) and the Social Democrats of the SPD, are willing to take advantage of the flexibility that Brussels will give to the fiscal rules. The same day that the Commission launched the Rearme Plan, it also proposed to maximize fiscal rules to give more margin in national accounts to defense spending. Specifically, he proposed to suspend the stability and growth plan, official name of these budgetary standards, so that the increases in the military chapter do not compute to punish the states that exceed 3% of annual deficit, a maximum limit that community treaties allow.
“For extraordinary times, it is possible to have extraordinary measures,” justifies the president of the Commission. And to this catechism they have received in Berlin, going from being the highest apostles of the fiscal rigor to preach the benefits of public debt. The step is significant because the activation of the exhaust clause, the mechanism that gives rise to the suspension of fiscal rules, must be requested by each capital. And although it had already been announced that the 27 states were going to claim the implementation of that clause in a coordinated manner, it is clear now that the next German government will have no choice but to do it.
It is also likely that the way in which Germany will finance its rearme marks the priority line in the EU: public debt – not the cost of spending – at least in the short term. This was already appreciated in the tax plans that the Member States had to present last fall. Already before the geopolitical earthquake that has caused the return of Donald Trump to the White House, the countries that bet on significantly increasing their defense expenditure already foresaw that their indebtedness was going to grow in the next two or three years. Poland, Estonia, Latvia, Finland or Sweden, countries very close to the border with Russia, already made clear months ago that was the priority option.
Less clear that the countries in the south of the EU explore this route. While the states of the Baltic Ribera stand out for having a great fiscal margin, France, Spain or Italy are the example of the opposite. In fact, Italy has already warned that its preferences are to encourage private investment because public debt is high (if applicable, 140% of GDP exceeds). Spain, on the other hand, has made it very clear that it wants to raise the expense in defense, but claims that not only strictly military games are entering there. Madrid wants the cybersecurity bill to be computed, fight against terrorism or border control. If achieved, the Spanish expense for that area would already rise from the scarce 1.28% of the GDP that marks now, well below the 2% that sets the commitment achieved in NATO in 2014.
