Europe’s path forward under Trump

Trump has made it clear that Europe is not his number one priority and there will be more focus on fair trade and putting American interests first. This also goes for NATO, where Trump is demanding at least 2% of GDP to be contributed by all member states and with less dependence on the U.S. Consequently, Europe must urgently increase defense budgets. This might jeopardize the European costly welfare state with cuts to public services.

Europeans find themselves compelled to swiftly re-arm by significantly increasing military expenditure. Many influential voices already have a preferred solution for securing the necessary funds, drastic cuts to social spending and public services. These are precisely the policies they have been advocating for decades, though without significant success so far as the Europeans have gotten used to entitlements and most voters are unwilling to let them go. However, increased military spending will have to be paid for somehow.

The approach with welfare state cuts presents a substantial risk. In particular the center-left parties think so, but to be true, all European parties, even the far-right, believe in the warfare state with generous sending programs. In democratic societies defined by competitive elections and free public debate, austerity measures risk driving more citizens towards extreme political forces. However, slashing social spending and weakening public services is far from the only way to generate the required financial resources. One viable alternative is borrowing. Historically, nations have always relied on debt in times of necessity. Admittedly, for countries like Italy, Spain and France, already heavily indebted due to irresponsible budgetary policies, assuming additional debt would be challenging.

However, the most promising solution would be joint borrowing at the European Union level. Currently, the EU itself carries virtually no debt. The ReArm Europe plan proposed by Ursula von der Leyen and adopted by the Council on March 6, does not include these measures. The overall amount announced, €800 billion, is certainly impressive, higher than the €750 billion mobilized in 2020 with Next Generation EU in response to the COVID-19 pandemic. But a closer look reveals that no new money is actually being put on the table at EU level.

The increase in military budgets will be managed at the national level, continuing to place a burden on the public finances of individual member states. The revision of the rules to allow the European Investment Bank (EIB) to finance defense projects was expected, but it is not accompanied by an increase in the bank’s capital. As a result, the impact of this change will remain limited. Redirecting the €150 billion in loans earmarked under Next Generation EU towards joint defense projects will come at the expense of investments in the energy and digital transitions. Similarly, reallocating cohesion funds will undermine efforts to combat territorial inequalities.

Significant new borrowing at the EU level would make strategic sense. Effective rearmament requires coordinated efforts on a continental scale to address gaps in national armed forces, avoid redundancies, and ensure interoperability of equipment. Moreover, such a collective initiative would strengthen the EU’s ability to revitalize Europe’s military industries, which have been severely weakened by three decades of silent disarmament since the fall of the Berlin Wall in 1989. Somehow, the Europeans decided to stop spending in military and relied on the U.S. instead. Encouraging European defense firms to collaborate would be far more effective than relying solely on national efforts.

In short, the rapid military build-up essential to counter a reduction in U.S. involvement in Europe imposes substantial pressure on European public finances. It would be reasonable to cut some social programs and public services, but there will be intense pressure in each and every country to keep the spending going. In the end, the only viable way to re-build European military and security is to borrow money and go into debt. This would be best to do in a coordinate way on an EU-level.