As Sir Keir Starmer aptly put it, Europe finds itself “at a crossroads in history,” confronting a future where the assumed security offered by the United States is no longer a given.
This threatens to upend 80 years of reliance on the US and has resulted in a vow from European leaders to re-arm so that they can better face the threat posed by Russia without the help of America.
As we have discussed on multiple occasions in the past, geopolitical events such as this extend beyond the narrow confines of the market and present significant economic implications, which are worth considering.
Following the dissolution of the Soviet Union in 1991, many European countries embraced a 'peace dividend’ and scaled back military expenditure, with governments slashing defence spending and choosing to depend instead upon the wider NATO alliance for protection.
This reallocation of resources away from defence allowed many European countries to invest in other sectors and contributed to economic growth. However, the diminished focus on military readiness also meant that Europe grew increasingly dependent on external security guarantees, particularly from the United States.
As everyone now knows, a resurgent Russia and an increasingly angry US President have thrust Europe into a security emergency and urgent attempts to re-arm.
It is worth mentioning briefly that the internal debate in America over its role in global politics is not new. America has oscillated between projecting its wealth and power as ‘The shining city on the hill’ to ‘Putting America First’ with isolationist policies since it was founded.
Geography has played a big part in the American mindset; outside of the Revolution they have never really had to fight a defensive war. However, technological advancement in the 1940s with long-range missiles and aircraft made America feel more vulnerable, leading to their support of NATO in post-war Europe.
By contrast, most European countries have long experiences of invasion and war; Germany has invaded France three times in the last 150 years (using the same road!) and the whole European Union project was designed to prevent future conflict.
The classic economic dilemma of 'guns or butter' reflects the challenge governments face in balancing military expenditure (guns) with public welfare (butter). Traditionally defence spending is seen as an unproductive investment – you build something that either sits in a silo or is used and destroyed. From a fiscal point of view, every pound spent on the military is potentially a pound not spent on other public services.
However, a recent report by the Kiel Institute suggested that increased spending on defence could boost European GDP by up to 1.5% if the money is spent on “high tech, regionally made armaments”. This indicates that military spending can stimulate an economy – if the money is spent domestically rather than buying foreign armaments.
A reasonable example here would be British shipbuilding. Assuming that a decision to build more ships for the Royal Navy was underpinned with a view to building them in the United Kingdom then the supply of materials such as steel would also need to be strengthened domestically, thus supporting additional industries in the UK and helping to generate a wider economic multiplier effect.
Historically technological advancement has also been accelerated in times of increased military spending. Technologies such as the jet engine were developed for military purposes before finding much wider and more beneficial use in peacetime.
To return to the quote at the start of this update, if Europe is at a crossroads then its leaders at the moment appear unified and with a clear sense of purpose. Of course, everyone hopes that negotiations, due to start in Saudi Arabia this week, will lead to a lasting peace deal. However, even if this does happen, Europe has been put on notice that the tectonic plates have shifted once again, and Western Europe is likely to have to bear far more responsibility for its future security – economic and military alike.
Sources:
- Guns and Growth The Economic Consequences of Surging Defence Spending. The Kiel Institute
- Why the US has spent 200 years Flip Flopping between Isolationism and Engagement
