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European NATO members need to find an extra 56 billion euros a year to reach the alliance’s defense spending target, but the deficit has halved over the past decade, according to research by Germany’s Ifo Institute for the Financial Times.
Research has shown that many of the EU countries with the largest deficits against NATO’s defense spending target of reaching 2% of gross domestic product – including Italy, Spain and Belgium – also have high levels of debt and budget deficit among the highest in Europe.
The push by the 32 members of the US-led alliance to increase defense spending in response to Russia’s full-scale invasion of Ukraine is fueling budget pressures in Europe at a time of low growth and when many countries are tightening their tax plans. Economists say this will make it harder for laggards to fill the gap.
The largest shortfall in value terms occurred in Germany, which last year spent 14 billion euros less than needed to meet the benchmark, according to Ifo. But Berlin has halved this gap over the past decade, adjusted for inflation, and plans to close it completely this year.
The next largest European deficits were €11 billion in Spain, €10.8 billion in Italy and €4.6 billion in Belgium. The three were among six EU countries with debt above 100% of GDP last year. Italy also has one of the bloc’s highest budget deficits, at 7.2%, and its interest costs are set to exceed 9% of government revenue this year.
“Countries with high debt levels and high interest costs don’t have much room to raise debt, so the only real way to do so is to cut spending in other sectors,” said Marcel Schlepper, an economist at Ifo. “It’s not easy, as we saw when Germany tried to cut subsidies on agricultural diesel and farmers protested.”
US State Department spokesman Matthew Miller this week acknowledged there had been an “improvement” in EU efforts to get all NATO members to meet the 2% threshold. Washington has long wanted Europe to spend more on its defense.
Last year, two-thirds of NATO’s total €1.2 trillion defense spending was spent by the United States, more than double the €361 billion spent by EU members, the United Kingdom and Norway combined.
New EU fiscal rules coming into force from next year are set to introduce further budget cuts as countries try to meet a 3% limit on annual deficits and a 60% debt-to-GDP ratio threshold. More than 10 countries in the bloc are expected to exceed the annual deficit limit, which will likely result in sanctions from the European Commission.
But during negotiations that concluded last year, Poland, the Baltics and Italy successfully campaigned to treat defense spending more favorably under the new rules. The Commission will therefore consider military spending as a mitigating factor when considering whether to take action against countries that exceed the annual deficit limit.
In cases like that of Poland, which is set to spend more than 4% of its production on defense in 2024 – the highest level among NATO members – and thus breach EU fiscal limits, this will likely lead to a more lenient assessment of his foreign policy. balance.
Jens Stoltenberg, the alliance’s secretary general, told reporters on Thursday that two-thirds of members would reach the 2% target this year, compared to just three in 2014, when the defense investment pledge was agreed after the Russia’s annexation of Crimea.
According to Pantheon Macroeconomics, Eurozone countries are on track to double defense spending from 150 billion euros in 2021 to 320 billion euros in 2026, estimating that this would boost sluggish growth by 0.2 to 0.3 %. This week, Norway became the latest European NATO member to say it will reach the alliance’s 2% target in 2024, a year earlier than expected.
Lorenzo Codogno, a former Italian Treasury official and now economic consultant, said it would be “difficult” for Italy, which last year had a debt exceeding 140% of GDP, to reach NATO’s target “if there is no a special exemption within the program.” rules or no community money involved.”
“The Russian threat is not perceived as sufficiently dangerous to justify, for example, cuts in social spending to make room for weapons,” he said.
NATO polls have found little public support for increasing defense spending in some countries with the largest deficits. Only 28% of Italians believe that their country should increase military spending, while 62% would like spending to be the same or less.
Despite being home to NATO’s headquarters, Belgium’s defense spending last year was just 1.21% of GDP, one of the lowest in the alliance, according to new data released Thursday. Spain wasn’t much higher at 1.24% and Italy was at 1.47%.
Excluding the seven European countries that have said they want to reach Nato’s 2% target this year, including new member Sweden, the Ifo found that the European deficit would still be 35 billion euros.
“We are moving in the right direction, but too slowly and too late,” Polish Foreign Minister Radosław Sikorski said on Friday, stressing that Russian defense spending is expected to reach 7% of GDP this year. “The Russian economy is already operating on a war footing. European economies must at least move into crisis mode.”