Europe faces NATO defense spending gap of 56 billion euros

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NATO's European members need to raise an extra 56 billion euros a year to meet the alliance's defense spending targets, but the shortfall has been halved in the past decade, according to research by the Ifo Institute of the German Financial Times.

Research shows that many EU countries – including Italy, Spain and Belgium – that are farthest away from NATO's 2% of GDP target for defense spending also have among the highest levels of debt and budget deficits in Europe.

The push by 32 members of the U.S.-led coalition to increase defense spending in response to Russia's full-scale invasion of Ukraine is adding to budget pressures in Europe at a time of low growth and austerity fiscal plans in many countries. Economists say that will make it harder for laggards to make up the difference.

The largest shortfall in value terms is in Germany, which spent 14 billion euros less than needed to meet the benchmark last year, according to Ifo. But Berlin has halved that gap, adjusted for inflation, over the past decade and plans to close it completely this year.

The second largest shortfalls in Europe are Spain's 11 billion euros, Italy's 10.8 billion euros and Belgium's 4.6 billion euros. The three countries were among six EU countries whose debt exceeded 100% of gross domestic product last year. Italy also has one of the EU's highest budget deficits, at 7.2%, and its interest costs will rise to more than 9% of government revenue this year.

“Countries with high debt levels and high interest costs don't have much room to raise more debt, so the only real way is to cut spending in other areas,” Ifo economist Marcel Schleper said. “That won't be easy. , as we saw when Germany tried to cut agricultural diesel subsidies and farmers came out in protest.”

U.S. State Department spokesman Matthew Miller acknowledged this week that the EU had made “progress” in its efforts to get all NATO members to meet the 2% threshold. Washington has long wanted Europe to spend more on its own defense.

Last year, two-thirds of NATO's total defense spending of 1.2 trillion euros came from the United States, more than twice the combined 361 billion euros spent by EU member states, the United Kingdom and Norway.

New EU fiscal rules starting next year will bring more budget cuts as countries seek to comply with a 3% annual deficit limit and a debt-to-GDP threshold of 60%. More than 10 countries within the EU are expected to breach annual deficit caps, which could lead to sanctions from the European Commission.

But in negotiations that ended last year, Poland, the Baltic states and Italy successfully fought for more favorable treatment of defense spending under new rules. Therefore, the Committee will consider military spending as a mitigating factor when evaluating whether to take action against a country that violates its annual deficit limit.

Poland, for example, will spend more than 4% of its output on defense by 2024 – the highest level among NATO members – thus breaching EU fiscal constraints, which could lead to an assessment More relaxed. Budget.

Jens Stoltenberg, the alliance's secretary-general, told reporters on Thursday that two-thirds of member states would meet the 2% target this year, which was agreed upon in 2014 after Russia annexed Crimea. At the time of the investment commitment, there were only three member states.

Data from Pantheon Macroeconomics shows that defense spending by euro zone countries is expected to double from 150 billion euros in 2021 to 320 billion euros in 2026, which is expected to boost weak growth by 0.2% to 0.3%. This week, Norway became the latest European NATO member to say it will meet the alliance's 2% target by 2024, a year earlier than originally planned.

Lorenzo Codogno, a former Italian Finance Ministry official and current economic adviser, said, “Without special exemptions, Italy, whose debt accounted for more than 140% of GDP last year, will have difficulty meeting NATO targets.” rules may not involve EU funds”.

“The Russian threat is not considered dangerous enough to justify cutting welfare spending to make room for weapons purchases,” he said.

A NATO poll found public support for increased defense spending is low in some of the countries with the largest shortfalls. Only 28% of Italians think their country should increase military spending, while 62% want its spending to remain the same or less.

Despite being home to NATO's headquarters, Belgium's defense spending accounted for just 1.21% of gross domestic product last year, one of the lowest levels in the alliance, according to new data released on Thursday. Spain is not much higher, at 1.24%, and Italy is at 1.47%.

Excluding seven European countries that have said they will meet NATO's 2% target this year, including new member Sweden, Ifo found that Europe would still have a shortfall of 35 billion euros.

“We are moving in the right direction, but it is too slow, too late,” Polish Foreign Minister Radoslaw Sikorski said on Friday, noting that Russia's defense spending this year is expected to reach GDP 7%. “The Russian economy is already at war. The European economy needs to at least shift to crisis mode.”