In the 30 years since the fall of the Iron Curtain, trillions of dollars spent on Cold War armies and weapon systems have been gradually diverted to health care, housing and schools.
That era – when security took a back seat to trade and economic growth – ended abruptly with Russia’s invasion of Ukraine last year.
“The peace dividend is gone,” said International Monetary Fund chief Kristalina Georgieva recently, referring to the mountains of money freed up as military budgets shrank. “Defense spending needs to increase.”
The urgent need to fight a brutal and unpredictable Russia has forced European leaders to take agonizing action Household decisions that will have a huge impact on people’s daily lives. Do they spend more on howitzers or hospitals, tanks or teachers, missiles or roads? And how to pay for it: raise taxes or borrow more? Or both?
The sudden security demands, which will go far beyond an end to the war in Ukraine, come at a time when colossal expenditures will also be required to feed the rapidly aging population and avoid potentially catastrophic climate change. The European Union’s ambitious goal of being carbon neutral by 2050 alone is estimated to cost between $175 and $250 billion a year over the next 27 years.
“The spending pressures on Europe will be enormous, and that doesn’t even include the green transition,” said Kenneth Rogoff, a Harvard economics professor. “The entire European social safety net is very vulnerable to these huge needs.”
After the fall of the Berlin Wall, social spending skyrocketed. Denmark doubled the money it spent on health care between 1994 and 2022, according to the latest figures from the Organization for Economic Co-operation and Development, while Britain increased its spending by more than 90 percent.
During the same period, Poland more than doubled the funds for cultural and leisure programs. Germany has ramped up investments in the economy. The Czech Republic increased its education budget.
Military spending by European members of the North Atlantic Treaty Organization and Canada hit rock bottom in 2014 as demand for main battle tanks, fighter jets and submarines fell sharply. After Russia annexed Crimea earlier this year, budgets started to increase again, but most countries still fell well short of NATO’s target of 2 percent of national production.
“The end of the peace dividend is a big break,” said Daniel Daianu, Fiscal chairman Councilor in Romania and former Minister of Finance.
Before war broke out in Ukraine, military spending by European NATO members should reach nearly $1.8 trillion by 2026, according to research by McKinsey & Company, a 14 percent increase over five years. Now spending is estimated to increase between 53 and 65 percent.
That means hundreds of billions of dollars that could otherwise have been used to invest in things like bridge and highway repairs, childcare, cancer research, refugee resettlement, or public orchestras, for example, are likely to be diverted to the military.
Last week, the Stockholm International Peace Research Institute reported that military spending in Europe last year saw its largest annual increase in three decades. And the fundraiser is just getting started.
Demand for military spending will be seen on Wednesday when European Union Trade Commissioner Thierry Breton is expected to discuss his fact-finding mission to see if European nations and arms makers can produce a million rounds of 155mm shells for Ukraine a year and how production can be increased.
Poland has pledged to spend 4 percent of its national production on defense. Germany’s defense minister has called for an additional $11 billion next year, a 20 percent increase in military spending. French President Emmanuel Macron has promised to increase military spending by more than a third by 2030 and “transform” France’s nuclear-armed military.
Some analysts argue that the cuts in military budgets have at times been so severe that they have undermined basic operational readiness. And polls have shown that there is public support for increased military spending, clearly illustrated by Finland’s and Sweden’s about-face to join NATO.
But in most parts of Europe, the necessary painful budget compromises or tax hikes have not yet become part of everyday life. Much of the austerity measures that have squeezed households over the past year have been the result of skyrocketing energy prices and stinging inflation.
In the future, the game board has changed. “France has entered a war economy, which I think we will find ourselves in for a long time,” Macron said in a speech shortly after announcing his spending plan.
But the crucial question of how to pay for the momentous shift in national priorities remains. In France, for example, government spending relative to the economy is the highest in Europe at €1.4 trillion (US$1.54 trillion). Almost half of that was spent on the country’s generous social safety net, which includes unemployment benefits and pensions. Debt has also skyrocketed in the wake of the pandemic. Still, Mr Macron has vowed not to raise what is already the highest tax level in Europe for fear of scaring off investors.
Debates about competing priorities are taking place in other regional capitals – even if the trade-offs aren’t explicitly mentioned.
In the UK on the same day in March that the government presented a budget that included a $6.25 billion increase in military spending, teachers, doctors and transport workers joined in strikes over wages and working conditions. It was just one in a series of strikes by public servants complaining that underfunding, double-digit inflation and the fallout from the pandemic have paralyzed essential services like health care, transportation and education. The budget included a $4.1 billion increase in the National Health Service over the same biennium.
Romania, which has increased its public debt over the years, has pledged to increase military spending by 0.5 percent of national output this year. And this month it agreed to purchase an undisclosed number of F-35 fighter jets, which have a list price of $80 million each. While the increase will allow the country to meet NATO’s budget target, it will undermine efforts to meet debt limits set by the European Union.
The shift in government spending is perhaps most striking in Germany, where defense spending plummeted after the reunification of the former East and West German nations in 1990.
“The defense was always saved because it was not very popular,” said Hubertus Bardt, Managing Director of the German Economic Institute.
Germany, the largest and most powerful economy in Europe, has consistently spent less money on the military as a percentage of gross domestic output than either France or Britain.
It’s a “historic turning point,” said German Chancellor Olaf Scholz when he announced a $112 billion defense fund last year. However, this pot of money did not include spending on ammunition. And when the fund runs out, Germany will have to find another $38 billion to catch up with its NATO partners.
Mr. Rogoff, an economist from Harvard, said most Europeans still don’t understand what the long-term impact of a dwindling peace dividend will be. This is a new reality, he said, “and governments need to figure out how to bring things back into balance.”
Melissa Eddy and Lara Jakes contributed coverage.