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Yahoo
4 days ago
- Business
- Yahoo
NATO has promised a spending blitz. Can its European members afford it?
The North Atlantic Treaty Organization, the defense alliance of 32 countries, is on a spending spree, with plans to funnel billions into their militaries and security systems over the coming decade. But it's a splurge that some European members of NATO, grappling with huge and ballooning debt burdens, can ill-afford. 'It's something unprecedented in peacetime to have such a massive increase in spending on any item – in particular, on defense,' Marcel Fratzscher, president of the German Institute for Economic Research or DIW, told CNN. Last month, NATO members agreed to boost their respective defense spending targets to 5% of gross domestic product by 2035 – more than double the current 2% target and the sort of major increase that US President Donald Trump has been demanding for many years. The pledge came as Europe's NATO members have to contend with an aggressive Russia and an America that has backed away from its long-standing role as the guarantor of the region's security. Governments have three options to meet the new spending target – cut other expenses, raise taxes or borrow more – but analysts told CNN that each is either politically unpalatable or unviable in the long term for heavily indebted European NATO countries. 'Many (European Union) countries face hard fiscal constraints,' analysts at Bruegel, a Brussels-based think tank, wrote earlier this month. 'It is unrealistic to expect countries that have struggled for decades to reach a 2% defense spending target to embrace credibly an ill-justified, much higher target.' Hard choices Many NATO countries have failed to meet the previous, 2% target, set in 2014. Most have increased spending in recent years in response to Russia's full-scale invasion of Ukraine in 2022 – so much so that the European Union's executive arm expects its 23 member states belonging to NATO to meet that target this year, based on their combined GDP. But they now need to go further. The new, 5% target includes a commitment by NATO member states to spend the equivalent of 3.5% of their annual GDP on so-called 'core' defense requirements, such as weapons, with the remaining 1.5% allocated to areas supporting defense like port infrastructure. For some nations, that will mean finding tens of billions of extra dollars a year. Frank Gill, a senior sovereign credit ratings analyst for Europe, the Middle East and Africa at S&P Global Ratings, thinks that meeting the 3.5% target alone will require European countries, including the United Kingdom, to borrow huge sums of money. Some nations may also cut or reallocate government spending to reduce the amount they need to borrow, he said, but that could prove difficult. 'A lot of (European governments) are facing other fiscal pressures… not least aging populations, which are essentially leading to even higher pension spending,' Gill told CNN. 'Politically, (that) is very challenging to cut.' Fratzscher at DIW in Germany agrees. For most NATO countries, he argued, cutting spending is 'utterly impossible.' 'Europe is aging quickly,' he said. 'It's completely illusionary to believe that… governments in Europe could save on public pensions, on healthcare, on care more generally.' The only sustainable way to finance the 'kind of magnitude of extra (defense) spending' now pledged by NATO is to hike taxes, he argued. Yet there exists neither the political will nor the public support to spend 'in such a dramatic way in this direction… and actually accept the consequences.' Crushing debt Simply borrowing more is a similarly tricky option in Europe where a number of governments are already saddled with debts close to, or larger than, the size of their country's entire economy. All else remaining equal, meeting just the 3.5% 'core' defense spending target could add roughly $2 trillion to the collective government debt of NATO's European members, including the UK, by 2035, according to a recent analysis by S&P Global Ratings. That compares with combined GDP of $23.1 trillion for the EU – a proxy for European NATO members – and Britain, based on World Bank data for 2024. The extra debt would be particularly hard to swallow for countries such as Italy, France and Belgium. These NATO members had some of the highest public debt-to-GDP ratios at the end of 2024, at 135%, 113% and 105% respectively, according to the EU's statistics office. Those are already heavy burdens. On Tuesday, French Prime Minister François Bayrou said the EU's second-largest economy risks a 'crushing by debt.' He warned that, should nothing change, just the interest France pays on its debt will swell to €100 billion ($117 billion) in 2029, becoming the government's largest single expense. He still supports splashing the cash on defense, while reining in other government spending. The EU is trying to make it easier for member states to invest in their security. Brussels has exempted defense expenditure from its strict rules on government spending and pledged to create a €150 billion fund from which countries can borrow, at favorable interest rates, to invest in their defense. However, there is another option for EU NATO members, according to Guntram Wolff, a senior fellow at Bruegel. 'Just not doing it. Not spending more,' he told CNN. Already, Spain has said it will not meet the 5% target, arguing that doing so would compromise its spending on welfare. Last year, the southern European nation spent only 1.28% of its GDP on defense, based on NATO estimates. Wolff said the 'best predictor for the increase in defense spending is (a country's) distance to Moscow – much more than any pledges at the NATO summit.'
CNN
4 days ago
- Business
- CNN
Analysis: NATO has promised a spending blitz. Can its European members afford it?
The North Atlantic Treaty Organization, the defense alliance of 32 countries, is on a spending spree, with plans to funnel billions into their militaries and security systems over the coming decade. But it's a splurge that some European members of NATO, grappling with huge and ballooning debt burdens, can ill-afford. 'It's something unprecedented in peacetime to have such a massive increase in spending on any item – in particular, on defense,' Marcel Fratzscher, president of the German Institute for Economic Research or DIW, told CNN. Last month, NATO members agreed to boost their respective defense spending targets to 5% of gross domestic product by 2035 – more than double the current 2% target and the sort of major increase that US President Donald Trump has been demanding for many years. The pledge came as Europe's NATO members have to contend with an aggressive Russia and an America that has backed away from its long-standing role as the guarantor of the region's security. Governments have three options to meet the new spending target – cut other expenses, raise taxes or borrow more – but analysts told CNN that each is either politically unpalatable or unviable in the long term for heavily indebted European NATO countries. 'Many (European Union) countries face hard fiscal constraints,' analysts at Bruegel, a Brussels-based think tank, wrote earlier this month. 'It is unrealistic to expect countries that have struggled for decades to reach a 2% defense spending target to embrace credibly an ill-justified, much higher target.' Many NATO countries have failed to meet the previous, 2% target, set in 2014. Most have increased spending in recent years in response to Russia's full-scale invasion of Ukraine in 2022 – so much so that the European Union's executive arm expects its 23 member states belonging to NATO to meet that target this year, based on their combined GDP. But they now need to go further. The new, 5% target includes a commitment by NATO member states to spend the equivalent of 3.5% of their annual GDP on so-called 'core' defense requirements, such as weapons, with the remaining 1.5% allocated to areas supporting defense like port infrastructure. For some nations, that will mean finding tens of billions of extra dollars a year. Frank Gill, a senior sovereign credit ratings analyst for Europe, the Middle East and Africa at S&P Global Ratings, thinks that meeting the 3.5% target alone will require European countries, including the United Kingdom, to borrow huge sums of money. Some nations may also cut or reallocate government spending to reduce the amount they need to borrow, he said, but that could prove difficult. 'A lot of (European governments) are facing other fiscal pressures… not least aging populations, which are essentially leading to even higher pension spending,' Gill told CNN. 'Politically, (that) is very challenging to cut.' Fratzscher at DIW in Germany agrees. For most NATO countries, he argued, cutting spending is 'utterly impossible.' 'Europe is aging quickly,' he said. 'It's completely illusionary to believe that… governments in Europe could save on public pensions, on healthcare, on care more generally.' The only sustainable way to finance the 'kind of magnitude of extra (defense) spending' now pledged by NATO is to hike taxes, he argued. Yet there exists neither the political will nor the public support to spend 'in such a dramatic way in this direction… and actually accept the consequences.' Simply borrowing more is a similarly tricky option in Europe where a number of governments are already saddled with debts close to, or larger than, the size of their country's entire economy. All else remaining equal, meeting just the 3.5% 'core' defense spending target could add roughly $2 trillion to the collective government debt of NATO's European members, including the UK, by 2035, according to a recent analysis by S&P Global Ratings. That compares with combined GDP of $23.1 trillion for the EU – a proxy for European NATO members – and Britain, based on World Bank data for 2024. The extra debt would be particularly hard to swallow for countries such as Italy, France and Belgium. These NATO members had some of the highest public debt-to-GDP ratios at the end of 2024, at 135%, 113% and 105% respectively, according to the EU's statistics office. Those are already heavy burdens. On Tuesday, French Prime Minister François Bayrou said the EU's second-largest economy risks a 'crushing by debt.' He warned that, should nothing change, just the interest France pays on its debt will swell to €100 billion ($117 billion) in 2029, becoming the government's largest single expense. He still supports splashing the cash on defense, while reining in other government spending. The EU is trying to make it easier for member states to invest in their security. Brussels has exempted defense expenditure from its strict rules on government spending and pledged to create a €150 billion fund from which countries can borrow, at favorable interest rates, to invest in their defense. However, there is another option for EU NATO members, according to Guntram Wolff, a senior fellow at Bruegel. 'Just not doing it. Not spending more,' he told CNN. Already, Spain has said it will not meet the 5% target, arguing that doing so would compromise its spending on welfare. Last year, the southern European nation spent only 1.28% of its GDP on defense, based on NATO estimates. Wolff said the 'best predictor for the increase in defense spending is (a country's) distance to Moscow – much more than any pledges at the NATO summit.'
CNN
4 days ago
- Business
- CNN
Analysis: NATO has promised a spending blitz. Can its European members afford it?
The North Atlantic Treaty Organization, the defense alliance of 32 countries, is on a spending spree, with plans to funnel billions into their militaries and security systems over the coming decade. But it's a splurge that some European members of NATO, grappling with huge and ballooning debt burdens, can ill-afford. 'It's something unprecedented in peacetime to have such a massive increase in spending on any item – in particular, on defense,' Marcel Fratzscher, president of the German Institute for Economic Research or DIW, told CNN. Last month, NATO members agreed to boost their respective defense spending targets to 5% of gross domestic product by 2035 – more than double the current 2% target and the sort of major increase that US President Donald Trump has been demanding for many years. The pledge came as Europe's NATO members have to contend with an aggressive Russia and an America that has backed away from its long-standing role as the guarantor of the region's security. Governments have three options to meet the new spending target – cut other expenses, raise taxes or borrow more – but analysts told CNN that each is either politically unpalatable or unviable in the long term for heavily indebted European NATO countries. 'Many (European Union) countries face hard fiscal constraints,' analysts at Bruegel, a Brussels-based think tank, wrote earlier this month. 'It is unrealistic to expect countries that have struggled for decades to reach a 2% defense spending target to embrace credibly an ill-justified, much higher target.' Many NATO countries have failed to meet the previous, 2% target, set in 2014. Most have increased spending in recent years in response to Russia's full-scale invasion of Ukraine in 2022 – so much so that the European Union's executive arm expects its 23 member states belonging to NATO to meet that target this year, based on their combined GDP. But they now need to go further. The new, 5% target includes a commitment by NATO member states to spend the equivalent of 3.5% of their annual GDP on so-called 'core' defense requirements, such as weapons, with the remaining 1.5% allocated to areas supporting defense like port infrastructure. For some nations, that will mean finding tens of billions of extra dollars a year. Frank Gill, a senior sovereign credit ratings analyst for Europe, the Middle East and Africa at S&P Global Ratings, thinks that meeting the 3.5% target alone will require European countries, including the United Kingdom, to borrow huge sums of money. Some nations may also cut or reallocate government spending to reduce the amount they need to borrow, he said, but that could prove difficult. 'A lot of (European governments) are facing other fiscal pressures… not least aging populations, which are essentially leading to even higher pension spending,' Gill told CNN. 'Politically, (that) is very challenging to cut.' Fratzscher at DIW in Germany agrees. For most NATO countries, he argued, cutting spending is 'utterly impossible.' 'Europe is aging quickly,' he said. 'It's completely illusionary to believe that… governments in Europe could save on public pensions, on healthcare, on care more generally.' The only sustainable way to finance the 'kind of magnitude of extra (defense) spending' now pledged by NATO is to hike taxes, he argued. Yet there exists neither the political will nor the public support to spend 'in such a dramatic way in this direction… and actually accept the consequences.' Simply borrowing more is a similarly tricky option in Europe where a number of governments are already saddled with debts close to, or larger than, the size of their country's entire economy. All else remaining equal, meeting just the 3.5% 'core' defense spending target could add roughly $2 trillion to the collective government debt of NATO's European members, including the UK, by 2035, according to a recent analysis by S&P Global Ratings. That compares with combined GDP of $23.1 trillion for the EU – a proxy for European NATO members – and Britain, based on World Bank data for 2024. The extra debt would be particularly hard to swallow for countries such as Italy, France and Belgium. These NATO members had some of the highest public debt-to-GDP ratios at the end of 2024, at 135%, 113% and 105% respectively, according to the EU's statistics office. Those are already heavy burdens. On Tuesday, French Prime Minister François Bayrou said the EU's second-largest economy risks a 'crushing by debt.' He warned that, should nothing change, just the interest France pays on its debt will swell to €100 billion ($117 billion) in 2029, becoming the government's largest single expense. He still supports splashing the cash on defense, while reining in other government spending. The EU is trying to make it easier for member states to invest in their security. Brussels has exempted defense expenditure from its strict rules on government spending and pledged to create a €150 billion fund from which countries can borrow, at favorable interest rates, to invest in their defense. However, there is another option for EU NATO members, according to Guntram Wolff, a senior fellow at Bruegel. 'Just not doing it. Not spending more,' he told CNN. Already, Spain has said it will not meet the 5% target, arguing that doing so would compromise its spending on welfare. Last year, the southern European nation spent only 1.28% of its GDP on defense, based on NATO estimates. Wolff said the 'best predictor for the increase in defense spending is (a country's) distance to Moscow – much more than any pledges at the NATO summit.'
The Independent
13-06-2025
- Business
- The Independent
What is the cost to the economy of Israel's attack on Iran?
If we needed another lesson about the difficulties of managing an economy in a period of nerve-wracking uncertainty, Israel's attacks on Iran have provided it. Market reaction to Israeli 200 fighter jets hitting more than 100 targets was swift – and predictable. The oil price shot up, the gold price shot up and share prices tumbled across the world. The FTSE escaped the worst of the damage, largely because of its substantial contingent of natural resource stocks, including the presence of two heavily weighted oil majors in its upper reaches. But it still gave up ground following its record close. Economic institute DIW has warned that higher oil prices resulting from the hostilities will hurt the German economy, Europe's economic engine – and the impact will not be confined there. Britain is in the midst of a moderate inflationary spike, with rates jumping to 3.4 per cent in April (3.5 per cent officially, but the Office for National Statistics got its sums wrong and has decided not to course correct). The jump in prices, created by an oil slick of bill, fare and tax increases in that month, is at least expected to be temporary. But higher fuel prices have the potential to change that by powering up prices, potentially leading to a higher and longer-lasting spike than had been expected. The Bank of England has no control over the international price of oil. However, history tells us it will act to damp down what it describes as the 'second order effects' from pricier oil fuelling inflation. That is a problem for the UK economy – and chancellor Rachel Reeves, while we're at it – because they could really use the helping hand of lower interest rates. Donald Trump's tariffs are hurting exporters and even though there have recently been signs that the trade deal secured by Keir Starmer will take effect soon, the base 'liberation day' 10 per cent levy will still largely apply to British exports. While this still leaves the UK in a relatively favourable position, the impact of the much higher tariffs on those without the (relative) benefits of a Starmer-style deal will still hurt. The US remains the world's biggest economy. Trump's economic vandalism will obviously damage the wider global economy, constricting trade, reducing growth, adding to the crippling uncertainty that many investors are apt to react to by hiding under their beds with pots filled with as much gold as they can afford. Companies can be expected to respond similarly if the hostilities continue: when CEOs hear war drums beating, they are apt to switch their focus from risk taking and investment to cost cutting and cash conservation until the turmoil has passed. In recent days, hopes of more UK interest rate cuts have been rising. The economy's struggles in April, which recorded the sharpest contraction in two years, the fact that inflation is actually lower than the ONS said it was and the marked weakening of the labour market, with unemployment rising, job openings vanishing and wage settlements falling, are food for those calling for looser monetary policy, including your correspondent. Traders had been betting on two more cuts, with the first coming in September. Israel's action, however, could shift the calculus again, certainly if it the immediate rise in oil prices is sustained. The Bank's rate setting Monetary Policy Committee (MPC) is not expected to move when it meets next week but, as ever, the comments in the minutes and the way the vote goes will merit close attention. Swati Dhingra will, as she typically does, take a dovish line. I would expect her to vote for an immediate cut. The big question is whether any of her colleagues on the nine-member MPC will join her. The uncertainty created by the outbreak of yet more hostilities is probably all the reason the majority will need for sitting tight and waiting to see how this plays out, before assessing the impact on inflation and the economy . For the rest of us, by which I mean those of us lucky enough to have savings and investments, the message is, well, sorry to descend into cliche, but keep calm and carry on. That meme, modern cliche and merch marketing tool – even though the faux wartime nostalgia of said merch is completely fake – represents sound advice. The markets are apt to panic when things like this happen. Traders who play an important role in price formation, exhibit herd like behaviour, even though this about the worst possible response. It was ever thus. But that doesn't mean we have to follow suit. Much better to sit tight and hope (pray?) that it blows over soon.
Local Germany
14-03-2025
- Business
- Local Germany
'Erratic' US policies likely to hit German growth
The DIW economic institute downgraded its forecast for Europe's biggest economy from a previous estimate of 0.2 percent expansion made in December. For 2026, it now expects growth of 1.1 percent, down from 1.2 percent previously. Firms were faced with uncertainty in the face of "erratic" US trade policy and potential counter-measures, the German institute warned. The effect was particularly pronounced for the many German companies that rely on exports, said Geraldine Dany-Knedlik, DIW's head of forecasting and economic policy. Germany is heavily dependent on exports, and last year the United States overtook China to become the country's top trading partner. US President Donald Trump, who has been threatening allies and adversaries alike with sweeping tariffs, has said he wants to hit all EU imports to the United States with hefty duties. Weakness in key trading partners has been a reason why Germany has been mired in recession for the last two years, combined with a manufacturing slowdown and tepid consumer demand. But signs that negotiations to form a new coalition government following February's election were making quick progress provided a bright spot for the economy and might give people some certainty, Dany-Knedlik said. "We might soon expect a government that is capable of action, and that should quickly make economic conditions clearer," she said. A proposal by likely next chancellor Friedrich Merz to spend €500 billion over 10 years on infrastructure could provide a major boost, potentially lifting GDP by two percent a year, DIW said. On Friday, Merz announced that he had reached a deal with the Greens that would allow him to get his spending plans through parliament on Tuesday. These plans were not included in the DIW's latest forecasts, however. DIW president Marcel Fratzscher said that a more fundamental reform of strict rules limiting government debt -- known as the "debt brake" -- was also sorely needed. "Strengthening public investment and reducing economic uncertainty should be a top priority for the new federal government," he said.
