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The EU is in a dangerous trilemma – green transition, re-arming and cutting spending at the same time?

Economics knows several practically unsolvable triple dilemmas, or trilemmas. The common feature of these is that we can only influence two of the three determinants at the same time, the third becoming an immediate consequence. (Examples include the monetary trilemma in the relationship between exchange rates, monetary policy independence and capital flows, and the energy trilemma in the relationship between energy security, energy price and sustainability.) The European Union has also now manoeuvred itself into an unsolvable and risky trilemma: the deadlines for a radically accelerated green transition are fast approaching, requiring extraordinary expenditures from national budgets. But this unprecedented burden coincides with the – long overdue – realisation that Europe urgently needs to build a competent defence force. But the real cost dimensions of rearmament are hardly discussed. Meanwhile, most member states should start cutting spending and debt after years of massive overspending. The danger, as in all trilemmas, is that the rigidity of policymakers will cause the legs of the trilemma to collapse one after the other, culminating in a major crisis.

The first leg of the trilemma: Green transition

“The big risk is that we won’t have enough money at all to go green,” said former Italian Prime Minister Enrico Letta candidly, who can hardly be accused of EU or climate scepticism, and is behind a report on necessary EU reforms. His point was that the EU needs a much bigger common budget than it has now, and a more complete financial union can provide the missing resources. However, the statement can in fact be directly interpreted as a reference to the European green transition itself.

“This is Europe’s man on the moon moment,” said Ursula von der Leyen, President of the European Commission, when announcing the Green Deal in 2019 that seems so distant now. The project has since become truly astronomical, but not just in the transformative sense that von der Leyen meant at the time: the green transition was then projected to cost the EU €260 billion a year by 2050. At the time, this seemed like an extremely high sum. But as with all major public projects, from infrastructure investments to military and space programmes, it turned out to be a mere entry sum: with the green transition deadlines constantly being brought forward, climate regulation getting wider and tighter, and the inflationary consequences of the Russia-Ukraine war, the European Commission estimated the necessary expenditure at €620 billion per year in 2022. But the black hole-like increase in the resources required only accelerated from there. In 2024, a recent report, not disputed by the EC, suggests that the investment needed will be €1,500 billion a year, so the estimated cost of the green transition has more than quintupled in just 5 years. We can only hope that the increase in costs will slow down from here. To put this figure in perspective, it is worth pointing out that this €1500 billion is equivalent to Germany’s total tax revenue in 2022, and double the total US defence budget at that time! Moreover, all this expenditure would have to be made by a war-torn EU economy that the EC estimates will grow by barely 0.9% even in 2024.

The figure can be referenced here: https://public.flourish.studio/visualisation/18404662/

The second leg of the trilemma: Rearming

First of all, it is worth noting that the EU member states decided to create a credible defence capability as early as 2000. It is just that no substantial steps have been taken in the last 24 years: this lost time should now be made up at breakneck speed.

Although the European public is under the impression that the armament of the EU is now really underway, in fact, apart from a few member states, the question is still open: is the EU able and willing to sacrifice a significant part of its prosperity, i.e. social expenditure, in order to have armies again? In this context, very little is said about rearmament. Indeed, in European societies, which have been predominantly pacifist since the collapse of the Soviet Union, there is an alarming lack of awareness of the cost dimensions of modern warfare, and the governments of the major welfare states are trying to keep quiet about it. As former German Defence Minister Karl-Theodor zu Guttenberg recently put it so aptly: rearmament “does not mean a one-off additional defence budget of 100 billion euros”, but “an incomprehensible amount of money”. How much money? To get a sense of the scale, let’s look at some facts:

  • The total cost of the US F-35 stealth fighter-bomber project (R&D and aircraft combined) was almost €2 trillion, while the 32 F-35s recently purchased by Poland cost €4.3 billion.
  • The cost of the development of the US B-2 stealth bomber project (including the aircraft) was approximately €50 billion.
  • The cost of building a single German Sachsen-class frigate is €1 billion. (Remember, the EU is increasingly keen to play a role in protecting sea lanes such as the Red Sea and the South China Sea.) The missiles fired by the frigate cost €2-3 million each.
  • The cost of building an American Gerard Ford-class aircraft carrier is €17 billion.
  • A single US Reaper drone costs €28 million, and these are consumables.
  • A single Patriot anti-aircraft missile system (including missiles) costs €1 billion; they are also in high demand on the front.
  • One Eurocopter Tiger combat helicopter costs €70 million.
  • The annual maintenance cost (fuel, repairs, technicians’ salaries) of a single modern fighter jet: $0.5-7 million.
  • The US hypersonic missile system development programme costs €4.4 billion per year.
  • And of course, let’s not forget that the annual maintenance of an infantry mechanised brigade with advanced technology (3,500-4,000 personnel) is €500 million (in the case of an armoured brigade, this includes 50-100 tanks, each costing €13-15 million, depending on the type.)

This goes some way to explaining – though it does not mitigate the consequences – the reasons for the passivity of European countries and the decades of delay in meeting NATO’s defence spending expectations. By comparison, according to Eurostat data, the total tax and contribution revenues, i.e. in practice the total disposable income, of the countries of the European Union in 2022 amounted to €6,500 billion. (And it actually costs more than this to maintain welfare states, since the vast majority of EU countries end each year with significant budget deficits. The EC estimates that almost 40% of European tax revenues are spent on social spending and transfers!) So if the aim is to build a truly competent and deterrent defence force and reduce the gap with the US, this would require a proportionately huge expenditure. It is no coincidence that the Stockholm International Peace Research Institute (SIPRI) calculates that, despite the outbreak of the Russian-Ukrainian war and grandiose pledges, a total of €470 billion was spent on defence in the EU-27 in 2023. True, even this seems high compared to the €330 billion of the “there will be no more war in Europe” philosophy of ten years ago.

It illustrates the priorities that are normal in a pacifist Europe that Germany’s defence budget in 2022, the year the war broke out, was less than €56 billion (much of it spent on personnel costs and maintaining bureaucracy), while Berlin spent, for example, €33 billion on international aid and project grants, €41 billion on unemployment aid, €42 billion on migration-related spending and €110 billion on plugging the annual deficit of the unprecedentedly generous German pension system. (Meanwhile, China has increased its armed forces by 400 modern fighter jets and 20 warships, and doubled the number of its long-range missiles in the past three years, according to a warning from outgoing US Admiral John Aquilino.) It is therefore no exaggeration to say that building a deterrent defence capability that does not exist only on paper would require a fundamental rethink of the philosophy and priorities of the distribution systems of the European welfare states: we are essentially talking about a reallocation of resources on a scale similar to the green transition – in the order of thousands of billions of euros a year.

The figure can be referenced here:   https://public.flourish.studio/visualisation/18404730/

The third leg of the trilemma: Reducing spending and public debt

Financing the excessively paced green transition and general armament requires, as we have seen, a concentrated expenditure that is completely unprecedented in the history of the EU. This in itself raises serious questions (for example, how long the two projects will be politically sustainable as the costs increase exponentially). However, the EU is not embarking on this overriding dual objective after a long and successful economic-financial period. The European economy, which had been very slow to recover from the effects of the European debt crisis, was also financially shaken by the Covid pandemic: European governments spent more than €1,000 billion to counter the economic effects of the pandemic, according to the EC’s estimates, and this does not even include the EU’s €830 billion recovery fund financed by joint debt. It was therefore high time for member states to cut spending and, with some exceptions, public debt. Of course, this was not to be: war broke out in 2022, forcing European governments to spend on a large scale again. Beyond the economic protection measures – such as subsidies for residential and business energy prices during the energy crisis, which alone consumed €900 billion over two years –, EU financial assistance to Ukraine now stands at €155 billion. In light of all this, it is not surprising that most EU member states are now in a financial situation where during peacetime EU excessive deficit procedures, debt crises and inflationary waves are usually triggered, rather than new economic programmes on a historic scale.

Gross total debt-to-GDP ratios in Europe according to IMF (red: above 75%, orange: above 50%):

The figure can be referenced here: https://public.flourish.studio/visualisation/18404788/

All of this is, of course, also felt by the EU and member state governments. This can be seen from the “backdoor” attempts to find a solution, a rescue, so to speak, that are going on in the background:

  • Member states are trying to channel and cannibalize EU green transition funds for defence purposes. (For example, one €10 billion technology-strategy fund has been slashed to the point where only €1.5 billion are left for green research. The ‘shopping list’ above gives you an idea of what a fund of that size is sufficient for.)
  • Brussels is seeking to drastically increase its budget and use the resources of the capital market union to be introduced to support green and defence funds. (This is opposed by many member states who argue that this would covertly increase Brussels’ political clout at the expense of member state governments.)
  • Efforts to loosen the deficit and debt rules themselves are ongoing.
  • Time and again, the idea of the European Central Bank supporting the programmes with a monetary programme (money printing), either directly or through targeted EU bond issuance (i.e. borrowing), is raised.
  • There are also ideas to impose new common European taxes and/or to redirect existing European aid programmes, such as cohesion funds, to achieve the new goals.
  • Once again, the pressure is on Germany to finally get into debt and become the engine of green and defence investment in Europe.
  • Finally, there is also talk of using the proceeds of safeguard duties against China and other ‘unfair’ competitors.

As can be seen from the list, the ideas are a sign of serious desperation. Most European governments have clearly not learnt the lesson of the 2012 debt crisis: the market will only tolerate irresponsible spending for a while. And central bank money printing would now start in an inflationary environment. As for tariff wars: they are easy to start, but much harder to win, especially when the targeted state is the world’s largest industrialised country. Moreover, further rapid – and especially such decisive – centralisation from Brussels lacks the democratic mandate.

Typically, for ideological reasons, there is no question of rethinking and rational narrowing or focusing of the objectives themselves. For example, the total green transition, which is to be achieved forcefully by 2035, could be tamed to be much more market-friendly (and thus much cheaper). Green transition could also be implemented in one sector at a time, rather than in every sector with rigid deadlines (allowing for the heretical idea that the Earth will not be destroyed if the EU achieves total green transition only by, say, 2055). Likewise in re-armament: instead of general and often parallel redundant weapons system orders, building up the most critical high-tech competences (air superiority, new generation missile systems, drones) and building up the rapid reaction force once already decided in 2000 would be more likely to succeed. Let us hope that the EU will soon choose this path, before it falls into the trap of the trilemma and decisions are replaced by emergency situations.

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