Salaries of soldiers vs. tanks, fiscal security vs. military security or…

For some of the European economies, but especially for the over-indebted ones, the sovereign debt crisis that followed the last global financial collapse was so devastating that the recovery took more than a decade, and the scars are still visible today. The high debt of a state, in itself, is not a sign of weakness, but it comes related to the budget deficit, which occurs when a government spends more money than it has.

Currently, 11 EU member states are in breach of EU deficit rules. France and Belgium risk seeing their country rating downgraded this year because of this. Italy accumulated the largest deficit in the EU last year. Hungary and Romania follow closely behind.

Deficits and debts have started to matter again because they are growing, in some cases beyond danger levels, and analysts agree that Europe cannot afford another austerity crisis. The last meant a lost economic decade.

This can be seen if the European countries are compared with the American states. Even though the global financial crisis started in the USA, the American economy recovered much faster. Now, if France were part of the USA, it would be one of the poorest countries in terms of GDP per capita.

Even Germany would not sit very well in the ranking. In 2008, the US and the Eurozone were almost equal in terms of GDP – the first was $14.8 trillion, the second was $14.2 trillion. After 15 years, the American economy advanced to 27,000 billion dollars, and the European one only managed to go up to 15,000 billion dollars, that is, it hit its stride. Growth allows America and American companies to dominate Europe, the stock markets and the world in terms of investment and capital. Also, the financial and economic strength of the USA allows the government in Washington to start trade conflicts that it directs in its own interest.

Eleven EU countries, including France, Italy, Poland, Romania, Hungary and the Czech Republic, are to be reprimanded by the European Commission for excessive government spending after new tax rules come into effect this year. They are economies whose budget deficits have increased above the threshold of 3% of GDP allowed by EU rules. The Commission will determine in June for each individual case whether it will launch the so-called excessive deficit procedures (PDE). Eurozone countries could face financial sanctions if they do not correct course. For the non-euro countries, the risks are related to reputation, as the Financial Times writes.

In the euro zone, France, Italy and Belgium, whose budget deficits exceed 3%, do not intend to comply in the coming years and will most likely be sanctioned. Other countries, including Spain and the Czech Republic, believe that their deficit will return to the accepted quotas this year and that the deviation is only temporary. “There can be borderline cases,” Valdis Dombrovskis, executive vice-president of the commission for economic affairs, told FT.

“If there is a country whose excessive deficit is close to 3%, but temporarily, we could decide not to use the excessive deficit procedure.” Poland and Romania, which are not part of the euro zone, as well as Slovakia, which uses the euro, are requesting exemption on the grounds that they are forced to exceed the threshold of danger with the military spending deficits necessary since Russia started war against Ukraine.

“Poland has the highest defense expenditures among NATO countries, higher than the USA. This is an extraordinary situation that should be taken into account when assessing the excessive deficit procedure, and the new EU fiscal rules are made for this,” said Andrzej Domanski, the Polish finance minister.

FT made a comparison of the EU states according to the weight of the budget deficit and defense spending in GDP in 2023.

In Poland, the deficit was 5.1% of GDP, while arms spending was 3.9% of GDP. In the region, Romania had a deficit of 6.6% of GDP with defense spending of 2.4% of GDP. In the case of Hungary, the budget slippage was 6.7% of GDP, and spending was 2.4% of GDP. Poland, concludes the FT, would fall within the EU limits with the budget deficit if it did not spend so much on defense.

But Poland is arming itself with debt, including foreign debt. Italy, the champion of deficits, with the indicator at 7.4% of GDP, spent only 1.5% of GDP on defense. The Czech Republic spent the same amount, but it had a smaller deficit of 3.7% of GDP. Meanwhile, the government in Prague began to implement austerity measures. “We have been in dialogue with the Commission and there is a broad understanding that such investments must be properly considered,” said Domanski.

Defense spending “is one of the relevant factors” that determine whether or not to open an excessive deficit procedure, explained Dombrovskis. But not all defense spending qualifies for lighter treatment. Under new EU budget rules, “increased government investment in defence” can be ignored, but not recurrent defense spending. “It was clear in the negotiations that this would be a problematic subject. Soldiers’ salaries versus tanks,” said an EU diplomat, noting that it was up to the Commission to determine what could be exempted.

The strict fiscal rules were suspended during the COVID-19 pandemic and are now being reinstated after being amended to include, among other things, clauses that give more freedom to defense investments. Bloomberg offers a different perspective on rising debt and deficits, and concludes that while most governments will make progress in repairing public finances by withdrawing energy subsidy programs, pressures from existing and new commitments and the impact of higher interest rates will keep debt high. in most of the region.

For example, Italy’s debt may once again exceed 140% of GDP. This will put governments in a position to choose between alienating their constituents by cutting spending or raising taxes and attract negative attention from investors. “The economic situation in Europe is very conducive to populist rhetoric”, says Famke Krumbmüller, analyst at EY. Although the burden of punishing fiscal abuses rests with Brussels, austerity could curb the precious little growth Europe can achieve. “It’s a political and economic bombshell for Europe, especially since the US doesn’t seem to be considering a consolidation in the near future and because China is growing only because of fiscal incentives,” said Allianz Chief Economist Ludovic Subran.