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Home»Economic News»Europe’s Defense Dilemma | ZeroHedge
Economic News

Europe’s Defense Dilemma | ZeroHedge

December 7, 2024No Comments3 Mins Read
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Authored by Stefan Koopman, senior macro strategist at Rabobank

Initial 100 Days

Franklin Roosevelt was the first to emphasize the symbolic significance of “the first 100 days”, reflecting on his early progress towards the New Deal. In the EU, the first 100 days of a new administration often set the agenda as well. The primary focus is now on competitiveness through strategic autonomy – building on the recent Letta and Draghi reports.

Regarding defense, the urgency is clear. The escalating risk environment has led European nations to boost defense budgets after years of underinvestment. However, closing the gap will be a lengthy process. Commission President Von der Leyen estimated that Europe needs an additional EUR 500bn in defense investment just to catch up. In addition to increased spending, the EU aims to pursue efficiencies: enhancing coordination on expenditure allocation while addressing the fragmented nature of the European defense industry.

Amidst this backdrop, the Financial Times reports that EU Defense Commissioner Kubilius has suggested a joint borrowing mechanism for military spending. This proposal aims to finance the bloc’s EUR 500bn target. However, the proposal may not be as comprehensive as it seems. The mechanism essentially facilitates and accelerates borrowing, with individual member states still responsible for repayment. It does not offer grants nor guarantee EUR 500bn in additional spending, falling short of its ambitious headlines.

Structurally, the proposal faces familiar challenges. Any joint borrowing initiative is likely to face opposition from fiscally conservative states, despite being designed as a coalition of willing participants that could include non-EU countries like the UK. Achieving unanimity remains a significant hurdle, as each disbursement would require approval from national parliaments, including the Bundestag. This mirrors past issues with EU-wide ‘borrow-to-lend’ schemes such as the EFSF and ESM.

There is also a strategic challenge. Coordinating cross-border defense projects necessitates shared priorities and operational alignment, areas where the EU often struggles. While discussions on project financing may enhance coordination, national interests could prevail as long as the fund does not offer grants. If the fund only reduces borrowing costs for select member states but increases debt levels for all, countries will prioritize their individual spending choices.

Meanwhile, as Kubilius introduces his proposal, Von der Leyen is finalizing the EU-Mercosur trade deal in Uruguay. This deal, the EU’s largest in terms of population and trade volume, is poised for completion after 25 years in the making, just days after the collapse of the French government. France, a vocal opponent, is actively working to block the deal despite the new market opportunities it presents in the face of US tariffs. Moreover, the EU’s strategy of reducing dependency on China necessitates exploring new markets in other economies. In this context, an EU-Mercosur agreement offers a chance to align with the EU’s regulatory framework over China’s.

Elsewhere, OPEC+ has once again delayed the resumption of oil production, extending the halt to September 2026. This marks the third postponement as crude prices struggle amid an impending surplus. The decision to add some barrels in the first half of next year has been viewed as mildly bearish, with Brent hovering around USD 71.8/bbl. Despite this, crude prices remain rangebound within a 6-dollar band since mid-October.

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