In recent weeks, statements calling for more public spending have multiplied in Europe. This is directly linked to American disengagement in defending the old continent and the consequence of the results of the last German elections.
Relaxation of the European straitjacket
Today, the Europeans rely on American military power to completely ensure their defence. European armies are far from anecdotal but cannot compete with American power.
In some areas, the expertise of the United States, which spends almost twice as much money on defence as the other 31 NATO members, is even difficult to replace. American authorities have long denounced this situation.
With Donald Trump's return to the White House, American reproaches have taken on another dimension. The American President threatens reprisals against European countries that do not sufficiently fund their armed forces.
Washington's attitude towards Kyiv, which is threatened with military abandonment, has provoked a collective awakening in European capitals. No longer able to rely unthinkingly on its American ally, Europe must be able to defend itself alone.
This inevitably involves increased military spending, which is difficult for many European countries that already do not comply with the budgetary rules in force within the European Union.
For this reason, the European Commission has decided to loosen the budgetary straitjacket, limiting military spending. Through various measures, € 800 billion should be mobilised over the next few years to strengthen Europe's defence.
Germany’s 180° turn
Alongside the European initiative, national responses are also being implemented to strengthen European security and resilience. This is particularly the case in Germany following the last general elections.
Expected to become the next German Chancellor, Friedrich Merz has announced his intention to significantly increase public spending on defence and infrastructure, which has been neglected since the introduction of the debt brake.
Since 2016, this mechanism has limited the federal budget's structural deficit to 0.35% of GDP and prohibited any structural deficit for the Länder since 2020. These strict fiscal rules allow Germany to have a public debt contained at just over 60% of GDP.
However, this tremendous budgetary prudence has contributed to the German economic stall by limiting investment, and it is now urgent to correct the situation. Such analysis is widely shared within the German political class. This will allow the next Chancellor to loosen the purse strings to benefit defence and infrastructure.
Positive impact...
Increasing public spending automatically has a positive impact on economic activity. However, the extent of this impact depends on many factors.
The first is obviously the amount spent. The € 800 billion effort for rearmament announced by the European Commission will not have a lasting significant influence on the € 17000 billion annual GDP of the European Union.
However, suppose all European countries increase their military spending to reach NATO's 2% of GDP threshold. In that case, the amounts injected can effectively revitalise the European economy as long as this spending mainly benefits European companies, especially the American arms giants.
The nature of the expenditure also influences the final impact. Increasing the salary or the number of military personnel does not have the same result as investing in new equipment produced in Europe. The effect is limited to an increase in employment and consumption.
Buying European equipment, on the other hand, allows industry development, stimulates expenditure on research and development, given the high technological content of military equipment, and can consequently improve the economy's productivity as a whole.
The same can be said of the infrastructure expenditure required in Germany. The amounts mentioned are sufficient to stimulate economic activity and improve the German economy's productivity and potential.
...in the medium term
The European desire to loosen the budgetary straitjacket to revive obsolete investments in defence and infrastructure may be a salutary turning point for the economies of the old continent. Well-targeted, this spending can revive European economic activity that has been at a standstill for several quarters and improve economic potential.
However, we should not be too quick to celebrate. These plans to increase public investment are slow to materialise by nature. The political obstacle must first be overcome.
This can be relatively fast in Germany, where the political class widely supports increasing spending. It will be slower in Europe, where most decisions require consensus, which is always difficult to find.
Then, we have to move on to the concrete implementation of the investments. It is not overnight that we know how to increase industrial production or multiply civil engineering works.
As a result, the change in budgetary course could only improve the economic situation of the old continent in the medium term.
In the meantime, even though European stock markets have reacted positively to this favourable development, we still prefer to avoid Eurozone equities as part of our portfolio strategy. Many European companies, on the other hand, are interesting on an individual basis.
