Rearmament to struggling Europe's economic rescue?

Europe is under immense pressure to increase its defence spending and weapons present themselves as a new economic opportunity

Rearmament the route to Europe's economic rejuvenation?

US President Donald Trump has been urging the European members of NATO to increase their military spending. The US defence budget is bigger than the next nine largest defence budgets combined, and it spends about 3.4% of its gargantuan GDP on defence. Precisely because the US spends so much, its European allies have been lulled into relying on American muscle, spending less on defence and more on domestic welfare. Those freeriding times are over. Europe is under immense pressure to increase its defence spending.

This compulsion to overhaul its spending priorities will, however, prove to be a blessing, even if it comes along goose-stepping in intimidating combat gear. This is because Europe also is being forced to stare at proximate industrial collapse, unless it moves on from its traditional areas of strength, and into radically new lines of production. Weapons present themselves as a new economic opportunity, however distasteful those long trained to choose the gooey option in the tradeoff between guns and better might find this to be.

Farewell to Farewell to Arms

President Trump has made it clear that he would wish Russia’s Vladimir Putin ‘bon appetit’, should he choose to make a meal out of any NATO member that has not lived up to its obligation to spend 2% of GDP on defence. That would give even Germany the vague appearance of a dish of sauerkraut. In order to make up for past shortfalls, Trump suggests that NATO’s European members now spend 5% of GDP on defence.

Trump’s sudden reversal of course on Ukraine, and public humiliation of Zelensky, combined with Vice President Vance’s advice at the Munich Security Conference that Europe has to fend for itself have forced European politicians to appreciate French President Emmanuel Macron’s persistent demand, since his first term in office, to establish Europe’s strategic salience outside NATO. Would-be German chancellor Friedrich Merz has talked about the need for military self-reliance, independent of America. That also means Europe stepping up its defence outlays significantly.

This prospect might strike the welfare-saturated Europeans as paving the way for drastic disruption of their comfortable lives and tightening their belts by several painful notches. There are several countries that spend 5% of GDP or more on defence, say Russia and Israel. Their citizens are not exactly writhing in agony as a result. If the national circumstance requires the defence budget to go up, go up it will. Ukraine spends, these days, more than a third of its GDP on defence.

And there is a circumstance that forces Europe to reconsider its economic prospects. There was a time when China used to compete with Europe on the strength of low wages. Europe had the advantage when it came to technology and engineering excellence, in very many sectors, particularly automobiles. Those days are now in the past.

China today deploys a quarter of the world’s industrial robots. It leads the world in photovoltaic cells, solar panels and modules, wind turbines, battery technology and the entire range of tech that goes into the making of electric vehicles. As a result, China is now a massive, almost unbeatable competitor in automobiles and in the green transition sectors. The European Union has protected its auto industry with the help of special tariffs: these range from 17% to 35.3% on China’s world-bearing e-vehicles, in addition to the standard tariff of 10% on any auto import. Europe’s battery champion Northvolt had to file for bankruptcy, unable to compete with China’s CATL.

The new breed of e-vehicles from India, stylish as well as technologically sophisticated, are likely to meet with a similar fate in Europe.

Since China had armtwisted giant western MNCs into transferring technology and setting up local subsidiaries as a precondition for accessing its giant domestic market, China now has a sophisticated machine building industry as well, which can produce advanced machinery of all kinds.

Europe still leads in commercial aircraft and many weapons systems. China has been able to produce a midrange airliner, with help from Russia, but its ship building and weapons systems are meant for domestic consumption.

Buy European, Make European

If Europe is forced to spend more on arms, it makes sense for it to spend more on European arms, designed and made in Europe, creating jobs of different skill levels that draw from a variety of fields. According to the Stockholm Peace Research Institute database, of the sales of the top 100 producers of weapons and services in 2023, America accounted for 50%, China, 16%, and Russia, 4%. Britain had a share of 7.5%, France, 4%, firms with ownership in more than one European country, which the database classifies as trans-European firms, accounted for 3.3%, Italy, 2.4% and Germany, 1.7%. The major European NATO powers accounted for just 19% of the arms sales of the biggest arms producers. Clearly, Europe can do much better.

And that would call for new R&D, new weapons systems, communications, use of artificial intelligence, advances in drone warfare, and hypersonic missiles that both China and Russia have and Europe lacks, new design, new trans-European division of parts, projects and production, redeploying the strength of Europe’s engineering and design industries in a vastly expanded arms industry, to support which Europe, in any case, has to divert money from other parts of national expenditure. The spin-offs of this endeavour would strengthen the civilian part of the economy, as well.

A new European arms industry might well pick up the slack created by loss of competitiveness for Europe in very many areas of traditional advantage.