One hopes that Russian President Vladimir Putin will soon realize that his invasion of Ukraine has been a spectacular miscalculation. But even if the current crisis abates, he should remind Western governments that sustainable growth requires paying for the ability to sustain economies against external aggression.
CAMBRIDGE – The brutal Russian invasion of Ukraine should be a wake-up call for Western politicians, business leaders and economists who promote an equitable and environmental future, but lack the practical or strategic sense to achieve it. Regardless of the short-term tactics Europe and the United States use to respond to the current crisis, their long-term strategy will have to put energy security on a par with environmental sustainability and financing military deterrence on a par with that of government. social priorities.
The Soviet Union collapsed in 1991 largely because its leaders, primarily President Boris Yeltsin and his economic advisers, recognized that the Soviet communist military-industrial complex could not keep pace with the economic might and superior technological prowess of the West.
Today, considering that the size of the Russian economy is less than one-twentieth the size of the combined economies of the United States and the European Union, that same strategy of vastly outpacing Russia’s defense spending should be much easier to pull off. Unfortunately, many Western societies are hesitant, especially on the left, to admit that defense spending is sometimes a necessity rather than a luxury.
For many decades, Western standards of living were buoyed by gigantic “peace dividends.” For example, US defense spending fell from 11.1% of GDP in 1967, during the Vietnam War, to 6.9% of GDP in 1989, the year the Berlin Wall fell, to just 3.5% of GDP. nowadays.
If the proportion of GDP dedicated to the defense of the United States remained at the levels of the time of the war with Vietnam, the corresponding expenditures in 2021 would have been 1.5 billion dollars more, above what the government spent on social security last year and nearly triple government spending on non-defense consumption and investment. Even at the level of the late 1980s, defense spending would have been $600 billion higher than today. The additional cost would have had to be financed with more taxes and borrowing, or by reducing spending in other areas.
European defense spending has long lagged far behind that of the United States. Currently, the UK and France spend just over 2% of their national income on defence, and Germany and Italy only about 1.5%. Furthermore, national interests and domestic lobbying mean that European defense spending is grossly inefficient: the whole is significantly less than the sum of its parts.
I am amazed at how many of my otherwise well-informed friends ask why Europe does not respond with more military force to the Russian attack on Ukraine and the looming threat to the Baltic states. Part of the answer, of course, lies in Europe’s dependence on Russian gas, but the biggest reason is its appalling lack of preparedness.
Thanks to Russian President Vladimir Putin, all this may change. German Chancellor Olaf Scholz announced on February 27 that Germany will increase defense spending to more than 2% of GDP, suggesting that Europe is finally starting to behave as it should. But those commitments will have major fiscal implications that, after the big fiscal stimulus of the pandemic era, may be difficult to digest. As Europe reformulates its fiscal rules, policymakers need to consider how to create enough room for maneuver to deal with unexpected large-scale military buildups.
Many seem to have forgotten that wartime spending surges were once a major cause of volatility in government spending. In a war, not only do government spending and budget deficits often rise sharply, so do interest rates.
By now, policymakers (along with many well-meaning economists) have become convinced that large global economic shocks, such as pandemics or financial crises, will inevitably lower interest rates and make large debts easier to pay. to finance; but in times of war the need to anticipate gigantic temporary expenses can easily drive up borrowing costs.
Certainly, in today’s complex world of drones, cyber warfare, and automated battlefields, how governments use their defense budgets matters a lot. Still, assuming that every time defense budgets are cut military planners will make up the difference with efficiency gains is magical thinking.
It would also help if the West manages to prevent further mistakes in energy policy like the ones that got us into this situation. Germany, in particular, which relies on Russia for more than half of its gas needs, appears to have made a historic mistake by decommissioning all of its nuclear power plants after the Fukushima disaster in 2011. By contrast, France – which produces 75% of its energy needs with nuclear energy – is significantly less vulnerable to Russian threats.
In the United States, the decision to cancel the Keystone XL pipeline proposal may have been based on strong environmental arguments, but now it seems ill-timed. Measures to protect the environment are not good if they create strategic weaknesses that increase the possibility of conventional wars in Europe, leaving aside the large-scale radioactive contamination that would occur if neutron bombs or tactical nuclear weapons are used.
Steadfast Ukrainian resistance, swift and harsh economic and financial sanctions, and internal dissent could yet force Putin to acknowledge that his decision to invade Ukraine was a spectacular miscalculation. But even if the current crisis abates, the horrific attack on Ukraine should remind even the most committed advocate for peace that the world can be harsh and unpredictable.
We all want lasting peace, but dispassionate discussions of how countries can achieve sustainable and equitable growth require reserving fiscal space – including emergency borrowing capacity – for the costs of protection against external aggression.
The author
Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University and winner of the 2011 Deutsche Bank Prize in Financial Economics, was Chief Economist at the International Monetary Fund from 2001 to 2003. He is the co-author of This Time is Different: Eight Centuries of Financial Folly and author of The Curse of Cash.
Copyright: Project Syndicate, 2020