25 or 6 to 4

The Magic of Numbers and the Militarization of Public Budgets

In one of the most schmoozing political meetings of the last decades, NATO members agreed to the demand of President Trump to dedicate 5% of their GDP for military purposes. The 5% target was until very recently widely seen as coming from fantasy land of a President who is no longer interested in NATO and its common security principle and thus sets a financial target which not even he believed to be agreeable. Now it is an official NATO rule which (close to) all member states signed on to.

Why 5 and not 3 or 10 %? A comparison to the 3% and 60% rules of the Stability and Growth Pact may help to answer the question. The SGP requires members to adhere to a maximum annual budget deficit of 3% of GDP and a maximum of 60% of GDP of accumulated public debt. The Pact was pushed by German Finance Minister Theo Weigelt to make financial stability in member states a first-order principle. As it turned out - and was analyzed early on - these fiscal rules were not smart at all. It is not surprising that we saw since the design of the Pact in 1997 overall four iterations and the introduction of significant pauses of the rules. Both, the flow and the stock rule of public finance, were not based on an overarching economic principle nor on any empirical data. The 3% and 60% were made up in political discussions about the design of the common currency. Like all political decisions, the rules and the interpretation of the rules were open to changing political circumstances.

I guess that the 5% commitment will follow a similar path. It is already decided that the 5% will consist of a 3.5% pillar and a 1.5 % pillar, where the latter will be expenditures in security infrastructure in a very wide interpretation. In other words, programs like bridges, ports, railroads, internet cables, and the likes, which are already in the planning or in design phase, can be counted as part of the 5% rule. I expect that over time, politicians will get very innovative when it comes to the interpretation of the rules. Not to mention that the number of exemptions will increase over time.

Still, we are talking about huge amounts of money. Take the case of Germany. 5% of its 2023 GDP is about $ 260 billion. State expenditures in the same year were about $ 960 billion. NATO’s 5% rule would mean that military expenditures would have made up about 28% of all state expenditures in that year. Social security and pensions were about $ 160 billion that year. In other words, if the NATO rule had already been in place and had materialized immediately, then military expenditures would have been at the very top in the state budget.

Now, the NATO rule will be stretched over ten years. The steady increase will still outperform all other budget items. Militarization of the public budget is the future in most European countries. It is breathtaking how quickly and fundamentally the European world changed. Even though a bulk of the military spending will be debt-financed, there is a clear competition with other state policies. It is not difficult to anticipate political resistance against socially and ecologically progressive policies in particular from fiscal policy hawks who will use the rise of public debt as a vortex for cuts in other areas. The militarization of public budgets is no free lunch, neither politically nor economically. Centre-left parties are part of the newly minted military complex. It is up to them to put as many general infrastructure programs under the umbrella of the NATO rule. Such a strategy would provide a defense zone within public budgets and the coming political budget struggles. Not much, but at least a way to capitulate in the budget fights of the next couple of years.