Europe's NATO members take an economic hit

Summary

The Indicator from Planet Money: Europe's NATO Members Take an Economic Hit

Release Date: February 27, 2025
Host/Author: NPR
Episode Title: Europe's NATO Members Take an Economic Hit

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Introduction

In the latest episode of "The Indicator from Planet Money," hosts Waylon Wong and Paddy Hirsch delve into the evolving dynamics between the United States and its European NATO allies. The episode, titled "Europe's NATO Members Take an Economic Hit," explores the financial implications for European nations as they respond to increased defense spending demands from the U.S. administration under President Trump.

Background: U.S. Pressure on NATO Defense Spending

The episode begins by setting the context of strained U.S.-Europe relations following the Trump administration's actions, including the disrupted visit of U.S. Senator Ted Cruz to Europe. This upheaval has left European politicians scrambling to reassess their relationships with the United States. Wayne Wong highlights the core issue:

Waylon Wong [00:30]: "One thing that looks increasingly certain when it comes to defense, members of the North Atlantic Treaty Organization, which of course includes a lot of European nations, are going to have to pay more."

President Trump's administration has intensified its long-standing criticism that many NATO members have been underfunding their defense commitments. Notably, the Trump administration's envoys have not only reiterated the demand for NATO members to meet their obligations but have also proposed raising the defense spending threshold from the previously agreed-upon 2% of GDP to 5%:

Paddy Hirsch [00:47]: "Trump's envoys signaled not only that they will be insisting on all NATO members meeting their obligations, but they want to see the threshold raised from 2 to 5% of GDP."

Economic Struggles of European Nations

European countries are already grappling with economic challenges, making the prospect of significantly increasing defense budgets a daunting task. The episode discusses how nations are planning to accommodate the additional financial burden. Jocelyn Maudsley, a professor at Newcastle University specializing in European security, provides insight into the unexpected stance of the U.S.:

Jocelyn Maudsley [04:02]: "I think everybody was mentally prepared for a US that didn't care very much anymore and was much more focused on Asia. What we perhaps hadn't really expected was the US as an enemy."

Despite these tensions, many European nations had been ramping up their defense spending even before Trump's presidency, particularly in response to Russia's invasion of Ukraine. Countries like Poland, Lithuania, and Romania have already increased their defense expenditures significantly:

Jocelyn Maudsley [04:30]: "Some countries, particularly in the Baltics, Poland, have already raised defense expenditure far beyond this. Poland's defense expenditure is higher than that of the US at the moment by..."

Debt and Funding Defense Spending

The financial strain of increasing defense budgets is further complicated by high debt-to-GDP ratios in several European countries. While Poland maintains a relatively manageable debt level at around 50%, the UK and Portugal approach 100%, and Greece stands at a staggering 160%. Ethan Milzewski, a professor at the London School of Economics, discusses the feasibility of borrowing to meet these defense needs:

Ethan Milzewski [06:13]: "The question then becomes, can European governments borrow under current conditions?"

Despite high debt levels, European governments appear capable of accessing the necessary funds. Investors remain confident, offering loans at rates below those in the United States and historically low:

Ethan Milzewski [07:04]: "The market is telling us that it is willing to lend to European governments at rates below the United States and very low by historical standards."

Strategic and Economic Benefits of Increased Defense Spending

Increasing defense budgets may present several strategic and economic advantages for Europe. Ethan Milzewski highlights the long-term benefits:

Ethan Milzewski [08:34]: "There are some long run benefits to increased defense spending. The reduced uncertainty of external threats, that is an economic benefit."

Moreover, enhanced defense spending can stimulate employment and drive technological advancements. Defense projects often lead to high-quality jobs with substantial pay and benefits, and the focus on advanced technologies can spur productivity and economic growth:

Ethan Milzewski [08:47]: "They have increased employment. They have increased employment. They also tend to be relatively good jobs in terms of their pay, benefits, et cetera."

Implications for the United States

An increase in European defense spending could lead to a more self-sufficient European defense industry, reducing reliance on U.S. defense products. While this might initially seem detrimental to the American defense sector, Nevada Lee from the Stimson Center offers a reassuring perspective:

Nevada Lee [09:26]: "Assuming the US doesn't become an enemy of European NATO, having an ally with a robust defense capacity of its own would be good for both sides."

Furthermore, a stronger European defense capability would enhance the overall security architecture, potentially easing the burden on U.S. military resources and fostering mutual strategic benefits.

Opportunities Amidst Fractured Relations

Despite the current tensions, the episode underscores an opportunity for Europe to fortify its economic and defense structures. Jocelyn Maudsley emphasizes the transformative potential of this situation:

Jocelyn Maudsley [10:04]: "There's no doubt that the way the Trump administration is handling this issue is fracturing the relationship between the US and Europe. But she says this creates an opportunity for Europe to make itself less dependent on the US and maybe give itself an economic shot in the arm at the same time."

Conclusion

Europe's response to increased defense spending demands from the U.S. presents both challenges and opportunities. While the financial strain is significant, particularly for economically struggling nations, the potential benefits in terms of security, employment, and technological advancement are substantial. The episode concludes by highlighting the delicate balance European nations must strike to enhance their defense capabilities without compromising their economic stability.

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Notable Quotes with Timestamps:

• Waylon Wong [00:30]: "One thing that looks increasingly certain when it comes to defense, members of the North Atlantic Treaty Organization... are going to have to pay more."

• Paddy Hirsch [00:47]: "Trump's envoys signaled not only that they will be insisting on all NATO members meeting their obligations, but they want to see the threshold raised from 2 to 5% of GDP."

• Jocelyn Maudsley [04:02]: "What we perhaps hadn't really expected was the US as an enemy."

• Ethan Milzewski [08:34]: "There are some long run benefits to increased defense spending. The reduced uncertainty of external threats, that is an economic benefit."

• Jocelyn Maudsley [10:04]: "This creates an opportunity for Europe to make itself less dependent on the US and maybe give itself an economic shot in the arm at the same time."

Final Thoughts

"The Indicator from Planet Money" adeptly navigates the complex interplay between defense spending and economic stability within the NATO alliance. By examining both the pressures exerted by the U.S. and the strategic responses of European nations, the episode provides a comprehensive analysis of a pivotal moment in transatlantic relations.

Transcript

[NPR]

Npr.

[Waylon Wong]

This is the indicator from Planet Money. I'm Waylon Wong.

[Paddy Hirsch]

And I'm Paddy Hirsch. In the wake of the Trump administration wrecking Cruz visit to Europe two weeks ago, European politicians and bureaucrats are desperately trying to figure out what the future of their relationships with the US look like. The UK prime minister's in the White House today trying to get a handle on it.

[Waylon Wong]

One thing that looks increasingly certain when it comes to defense, members of the North Atlantic Treaty Organization, which of course includes a lot of European nations, are going to have to pay more. For years, President Trump has complained that many NATO members have been getting a free ride.

[Paddy Hirsch]

Yeah, well, that ride appears to be coming to an end. Trump's envoys signaled not only that they will be insisting on all NATO members meeting their obligations, but they want to see the threshold raised from 2 to 5% of GDP.

[Waylon Wong]

We're talking about hundreds of billions of dollars being spent by countries that are already struggling economically. On today's show, we'll talk about where all of that money might come from.

[Angel Carreras]

This message comes from Capital One with the Venture X card. Earn unlimited double miles on everything you buy, plus get premium benefits at a collection of hotels when booking through Capital One Travel. What's in your wallet? Terms?

[NPR]

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[Paddy Hirsch]

The hits to America's relations with Europe came hard and fast. First, there was the US Defence Secretary Pete Hegseth telling NATO that President Trump wants them to crank up defence spending to 5% of GDP. Then there was Vice President J.D. vance at a security conference castigating European nations on freedom of speech. And then there was America at the UN Refusing to blame Russia for the war in Ukraine.

[Waylon Wong]

It's all sent European leaders a scurrying. French President Emmanuel Macron flew to Washington to gauge Trump's mood on Monday. And UK Prime Minister Sir Keir Starmer visits The White House today, they're all trying to figure out what this means. Is America siding with Russia, withdrawing from NATO, ending its relationships with Europe?

[Paddy Hirsch]

Well, one thing that is absolutely certain, when it comes to defence, Europe is going to have to pay more, a lot more.

[Ethan Milzewski]

I think that this should not be necessarily surprising to people.

[Paddy Hirsch]

Nevada Joan Lee covers European and American defence relations at the Stimson center, an international security think tank in Washington, D.C.

[Ethan Milzewski]

Trump has been discussing European defense spending and NATO defense spending since before he even ran for president.

[Waylon Wong]

All members of NATO, as indicator listeners might remember, agreed to spend at least 2% of GDP on defense. But in the past, most, with a few notable exceptions like Poland, Greece and the UK have not done this.

[Paddy Hirsch]

And that has been a source of complaint for the US for many years, long before Trump came into office. Robert Gates, who served as defense Secretary under Presidents George W. Bush and Obama, left his office urging European members to up their game, spending wise.

[Waylon Wong]

So the demands are nothing new. But this time they do feel different. Jocelyn Maudsley is a professor at Newcastle University, specializing in European security.

[Jocelyn Maudsley]

I think everybody was mentally prepared for a US that didn't care very much anymore and was much more focused on Asia. What we perhaps hadn't really expected was the US as an enemy.

[Paddy Hirsch]

Jocelyn says that European countries were already ramping up spending on defence well before Trump came into office. In response to Russia's invasion of Ukraine, some countries, because they're NATO members and NATO has announced its support for Ukraine. Other countries, because of fears that if Russia's successful in Ukraine, well, they might be next.

[Jocelyn Maudsley]

Some countries, particularly in the Baltics, Poland, have already raised defence expenditure far beyond this. Poland's defence expenditure is higher than that of the US at the moment by.

[Waylon Wong]

GDP measures, but defense is expensive. Poland is a medium sized European nation with a GDP of around $900 billion. It spent 4.2% of that on defense last year, about $41.5 billion. But Poland's state of economic health is a lot better than many of its neighbors.

[Jocelyn Maudsley]

The core economies of Europe, France, Germany, Italy and the UK are all sluggish. And getting much beyond the 2% is actually economically quite challenging.

[Paddy Hirsch]

Jocelyn says her home in the United Kingdom provides a good example of how challenging it could be to increase defence spending to 5%. And where the choices that leaders are going to have to make will be particularly difficult.

[Jocelyn Maudsley]

We're coming off the back of over a decade of austerity politics. Public services are in a mess, and you suddenly have a demand like this exactly the same moment that the Newish Labour government was trying to pump money back into public services.

[Waylon Wong]

Some countries might make the decision not to cut services. Instead they might borrow.

[Ethan Milzewski]

The question then becomes, can European governments borrow under current conditions?

[Paddy Hirsch]

Ethan Nielsetsky is a professor at the London School of Economics. He notes that a number of European countries have borrowed to fund their defence spending. Poland, Lithuania and Romania are just 3.

[Waylon Wong]

But debt to GDP ratios in some European nations don't look healthy right now. Some countries are fine, Poland's at about 50%. But in the UK and Portugal, debt to GDP is closing in on 100%. And then you've got Greece at 160%.

[Paddy Hirsch]

God, I'm recalling the great sovereign debt crisis of 2009 in Europe.

[Waylon Wong]

I know, but just for context, America's debt to GDP is around 123%. So it's all rel. And besides, Ethan says investors don't seem too worried about European debt loads right now.

[Ethan Milzewski]

The market is telling us that it is willing to lend to European governments at rates below the United States and very low by historical standards. So while the whole world has a public debt problem, it doesn't seem like Europe at the moment is the biggest concern of investors.

[Paddy Hirsch]

It smells like an opportunity, one that Jocelyn Maudsley says European governments are already preparing themselves to embrace. She points to the new leader of perhaps the most anti debt nation of.

[Jocelyn Maudsley]

All, Germany, Friedrich Merz, who had always been a hardliner on the idea that Germany must run a balanced budget. Now his leader, he's saying we need spend on defence.

[Paddy Hirsch]

Britain's Prime Minister announced this week that the UK will increase defence spending and it'll cut foreign aid to pay for it. Jocelyn says the UK Chancellor Rachel Reid's is going to have to give up her rigorous fiscal rules on debt and spending.

[Waylon Wong]

The UK might also tap the bond markets for defense funding, she says, and.

[Jocelyn Maudsley]

We shall have to go for a bout of military Keynesianism.

[Waylon Wong]

Potato, potato. Keynesianism, Keynesianism, yes, there you are.

[Paddy Hirsch]

Keynesianism, you know that concept where the government spends a great deal of money to kind of resuscitate the economy.

[Jocelyn Maudsley]

The idea that if you invest in the military that you do get a growth spurt that can then go into the wider economy.

[Paddy Hirsch]

In fact, Ethan Milzewski says by insisting on increased defence spending, Trump actually could be doing Europe a favour here, both strategically and economically in a number of ways.

[Ethan Milzewski]

There are some long run benefits to increased defence spending. The reduced uncertainty of external threats, that is an economic benefit.

[Paddy Hirsch]

Okay, so good for macro security, but good for employment too.

[Ethan Milzewski]

Historically defence buildup have been good for employment, they have increased employment. They also tend to be relatively good jobs in terms terms of their pay, benefits, et cetera. The nature of the arms race is such that it really incentivizes you to going to the most speculative, the most advanced technologies. And that's why defense spending does tend to have some longer term benefits in terms of productivity growth, technological advancement, and therefore economic growth.

[Waylon Wong]

The result could be a thriving independent defense industry in Europe, one that is less dependent on the US Yeah, but.

[Paddy Hirsch]

Hold on, wouldn't that be bad for America? I mean, like around 60% of all the EU defense purchases are made from US companies.

[Waylon Wong]

Nevada Lee at Stimson says yes, the US might sell a little less to Europe, but the US defense industry sometimes has trouble meeting the needs of its own military. Assuming the US doesn't become an enemy of European NATO, having an ally with a robust defense capacity of its own would be good for both sides.

[Ethan Milzewski]

At the end of the day, when our allies do well and create incredible systems, we benefit as well. And we would also benefit from being able to rely on Europeans to take care of their own security a little bit more.

[Paddy Hirsch]

She says there's no doubt that the way the Trump administration is handling this issue is fracturing the relationship between the US And Europe. But she says this creates an opportunity for Europe to make itself less dependent on the US and maybe give itself an economic shot in the arm at the same time.

[Waylon Wong]

This episode was produced by Angel Carreras with engineering by Jimmy Keeley. It was fact checked by Sierra Juarez. Kate Concannon is our editor and the indicator is a production of npr.

[Angel Carreras]

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