Europe has had trouble balancing its relatively large number of spending commitments with lackluster economic growth. The European economy remained basically stagnant in 2023, compared to 2.5% growth in the United States. Economic subsidies, a large welfare state, and a new push to increase defense spending means that all but four EU members are left with budget deficits in 2023. While having a deficit is not abnormal amongst developed countries, the number of members with a deficit above 3% is troubling and may require action on the part of the European Commission. As of the last report, 11 states violated EU member state rules by having budget deficits above 3%. EU members must ultimately decide if deficits are a necessary evil or if some spending commitments must be decreased.
Part of this decision will depend on if the European Commission will launch excessive deficit procedures on the members in question. This review has begun already for many members of the EU. As of now, Belgium, France, Hungary, Italy, Malta, Poland, Romania, and Slovakia now have reviews open to determine necessary steps to tackle their deficits. So far this has simply meant that the European Commission is analyzing the situation of each member to determine recommendations or required corrections. These reviews take into account external circumstances and corrective measures which are already put into place.
Corrective reviews like this are not a new occurrence in the European Union. In fact, these reports have come out every year, with reports during the covid era including even more members with excessive deficits. What is especially alarming is that the European Union as a whole ran a deficit of 3.5% in 2023. Additionally, while eight members are under review for high deficits, all but four have budget deficits in general. Excessive debt is also becoming a serious problem for the EU. The 2023 ratio of debt to gross domestic product was 81.7% across the union.
High levels of debt and budget deficits have made some members begin to return to a level of economic austerity. Finland and France have cut spending, and Spain has begun to significantly raise taxes. These measures may not be enough as defense and “green” spending have outpaced spending cuts and tax increases. The EU’s second largest economy, France, is running a budget deficit of 5.5% but is still projected to allocate an increased €26.4 billion to green spending in 2024. In recent years, Germany has been especially dedicated to transforming its economy to meet certain environmental goals. In part due to this, increases in new spending and investment have created holes in the German budget, with tens of billions missing from proposed spending. The German high court has even had to restrict spending as the governing coalition attempted to pull billions out of a special emergency fund as a way to go around the constitutionally mandated debt brake.
Hefty investments in “green” spending have played a large part in Europe’s current woes. It is not the only culprit, however. France especially has ramped up protectionist economic policies meant to artificially protect certain domestic industries. These barriers to investment and foreign cooperation only further hamper the already indebted French economy. Rather than discouraging investment, the French government should aim to welcome outside investment, competition and advancement.
The final large aspect of this dynamic is the European increase in defense spending. With the United States so far refusing to put boots on the ground to resist Russia’s advancement, Europe might finally have to finance its own defense. Defense spending across Europe increased by 16% from 2022-23, with Poland increasing by almost 70%. This is necessary as the United States has traditionally financed much of NATO’s defense spending, thus allowing European members to invest in their green infrastructure and public assistance programs. While any war is not desirable, this at the very least may be leading to a shift where European states take charge of governing the affairs of Europe.
Most European countries historically have large welfare states. This means that the population is used to large amounts of economic subsidies and public assistance. Widespread protests famously disrupted France when the economically centrist president Emmanuel Macron sought to raise the retirement age by two years as an attempt to keep the pension system viable. Serious spending cuts and tax increases may be out of reach for most members of the EU. The fact that green infrastructure investments are so far more expensive than they are worth has not outweighed the virtue signaling which surrounds such programs. The same can be said for protectionist trade policies and public assistance programs. Activist politicians will predictably support ineffective policies to garner public support. It appears increases in defense spending may finally be popular enough amongst European voters to allow politicians to cut spending in other areas.
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