Is the peace dividend over?

Russia’s brutal invasion of Ukraine should be a wake-up call for Western politicians, business leaders and economists who advocate a green and fair future but lack the practicality or strategy 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 must put energy security on equal footing with environmental sustainability and military deterrence funding. essential on an equal footing with the financing of social priorities.

The Soviet Union collapsed in 1991 largely because Russian leaders, especially President Boris Yeltsin and his economic advisers, recognized that the Soviet communist military-industrial complex could not afford to keep up with economic might and the superior technological prowess of the West. Today, when Russia’s economy is less than one-twentieth the combined size of the US and European economies, the same strategy of vastly outspending Russia on defense should be much easier to execute. Unfortunately, there is a reluctance in many Western societies, especially on the left, to admit that defense spending is sometimes a necessity, not a luxury.

For many decades Western living standards have been boosted by a huge “peace dividend”. 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 over 3.5% of GDP today. If U.S. defense spending as a percentage of GDP were still at Vietnam-era levels, defense spending in 2021 would have been $1.5 trillion higher — more than the government spent on Social Security last year, and nearly triple government spending on non-military consumption and investment. Even at the level of the late 1980s, defense spending would be more than $600 billion higher than today. The extra cost would have to be financed by higher taxes, more borrowing, or less government spending in other areas.

Europe’s defense spending has long been well below that of the United States. Today, the UK and France spend just over 2% of their national income on defence, and Germany and Italy around 1.5%. Moreover, national interests and domestic lobbying mean that European defense spending is highly inefficient, the whole being considerably less than the sum of its parts. I’m amazed at how many of my otherwise knowledgeable friends have asked why Europe isn’t mounting a stronger military response to Russia’s attack on Ukraine and the impending threats against the Baltic states. Part of the answer, of course, is Europe’s dependence on Russian gas, but the most important reason is its glaring lack of preparation.

Thanks to Russian President Vladimir Putin, all of that could change. German Chancellor Olaf Scholz’s announcement on February 27 that Germany will increase defense spending to more than 2% of GDP suggests that Europe may finally pull itself together. But such commitments will have major fiscal implications – and, after the massive pandemic-era fiscal stimulus, these could be hard to digest. As Europe rethinks its fiscal rules, policymakers must think about how to make enough space to deal with unexpected large-scale military buildups.

Many seem to have forgotten that wartime spending spikes were once a major driver of public spending volatility. In a war, not only do government expenditures and budget deficits usually increase sharply, but interest rates sometimes increase as well. Today, policymakers (as well as many well-meaning economists) have become convinced that major global economic shocks such as pandemics or financial crises will invariably lower interest rates and make it easier to finance large debts. But in times of war, the need to incur massive temporary expenditures can easily drive up borrowing costs.

It is true that in today’s complex world of drones, cyber warfare and automated battlefields, how governments spend their defense budgets is very important. Yet it is wishful thinking to assume that whenever defense budgets are cut, military planners will make up the difference with increased efficiency.

It would also help if the West could avoid further strategic energy policy blunders of the kind that have gotten us to this point. In particular, Germany, which depends on Russia for more than half of its gas needs, seems to have made a historic mistake by decommissioning all its nuclear power plants after the Fukushima disaster in 2011. In contrast, France, which covers 75% of its energy needs thanks to nuclear power, is much less vulnerable to Russian threats.

In the United States, the cancellation of the Keystone XL pipeline project may have been based on sound environmental logic. But now the timing seems awkward. Measures intended to protect the environment are of no use if they lead to a strategic weakness that increases the possibility of conventional wars in Europe – not to mention the large-scale radioactive pollution that would result from the deployment of neutron bombs or weapons nuclear tactics.

Fierce Ukrainian resistance, swift and severe economic and financial sanctions, and domestic dissent could still force Putin to acknowledge that his decision to invade Ukraine was a spectacular miscalculation. But even if the current crisis subsides, the horrific attack on Ukraine should remind even the most committed peacemaker that the world can be harsh and unpredictable.

Everyone hopes for a lasting peace. But short-sighted analyzes of how countries can achieve sustainable and equitable growth require leaving fiscal space – including emergency borrowing capacity – for the costs of protecting against external aggression.


Kenneth Rogoff, professor of economics and public policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was chief economist of the International Monetary Fund from 2001 to 2003. The co-author of “This Time is Different: Eight Centuries of Financial Folly”, his new book, “The Curse of Cash”, was released in August 2016.


© Syndicate Project

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