Putin’s invasion of Ukraine suggests ‘peace dividends’ are fading | Kenneth Rogoff

RRussia’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, with the Russian economy less than one twentieth the combined size of the US and European economies, the same strategy of spending Russia heavily 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 has plummeted from 11.1% of GDP in 1967, during the Vietnam War, to 6.9% of GDP in 1989, the year of the fall of the Berlin Wall, to just over 3.5% of GDP today. If US defense spending as a percentage of GDP were still at Vietnam-era levels, defense spending in 2021 would have been $1.5bn (£1.1bn) higher – more than what the government spent on social Security last year, and almost triple government consumption and investment expenditure excluding defence. 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 United Kingdom and France spend just over 2% of their national income to defence, and Germany and Italy only 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 announcement February 27 that Germany will increase its 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 rise sharply, but interest rates also sometimes rise. 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 mistakes in energy policy of the kind that have gotten us to this point. In particular, Germany, which is counting on Russia to more than half of its gas needs, seems to have made a historic mistake by dismantling all its nuclear power plants after the Fukushima disaster in 2011. On the other hand, France, which is encountering 75% of its energy needs thanks to nuclear power, is much less vulnerable to Russian threats.

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In the United States, the cancelation of the Keystone XL pipeline project was perhaps 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 is a professor of economics and public policy at Harvard University and was chief economist of the International Monetary Fund from 2001 to 2003.

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