War in Ukraine: Are the peace dividends over? | Business

The brutal Russian invasion of Ukraine should be a wake-up call for Western politicians, business leaders and economists who promote an equitable and environmental future, but lack the practical or strategic sense to achieve it. Whatever short-term tactics Europe and the United States use to respond to the current crisis, their long-term strategy will have to put energy security on a par with environmental sustainability and funding military deterrence on the same level as social priorities.

The Soviet Union collapsed in 1991 largely because Russian leaders, primarily President Boris Yeltsin and his economic advisers, recognized that the Soviet communist military-industrial complex could not keep pace with the economic might and superior technological prowess of the West. Today, considering that the size of the Russian economy is less than one-twentieth the size of the combined US and EU economies, that same strategy of vastly outpacing Russia’s defense spending should be much easier to pull off. Unfortunately, many Western societies, especially the left, are hesitant to admit that defense spending is sometimes a necessity rather than a luxury.

For many decades, Western standards of living were buoyed by gigantic “peace dividends.” 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 above 3.5% of GDP today. If the share of GDP devoted to US defense was still at Vietnam-era levels, the corresponding expenditures in 2021 would have been $1.5 trillion more, above what the government spent on social security. last year and almost triple government spending on non-defense consumption and investment. Even if defense spending in the late 1980s had been $600 billion higher than today, the additional cost could have been financed by more taxes and borrowing, or by reducing spending in other areas.

European defense spending has long lagged far behind that of the US. Today, the UK and France spend just over 2% of their national income on defense, with Germany and Italy only close. of 1.5%. Furthermore, national interests and domestic lobbying mean that European defense spending is grossly inefficient: the whole is significantly less than the sum of its parts. I am amazed at how many of my otherwise well-informed friends ask why Europe does not respond with more military force to the Russian attack on Ukraine and the looming threat to the Baltic States. Part of the answer, of course, lies in Europe’s dependence on Russian gas, but the biggest reason is its appalling lack of preparedness.

However, thanks to Russian President Vladimir Putin, all this may change. German Chancellor Olaf Scholz announced on February 27 that Germany will increase defense spending to more than 2% of GDP. This suggests that Europe is finally beginning to behave as it should. But those commitments will have major fiscal implications that, after the big budget stimulus of the pandemic era, may be difficult to digest. As Europe reformulates its fiscal rules, policymakers need to consider how to create enough room for maneuver to deal with unexpected large-scale military buildups.

Many seem to have forgotten that wartime spending surges were once a major cause of volatility in government spending. In a war, not only do government spending and budget deficits often rise sharply, so do interest rates. By now, policymakers (along with many well-meaning economists) have become convinced that large global economic shocks, such as pandemics or financial crises, will inevitably lower interest rates and make large debts easier to pay. to finance; but in times of war the need to anticipate gigantic temporary expenses can easily drive up borrowing costs.

He knows in depth all the sides of the coin.


Certainly, in today’s complex world of drones, cyber warfare, and automated battlefields, how governments use their defense budgets matters a lot. Still, assuming that every time defense budgets are cut military planners will make up the difference with efficiency gains is magical thinking.

It would also help if the West manages to avoid further mistakes in energy policy like the ones that got us into this situation. Germany, in particular, which relies on Russia for more than half of its gas needs, appears to have made a historic mistake by decommissioning all of its nuclear power plants after the Fukushima disaster in 2011. By contrast, France — which produces 75% of its energy needs with nuclear power—is significantly less vulnerable to Russian threats.

In the US, the decision to cancel the Keystone XL pipeline proposal may have been based on strong environmental arguments, but now it seems ill-timed. Measures to protect the environment are not good if they create strategic weaknesses that increase the possibility of conventional wars in Europe, leaving aside the large-scale radioactive contamination that would occur if neutron bombs or tactical nuclear weapons are used.

Steadfast Ukrainian resistance, swift and harsh economic and financial sanctions, and domestic opposition could yet force Putin to acknowledge that his decision to invade Ukraine was a spectacular miscalculation. But even if the current crisis abates, the horrific attack on Ukraine should remind even the most committed advocate for peace that the world can be harsh and unpredictable.

We all want lasting peace, but dispassionate discussions of how countries can achieve sustainable and equitable growth require reserving fiscal space—including emergency borrowing capacity—for the costs of protecting against external aggression.

Kenneth Rogoff He was Chief Economist of the International Monetary Fund, and is Professor of Economics and Public Policy at Harvard University.

© Project Syndicate 1995–2022

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