Hello there,
On paper at least, this week saw the most significant loosening of the purse strings by European governments in years – and yet financial markets have hardly flinched.
First, Germany unveiled budget numbers for this year and next which include record investments and longer term spending plans that will mean a doubling of its debt interest repayments by 2029.
Then, in a bid to keep Donald Trump engaged in NATO, European leaders on Wednesday committed to more than doubling their defence spending to 5% of GDP over the next decade – a target that only a handful have the resources to meet.
Euro zone bond yields ticked up a few points here and there but for most market players it was all a bit of a non-event.
In Germany’s case, the budget U-turn of Friedrich Merz’s government has been so well trailed in advance that it was likely that markets had simply priced it in long ago. As for the 5% NATO target - well, it turns out that few people are taking that at face value.
Listen to Italy’s Georgia Meloni, who pointed out that NATO countries would have “total flexibility” over when and how they reached the target and stressed that in Rome’s case, not a single euro would be diverted from other budget priorities.
Or hear Hungary’s Viktor Orban tell reporters at the same Hague summit that 5% would require a “different method” of calculating budget spending.
The fact is that a lot of existing budget items can be dressed up in such a way that they can be incorporated into the 5% tally, which includes both “core” defence spending and “defence-related” items.
So a new road that you were planning to build anyway could be included if you explain that it is needed to ensure heavy military vehicles can get from A to B. Or perhaps the running costs of French gendarmes can be squeezed in because, while they are essentially a civilian force, they happen to report to the defence ministry.
But it won’t all be smoke and mirrors. With Europe’s capitals mindful of rising tensions with Russia on their eastern flank, they will be gradually diverting more genuinely new spending to their militaries and that will cut into budgets elsewhere.
Britain and Sweden have already signalled their overseas aid budgets will take a hit; more broadly, the question across Europe remains how much needs to be shaved off welfare spending which already is not as generous as it used to be.
Add to this other growing pressures on public purses, from demographic ageing to the impact of climate change, and there is what Bank of England chief Andrew Bailey this week highlighted as a creeping issue about rising debt and what that means for our economies.
"I do think that it's important - and I don't want to sound preachy about this - that we do have a proper debate with the public about the implications of all of this,” he told UK lawmakers.
Plus, debt relief
An early sign that summer is on its way is the European Central Bank’s annual get-together for the world’s top central bankers in the Portuguese resort town of Sintra, which starts next week. It’s an awkward time for the world’s rate-setters – they may have pretty much tamed inflation for now, but what comes next depends largely on things beyond their control – from Trump’s tariffs to conflict in the Middle East.
There will be much reflection on how to sharpen the tools of their trade to deal with what lies ahead. The ECB may choose the moment to release a long-trailed operational review.
And finally, while Spain opted out of the NATO spending hike, it does want to spend more on debt relief for low-income countries. It is hosting a meeting of world leaders in Seville next week that will set out the priorities for financing development goals over the next decade.
Spain’s Economy Minister Carlos Cuerpo joined this week’s Econ World podcast to talk about how rich, creditor nations can do more to help. Listen here.
Carmel Crimmins will be back for next week’s newsletter.
