Europe is looking for ways to increase its defense spending with the Commission presenting the “ReArm Europe” plan.
Although the US president’s announcement of tariffs on Europe has not yet been implemented, this week’s plunge in the stock markets showed that the markets finally believe Donald Trump will impose them.
On the other hand, Europe is looking for ways to increase its defense spending, with the European Commission presenting the “ReArm Europe” plan earlier this week.
Tariffs: Growth at risk
Although tariffs on European products have not yet been implemented, according to analysts, a generalized 10% tariff by the US on all imports from the Eurozone – combined with increased trade uncertainty – could reduce the annual growth rate of the Eurozone’s GDP by up to 0.5 percentage points and even one percentage point.
As the central banker, Yannis Stournaras, has stated many times, no particular impacts are expected in Greece, because the Greek economy is not largely exposed to exports to the US, but indirect consequences will arise.
According to the Governor of the Bank of Greece, “Greece will show growth of 2.5% this year, a performance that is directly related to a growth rate in the Eurozone of 1.1%. If the rate in the Eurozone slows down, due to the imposition of tariffs, there will obviously be an impact on Greek GDP, but not a significant one.”
How the US-China trade war affects the port of Piraeus
The port of Piraeus operates as an important gateway for Chinese products to Europe.
US tariffs on Chinese exports or a general slowdown in global trade could reduce the volume of transit cargo from Piraeus, affecting freight rates and revenues for Greek shipping.
Already, the president of the Hellenic Shipping Federation, Vassilis Korkidis, has expressed concerns that the escalation of US-China trade disputes will have a negative impact on Greek shipping.
Inflationary pressures: “Tariffs are taxes”
As the European Commission has pointed out in a statement, “tariffs are taxes.” By imposing tariffs, the US taxes its citizens, thereby increasing business costs, stifling growth, and fueling inflation.
Increasing defense spending could have a mixed impact on GDP
Quite simply, the European Commission is saying that tariffs on everyday goods or raw materials can fuel inflationary pressures.
Defense spending
The European Commission presented the “ReArm Europe” plan with a €150 billion fund in the form of loans to member states for critical armament programs (air defense, missiles, drones), which in total could leverage up to €800 billion in additional defense spending in Europe.
Essentially, this is a new effort of similar size to the Recovery Fund, this time for defense. At the same time, it will also propose activating the national clause for defense spending.
Increasing defense spending could have a mixed impact on GDP. A study by the Kiel Institute argues that if European countries increase defense spending from around 2% of GDP to 3.5% and shift procurement to domestically produced defense equipment (instead of purchases from third countries), GDP could be boosted by an additional 0.9% to 1.5% per year.
The risk of debt
On the other hand, however, as events unfold, defense is now becoming a priority with spending on other sectors being put on hold. The increase in defense spending will be financed by the Budget and new loans, burdening countries with new debts.
Of course, it remains to be determined exactly what will happen with defense spending. That is, if it will ultimately be completely exempt from the spending ceiling or if countries will simply be able to invest more than what has been agreed upon only for their defense, as the escape clause will be activated in this case.
The increase in defense spending may have another negative consequence as it may affect the trade balance mainly through the imports of weapons systems. Countries like Greece, which implement large armament programs, and do not have their own major production, may see their trade deficit worsen.
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