No matter how the war in Ukraine ends, one thing is clear: Europe is entering a period of massive investment in defense infrastructure. Facing the reality that they will have to be responsible for their own defense, 10 different European countries increased their defense budgets by 20 percent in 2024 alone. But how will the money get used? Pessimists believe that funds will go toward salaries and procurements without any real boost to European economies, while optimists argue for the possibility of investment-led growth and job creation.<\/p>\n
Which will it be? On the latest episode of FP Live, I spoke with Jared Cohen, the president of global affairs at Goldman Sachs and co-head of the Goldman Sachs Global Institute. The discussion is part of a partnership between FP and the institute. Watch the full discussion in video at the top of this page, or in audio by looking for the FP Live podcast. What follows here is a lightly edited transcript.<\/p>\n
RA:<\/strong> Europe has gone from decades of defense complacency to a shock realization that it needs to rearm. How do you see the state of Europe\u2019s military industry?<\/p>\n JC:<\/strong> There\u2019s an important question to ask about European defense: Why are we talking about this now? Sixteen years ago, both the European economy and the U.S. economy were roughly $14.2 trillion. The American economy in the last 16 years has grown 87 percent. Europe\u2019s economy has grown 13.5 percent. So Europe is stuck at $15 trillion, while the United States is close to $27 trillion. Something\u2019s off there, and we ignored this for a while. If you look at the U.S. defense commitment to Europe over those 16 years, it\u2019s let Europe off the hook from shouldering a defense burden. You can see that with the 40 American bases and 80,000 American troops spread throughout the European continent.<\/p>\n When Russia invaded Ukraine [in 2022] to kick off the latest phase of this war, the scale of what Russia was willing to do in Europe was a surprise. Everyone thought post-Cold War that there were limits to what territorial annexation would look like. But it became clear that Russia was committed to taking all of Ukraine. The Europeans looked at their own defense industrial sectors and realized that two things were true: one, they had underinvested in it; two, they couldn\u2019t count on the United States for the security guarantees that they\u2019d come to take for granted.<\/p>\n That brings us to the inflection point we\u2019re at today, with two trends at play. One is an economic trend: Without economic growth, you start to evaporate geopolitically. And this is not something created by [U.S. President] Donald Trump. Trump accelerated the realization that Europe has been evaporating from the geopolitical scene. But the Biden administration was also very tough on Europe, whether it was the Inflation Reduction Act or the AUKUS deal that led France to temporarily recall its ambassador from the United States. So, there\u2019s a bipartisan move away from Europe due to this lack of economic growth.<\/p>\n The other trend has to do with the stats around European defense. In the last four years, the European member states of NATO have each spent roughly 3.9 percent more on defense annually. Back in 2014, there were only three NATO countries spending 2 percent of their GDP on defense. Last year, 23 of them. Mark Rutte, the secretary-general of NATO, has said that by the end of this year, all NATO members will cross the 2 percent threshold (although I\u2019m skeptical about Spain). And at the NATO summit at The Hague, they committed to 5 percent of GDP being spent on defense by 2035. Now, the carve-out to that is 1.5 percent of it can be spent on infrastructure and logistics, which Prime Minister [Giorgia] Meloni in Italy reminded us with the plans to build a bridge to Sicily. These numbers all sound compelling, but there\u2019s two questions to ponder. Firstly, what does it mean to spend money on defense? Is it all salaries? Is it a way to subsidize auto industries? Is it really solving some of the key headwinds? And then secondly, whether it\u2019s economic or military, Europe has always been clear. I don\u2019t think Europe\u2019s problem is one of substance; I think it\u2019s one of form. Europe knows exactly what it needs to do to grow economically and consolidate its defense push. It can\u2019t do it. I just think there\u2019s too many headwinds to implementation. That means that, yes, we see wonderful numbers. There\u2019s a lot of rhetoric around Europe becoming more committed to its own defense. But the evidence suggests that it\u2019s still going to largely happen at the national level. And there\u2019s only so much that all these European countries can do at the national levels.<\/p>\n RA:<\/strong> OK, so as Europe attempts to dramatically increase defense spending, let\u2019s examine some of the headwinds more closely. You mentioned slow growth, but there\u2019s also political stability, the ability to raise capital, and much else that stands in its way.<\/p>\n JC:<\/strong> Yes. Let\u2019s unpack some of the headwinds around economic growth, because it\u2019s important context for understanding where the money comes from. So, let\u2019s start with European fragmentation, especially about who gets to lead. If you look at the major defense players in Europe right now, France gets to lead the table because they\u2019re the only ones with nuclear weapons. But the other players, the Italians for example, don\u2019t want a multilateral European architecture led by France. Second, it\u2019s very hard for these governments to do anything. My favorite question to ask European prime ministers is what percentage of the vote did you have to win to become prime minister? It\u2019s usually like 12 or 13 percent. So, if they do anything, their coalitions collapse, and you end up with a caretaker government. We see this time and again.<\/p>\n RA:<\/strong> As an aside, the government that put together the recent NATO summit at The Hague in the Netherlands was a caretaker government. That was not lost on anyone.<\/p>\n JC:<\/strong> Right. Another big headwind economically is regulation. Only four of the top 50 technology companies are located in Europe, and none of them are going to become European champions because no country wants to give up their national champion for greater European service. And look, you don\u2019t have a capital markets union in Europe. So people will flippantly say Europe\u2019s an economic union but not really a robust political union. I would be even less generous and say it\u2019s a shared currency. But without a robust capital market union, it\u2019s difficult to see a path toward consolidation. It\u2019s difficult to think about where the money comes from. That\u2019s why Germany is making constitutional changes to the fiscal debt ceiling, to be able to raise the money. Last year, it spent close to 88 billion euros on defense, which made it fourth in the world in terms of defense spending. When you dig into the accounting of that, I\u2019d ask how much of that goes toward entities that also provide spare parts to the auto sector. So, again, it gets a little complex.<\/p>\n RA:<\/strong> There\u2019s also the types of things that they could buy if they can raise the money. Even that is so fractured at every level. You\u2019ve put out this research that shows they have 19 types of battle tanks and America has just one type. I\u2019m imagining how hard it is to figure out interoperability here!<\/p>\n JC:<\/strong> That\u2019s only one statistic. While individual European countries are spending more on defense, the irony is that the volumes of cross-border defense are largely going down. And part of that is there\u2019s just not that many cross-border consolidation deals that are up for grabs, because, again, no country is going to give up their national champion so that someone else can benefit from a European champion. When an economy is growing at 1 percent, 0.75 percent, or 1.2 percent, they just don\u2019t have that luxury. I love the tank example. Unfortunately, it\u2019s not the only one. Europe has 27 different types of destroyers. The United States has four. Europeans have 20 different types of fighter jets. The United States has seven.<\/p>\n To just show that this isn\u2019t theoretical, it actually matters also for technology that isn\u2019t as sophisticated. There\u2019s a type of military equipment called howitzers, they\u2019re basically artillery that looks like modern cannons. Europe has sent 17 different types of howitzers to Ukraine. And many of those require different types of spare parts, different types of training, and even different types of shells. That\u2019s a huge inefficiency and creates a ton of friction and unnecessary redundancy.<\/p>\n Additionally, because of Europe\u2019s underinvestment in this and their overreliance on U.S. markets for defense, 64 percent of all defense procurement from European member states of NATO comes from the United States. Why? Because Europe doesn\u2019t really have shared procurement specs or mechanisms. So, it\u2019s very difficult for them to do that collectively. As a result, they have a lot of inefficiencies. Last year, the European Commission released a white paper, and they called out several areas of capability gaps: air and missile defense, artillery, ammunition and missiles, drones and counter-drone systems. And that\u2019s before you even get into space-based ISR capabilities, which is intelligence, surveillance, and reconnaissance, where they\u2019re entirely reliant on the United States. It\u2019s before you get into heavy-lift capabilities. It\u2019s also before you got into ammunition. Even if Europe has 150 million shells, that\u2019s not enough to, on their own, be able to sustain even a medium-term war effort in the east.<\/p>\n RA:<\/strong> This is a good moment to pivot to the tailwinds and what could go right if Europe actually invests all of this money that it\u2019s trying to raise and invests it properly. It has some basic advantages on that front. And Ukraine could be an advantage here rather than a burden.<\/p>\n JC:<\/strong> We\u2019ve talked a lot about the headwinds. Europe does have a couple tailwinds. One is that, in aggregate, it\u2019s still the second-largest economy in the world. So the potential is there. I think a second one is there is a substantive path forward for Europe. There is tremendous human capital, very solid infrastructure, and tremendous universities that have great research and development. People want to live there. Even though we\u2019re less nostalgic about the trans-Atlantic relationship than we have been in the past, I do think that there\u2019s something to be said about Europe having a wake-up call. The defense spending at the national level is real, and that is good for each of these economies.<\/p>\n The other tailwind for Europe right now is Ukraine. Now, I\u2019m not going to say Trump has done an about-face, but I do think that he has figured out that Ukraine has been a tremendous catalyst to get defense spending up to past 2 percent and maybe even up to 5 percent. He\u2019s also figured out that the vast majority of weapons that Europe needs to fund the war or support the war effort can actually be bought from the United States. If you think about the U.S.-EU trade deal, $650 million invested into the United States\u2014an unspecified amount for defense\u2014there can be some symbiosis there, and there was a tariff exemption put in place for airplanes and associated parts with aviation.<\/p>\n RA:<\/strong> The phrase I kept hearing in The Hague when I was speaking to leaders there is \u201cdual use\u201d\u2014this idea that, yes, you\u2019re spending on defense, but it also has all these other implications. It builds this ecosystem of technological shifts, and you create jobs, and then there\u2019s a trickle-down effect to growth more broadly. It sounds good, harder to just believe on the face of it. If you were to advise investors in Europe how they should think through this, how governments should think through the dual-use question, what would your answer be?<\/p>\n JC:<\/strong> Ukraine is an interesting example of this. I do think there\u2019s three things that Europe can do and you\u2019re seeing them do each of them, at least in part, but they\u2019re not turbocharging any of them. One is pushing for greater strategic autonomy in Europe, and that\u2019s to kind of capitalize on the emotional reaction. Europe has an awareness now of what its gaps are in terms of capabilities, and those aren\u2019t going to be addressed overnight, but I think they are serious about finding ways to address them, even if, in the short term, it means they have to buy those capabilities from the United States. You are seeing a pretty substantial allocation of resources to invest in R&D in Europe, and I think that\u2019s a good thing.<\/p>\n Second is the modernization of NATO. That\u2019s easier said than done, but you\u2019re certainly seeing more spending, deeper regionalization, and integration with some of the Indo-Pacific capabilities. You\u2019re seeing various technology initiatives around innovation and defense tech.<\/p>\n The third one is what I would describe as techno-democracy partnerships. And here, this is going to sound overly simplistic, but a lot of Europe\u2019s answers on defense are found in Ukraine. Ukraine is the most interesting battlefield in the world right now from a defense tech perspective, from an R&D perspective. It\u2019s the largest standing army in Europe right now, and it\u2019s not a dormant army by any stretch of the imagination. They have the most up-to-date insights on what modern warfare looks like. The cycle of innovation to trial and deployment on the battlefield is extraordinary. The first-person view drones that you\u2019re seeing in Ukraine right now, they\u2019re basically rolling out 5 million of these a year. They\u2019re rolling out 6,000 drones per day, and every day there\u2019s more and more capability. And these aren\u2019t the types of drone technologies that require a really complex, multiyear [Defense Department] procurement. A lot of this is done by private individuals. It\u2019s off-the-shelf drones.<\/p>\n","protected":false},"excerpt":{"rendered":"No matter how the war in Ukraine ends, one thing is clear: Europe is entering a period of…\n","protected":false},"author":2,"featured_media":349123,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5174],"tags":[3647,7499,2000,299,5187,6218,6219,2821,811],"class_list":{"0":"post-349122","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-eu","8":"tag-economics","9":"tag-editors-picks","10":"tag-eu","11":"tag-europe","12":"tag-european","13":"tag-geopolitics","14":"tag-homepage_regional_europe","15":"tag-nato","16":"tag-security"},"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@uk\/115038443790360733","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts\/349122","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/comments?post=349122"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts\/349122\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/media\/349123"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/media?parent=349122"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/categories?post=349122"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/tags?post=349122"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}