Something's Gotta Give

The world events of the last few months are both scary and exciting. Scary because they do not only challenge certain facts but because they also occasionally force a confrontation with inconvenient truths. Exciting because they are, in some instances, opening new opportunities for the brave.

In case it was previously unclear, the US forcefully signaled a redefinition of its role in European security at last week's Munich Security Conference. NATO’s Secretary-General Mark Rutte proposed that member nations raise their defense spending to ‘considerably more than 3% of GDP’ just as many European states struggle to reach the 2% target.

Unlike sustainability, which should ultimately pay for itself through private investments, security represents a hard government expenditure delivering critical, albeit non-financial benefits. The bottom line: Europe must spend significantly more to meet a fundamental need.

There are three widely discussed financing paths. A fourth one is conspicuously absent from the debate.

The first idea is for governments to borrow money to finance incremental defense expenditures. It is politically acceptable since the costs are conveniently delayed and diffuse. But… Raising debt without a turnaround plan for the underperforming European economy can only be a short-term fix.

The second idea is to boost Europe’s economic performance through enhanced competitiveness. Strikingly, Western Europe now produces barely more than half the amount of US dollars per capita than the US.1  The Draghi report discusses how investment, innovation, and deregulation can help close the gap, a politically acceptable narrative. But… Betting on enhanced productivity alone to help Europe compete in the global marketplace is disingenuous. Rival regions are not standing still.

The third idea consists of reallocating funds from welfare programs into military budgets. Thanks to the exorbitant security privilege granted by the US over the last decades, the European Union spends about 20% of its GDP on social protection (excluding healthcare) versus 17% for the United States. But… This is politically complicated.

The fourth idea does not seem to be openly discussed when considering untapped economic potential. Europe works significantly less than the US: There are striking differences in the number of hours worked annually between the US and Western Europe.2 Europe could choose to incentivize longer working hours, allowing its citizens to produce, earn, spend, and enjoy more.3

The fall of the Berlin Wall in 1989 marked the global triumph of capitalism à l’Americaine. On its back, Eastern Europe underwent a political, economic, and cultural transformation implemented in a remarkable fashion to gain a competitive edge in the global markets.

This time, it is Western Europe’s turn to engineer a renewal of its economic model. This is both scary and exciting.

In this new reality, there is no room for self-deception. Working smarter and more is integral to unleashing Europe’s exceptional assets and values around a common purpose.

1 Based on GDP/Capita ignoring purchasing power parity to express the raw difference in terms of purchasing power in the global marketplace

2 GDP per worked hour, a simple measure of productivity, does not materially contribute to the US/EU performance gap

3 Taxes as a percentage of GDP are elevated in Europe