Relying on debt-funded military expenses will weaken the credit approach of France and the UK, but a combination of limited fiscal flexibility and high bond yields can encourage the two governments to make necessary budgetary adjustments. In addition, Germany’s fiscal stimulus may have a favorable widespread impact on development, which will help soften the permanent impact of increased European defense expenditure on public debt ratio.
Germany would rely on issuing high loans primarily to offset the decades of under-investments in its armed forces as the coming administration won an essential two-thirds parliamentary majority for improving constitutional debt brakes. Strong public finance, government loan-to-GDP ratio of 63% and GDP in 2024, anchor by the budget deficit of 2.0% of GDP, provide sufficient flexibility to finance large fiscal stimulation without significant tax increase or cuts in other areas.
The UK is likely to fund a loan and finance high defense spending through a mixture of some budgetary adjustment, which is looking at the GDP’s 100% government loan burden and 5.8% of GDP’s budget deficit as 2024. The government’s comfortable majority in Parliament can provide flexibility to reduce non-defense expenditure.
In contrast, France has faced a limited ability to absorb high defense spending through additional loans, which is already a high government debt-to-GDP ratio 113%. Despite the budget deficit of 5.8% of GDP, other budgetary trade-closing is equally challenging due to the country’s minority government, highly fragmented parliament and a relatively high risk of further political instability.
Budget to provide finance to high defense spending
Increase in defense spending (Figure 1) By 2027, a potentially revised NATO target of 3% of the GDP would mean that the annual expenses allocated to the armed forces increase by almost EUR 95BN in France and the UK, and above the EUR 140BN in Germany.
This will represent an increase in the average spending of EUR 45BN in a year through 2027 (GDP’s 0.9PP) in Germany, which is expected to be covered by almost particularly high funding versions, almost especially high funding versions, without the material credit implications.