Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Europe’s borrowing binge to scale up its defence industry risks a new debt crisis, a leading Dutch politician has warned.
Pieter Omtzigt, who heads one of the parties in the four-way coalition government, told the Financial Times that a plan to generate up to €800bn in military spending approved by EU leaders this month would push up interest rates and government debt levels in the bloc.
Dick Schoof, the prime minister of the Netherlands, backed the plan at the March 6 summit. But his decision has triggered a backlash in the Dutch parliament with three of the coalition parties, including Omtzigt’s centre-right New Social Contract, voting against it.
Omtzigt said he supported greater defence spending but insisted uncontrolled borrowing had serious repercussions, as evidenced by the Eurozone sovereign debt crisis of 2009-2015.
Public deficits would “explode”, he said. “Countries will get further indebted when they are already incredibly indebted compared to the rest of the world,” he said. “Maybe our Greek friends can tell you what the price of that is at some point for your own population.”
Increasing interest rates and a recession left Greece unable to service its debts in 2010, forcing other EU members and the IMF to bail out the Eurozone country to save the single currency. In return, Athens made painful budget cuts.
While the Dutch government on Friday supported Schoof’s decision regarding Europe’s rearmament plans, it said he must veto any proposal to raise more common debt or to loosen fiscal rules to exempt defence spending indefinitely.
The European Commission has proposed a four-year exemption, which would allow member states to spend up to €650bn on defence without being in breach of the bloc’s deficit and debt rules. But Germany has asked for that carve-out to apply in the “long term”.
To fuel the rearmament, the commission is also raising €150bn with its own top credit rating, which will be disbursed to capitals in the form of cheap loans.
Many EU countries’ debt burden ballooned during the Covid-19 pandemic, with France, Italy and Spain having debt levels bigger than their annual economic output.
When Germany, which has lower debt levels, announced plans on March 5 to run bigger deficits to re-arm and invest in infrastructure, yields on its bonds rose 40 basis points in two days. They remain above pre-announcement levels.
Economists at ING, the Dutch bank, have warned Europe’s rearmament plan “will clearly present an upward risk on rates”.
Omtzigt said The Hague would remain staunchly opposed to another joint borrowing effort, pointing out the Netherlands only agreed to a pandemic-era €800bn recovery fund backed by joint debt on condition that it would be a one-off.
“We are afraid” the recovery fund will be replicated for defence, Omtzigt said. He said the Netherlands received about €5bn of recovery funds but will pay about €35bn of the related debt, because of its successful economy. Rising interest rates will add €30bn annually to the EU budget from 2028 in repayments and interest, about a sixth of the total.
Omtzigt said his country was increasing defence spending, having hit Nato’s 2 per cent of GDP target last year. “But we will need to do more,” he admitted.
The politician, who has a PhD in economics, said the prospect of US tariffs or another energy price shock meant member states needed a buffer against another recession.
“If there were a new financial blow to the Eurozone . . . then we would face difficulties.”
Read the full article here
