Financing a war

The war in Ukraine is heading towards a ceasefire and a tense peace, or, thanks to Trump's complicity, towards a clear victory for Putin. Either way, Europe will need a major leap in its defence capacity. To discourage the potential aggressor and stabilise a cold war, or, worse, to fight the hot war in good conditions. Let us hope that we are sufficiently skilled to guarantee the first option.

The classic problem of how to finance a war is thus posed. The typology of measures is well known: printing money, taxes, debt, seizures from the adversary. The first is not advisable: it generates inflation. Seizures in large volume, even if they were possible, are not either: they generate too much resentment. The expenditure that a war requires is extraordinary and the logical thing is to make it possible by softening the blow, resorting first to loans (from banks or through bond issues) and then, progressively, to ordinary tax revenues.

The European debate on the issue has only just begun. A clear-cut conclusion will not be reached until the degree of urgency is determined. That is, the temperature of the conflict. But there are already some ideas and decisions. In short: Europe is considering all the paths, except inflation (even so, the ECB's action will matter). To the extent that urgency dominates - something initially certain - it must be debt. An extraordinary EU Council has just approved a plan presented by Von der Leyen with a global cost of 800 billion euros, about 5% of the EU's GDP. It is not suddenly affordable with taxes, but it is affordable with debt. Going from 90% of current GDP to 95% for extraordinary reasons falls within the new ordinary.

Now, if, as it seems, a long cold war will have to be dealt with, the financing methodology must be dual. Initially, there will be a spending spike that will be met with debt. But soon ordinary revenues (taxes) will have to take center stage. Burikov and Wolff, from the think tank Bruegel estimates the need for an annual spending increase of €250 billion. Again, this is a manageable amount if it is achieved gradually (especially if the context is one of a growing economy). In short: we will combine debt with ordinary tax revenues, more debt at the beginning and more ordinary revenues in the new normal that will follow the initial shock.

Europe being what it is, everything gets complicated from there. A key question: who gets into debt, the EU or the Member States? Breaking a taboo, the Next Generation – of a similar size to Von der Leyen's proposal – has been financed with EU debt. It would be logical for the new defence programme to also be financed in this way, but the proposed route mainly opts to allow specific indebtedness of the Member States. How? One possibility would be for the least indebted to take on the responsibility. This would put a lot of weight on Germany and would be too disruptive for it. Another would be proportional: all states can expand their debt in equal proportion to GDP. Adopting it requires the German parliamentary manoeuvre to relax its "debt brake" to take place this March, before the new Parliament opens. But, even so, it is the most realistic. Also, I will argue, the most desirable for Spain.

The proportional approach goes hand in hand with not planning the formation of a European army, which can work under four conditions: very strong coordination of commands (a single one in hot times), joint planning, standardization of equipment (spare parts must be interchangeable) and joint development of major equipment (etc.). The logic of financing will inevitably lead to a distribution of expenditure aligned with the contribution of each state. The principle of "fair return" (receiving as much as one contributes) is cumbersome but practicable. It has worked for Airbus. It also has the virtue of creating jobs everywhere and, therefore, of rooting defense policy. This is why it is important that the bulk of the expenditure is materialized in Europe.

Spain should not be reluctant, on the contrary, to a European defence programme of this kind. If it is, it will be irrelevant in Europe. When the data is bad, we have to be there. Today it is our turn to support our fellow citizens in the east, tomorrow they will be there for us. There will be no shortage of crises in the south. I am therefore pleased that President Sánchez has supported it. We also think that we would be allowed additional debt (perhaps up to 5% of GDP, acceptable) with a conditionality that, if we manage to make the conflict cold, will involve a lot of investment in advanced dual-use technologies: cybersecurity, AI, materials, etc. An opportunity for the productivity improvement agenda, central to Catalonia and Spain.