Europe’s higher defence expenditure may hit exports
At the Munich Security Conference (MSC) last month, just a week before the second anniversary of the Russian invasion of Ukraine on February 24, 2022, the leaders of European countries assured full support to Ukraine in its war against Russia, and resolved to build their own military capabilities instead of solely relying on the United States to defend them under the umbrella of North Atlantic Treaty Organisation (NATO). Last week, they met in Paris to reiterate their determination to support Ukraine, increase their defence spending to at least 2 per cent of their GDP and coordinate their defence procurement policies. Using frozen Russian financial assets to finance arms purchases for Ukraine and sending soldiers to fight in Ukraine also came up during the talks.
The MSC started on a gloomy note. Alexie Navalny, the best known dissenter in Russia, had just died in custody. The exhausted and under equipped troops of Ukraine were losing ground. The US Congress had stalled the aid package to Ukraine. Donald Trump, former US President and the front runner to get the Republican Party nomination to contest the Presidential election this November, had sown the seeds of doubt about whether the US will continue to support Ukraine and Europe, if he won the elections. Naturally, many European leaders who were used to seeing their armed forces and military budgets shrink substantially in recent years saw no option but to reverse that process. If they do end up spending 2 per cent of their GDP on defence procurement, that would amount to almost $400 billion. Some countries are spending or planning to spend more than 2 per cent of their GDP.
Similar defence expenditures in the next few years can enhance Europe’s capabilities to defend. That would mean diversion of significant resources in the next few years towards acquiring weapons and ammunition, recruiting and training more personnel and building minimum credible deterrence (nuclear and otherwise) to deal with the threats emanating from Russia. But, barring some exceptional companies, Europe does not have big manufacturers of arms and ammunition. So, at least in the short run, till it builds its own capabilities, Europe will have to source its military hardware from abroad. That would appear to be a great opportunity to the exporters of defence equipment from India but it is more likely that Europe will source more equipment from the US, just to make sure that all the NATO countries use similar equipment. However, some orders may come the way of enterprising Indian defence equipment manufacturers.
To find more resources to fund higher defence expenditure, Europe may have to raise taxes or cut government spending on welfare and other development activities. That can hurt economic growth and demand for goods that are now being imported into Europe. Already, the attacks by the Yemen-based Houthis on ships going through the Red Sea have forced the shipping lines to take the longer route around Africa, raising the costs of imports from Asia for Europe. So, there are reasons for our exporters to be worried because at present, a little over 17 per cent of our exports go to Europe. Unless our exporters diversify and increase their penetration in other markets, any shortfall in exports to Europe will be difficult to make good.