Business Standard

Europe’s higher defence expenditur­e may hit exports

- T N C RAJAGOPALA­N Email: tncrajagop­

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.

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