Friday, December 1, 2023

Can we exclude Defense equipment investments from the public deficit count in Europe?

In an article from July 21, 2019, the blog makes the link between Bulgaria's necessary investment to acquire 8 F16Vs in order to replace its Mig29s for an amount of $1.256 billion, and the widening of the country's public deficit, which will increase in 2019 from 0.5% to 2.1% due to this investment. However, for several decades, many French politicians have campaigned in Brussels to remove investments in defense equipment from the public deficit count. Why has this measure never had the ear of the European Commission? and would it be possible to propose a mechanism to justify such an approach?

If since the first oil shock, France has become accustomed to evolving with public spending in excess of revenue, this is not the case for many other European countries, for whom balanced budgets are a doctrine serving as a postulate. This is the case, for example, of Germany, the Netherlands, the Scandinavian countries and, surprisingly, many Eastern European countries, which have applied marked budgetary rigor since their entry into the EU. . This positioning, which will not have prevented abuses and increasing debt of many states, notably Germany, partly explains the refusal to consider the French proposal. It is true that, in a single currency like the Euro, the public deficit of some has repercussions on the stability of the currency, therefore on the economic stability of all the countries of the Euro zone. The case of Greece, followed by fears about the solvency of Spain and Italy, show to what extent this paradigm is justified.

German army M104 Patriot battery
Several European countries have recently acquired the American Patriot PAC-3 system to the detriment of the Franco-Italian SAMP/T Mamba

Furthermore, the French proposals took place while all European countries were engaged in a massive reduction in the formats and means of their armed forces, on the altar of the "benefits of Peace". The French position, which also did not escape the general enthusiasm, was perceived as an anachronism by many capitals, even if France justified them by the need for external interventions and operations, whether in Côtes d'Ivoires, Rwanda, Chad and Lebanon, theaters considered very distant by European leaders.

Since the beginning of the current decade, with the Russian intervention in Georgia in 2008, the Arab Spring and the intervention in Libya, and especially the annexation of Crimea and support for Russian-speaking separatists in the Donbass by Russia, the European countries gradually became aware of the need to rebuild their military arsenal. Since then, investments in equipment programs have multiplied, with, notably, a very significant use of American equipment, even when European solutions existed. However, for many countries, as is the case of Bulgaria, Greece, and even France and Germany, this effort is limited by the need to respect the convergence criteria of the euro zone, and notably a maximum public deficit of 3%. (Bulgaria is not part of the euro zone but must join it in the coming years).

The opposition of economic and security necessities having not made it possible to escape from the current status quo, it would be beneficial to imagine an alternative approach which would make it possible to free up this investment, so as to respond to the defense challenges which are looming today. with sometimes very short deadlines.

VBMR griffon close-up 1
Defense equipment contracts in Europe are largely constrained by the objectives of controlling public deficits of member states

Let us first recall that, as we have repeatedly established in the “Positive Valuation Defense” doctrine, the budgetary return on investment in the Defense economy in France is today equal to 145% of the amounts invested by the State. Parallel studies establish that this rate of budgetary return was greater than 100% in the majority of European countries with a defense industrial and technological base. Therefore, the investment made by a European country to acquire equipment whose value chain is produced in Europe will create a positive budgetary return in the country producing the equipment, which, from the point of view of the euro zone, neutralizes this investment, provided that positive effects in the manufacturing country are also neutralized.

This paradigm therefore makes it possible to propose three approaches allowing European countries to neutralize their investments in Defense equipment in the calculation of the public deficit, as long as the equipment is actually produced in Europe:

  • It is possible to go through a double entry, one to neutralize the expenditure of the purchasing country, the other to transfer this investment to the "calculation" deficit of the country manufacturing the equipment, on the share of the value of the equipment. equipment actually produced on its soil.
  • It would also be possible for the State manufacturing the equipment to make a direct contribution to the price of the equipment acquired, corresponding to part of the revenue and budgetary savings generated by this investment, for the benefit of the purchasing country. (This is how the United States proceeds, and the Bulgarian bill went from $1.7 billion to $1.25 billion)
  • It is finally possible to proceed with a mixture of these two approaches, by proceeding with a matching contribution of, for example, 35% on the sale price, and a budgetary compensation of 65% of the amounts invested.

It should be noted that this approach, balanced from the point of view of the monetary policy of the Euro zone, would also greatly favor European industrialists in Europe. In addition, it can also apply to “domestic” acquisitions, namely acquisitions of Defense equipment passed to its own Defense Industry. It would thus make it possible to free up investments by all European countries to accelerate the modernization of the continent's defense forces.

It should also be noted that, if budgetary compensation cannot be used for the sale of Defense equipment outside Europe, partial matching can represent a very effective means of countering the very aggressive pricing policies of countries such as China, Russia, the United States and even South Korea or Turkey, to capture markets. It would simply neutralize the additional cost of European equipment linked to the greater tax burden in our countries.

Fabrice Wolf
Fabrice Wolf
A former French naval aeronautics pilot, Fabrice is the editor and main author of the site. His areas of expertise are military aeronautics, defense economics, air and submarine warfare, and Akita inu.

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