by N. Peter Kramer
‘We believe that Europe will have to build its own defences in the coming years’. That message from US Vice President J.D. Vance at the Munich Security Conference did not fall on deaf ears. Not among European policymakers, but also not among investors. The possibility that the United States will close its protective defence umbrella over Europe – EU, UK, Norway, Iceland... – was the theme on the financial markets.
The most striking effect was the rise in the value of the European defence stocks. If the US tells the Europeans to fend for themselves, these companies will benefit from the billions that will flow in defence. Rheinmetall, the showpiece of the German defence industry, rose by almost 10 percent.
Since the beginning of this year, it has already increased in value by 46 percent, after the outbreak of war in Ukraine, the share has risen almost tenfold. The leader on Monday was the Swedish defence company Saab, which rose by 14 percent. The 20 percent rise in the much-plagued steel producer ThyssenKrupp was also a result of the conference in Munich.
But there is another effect. The defence billions will have to come from somewhere. Many EU member states are not doing well financially. To realise the high defence ambitions, more debt will be inevitable.
The rating agency S&P Global has already calculated that increasing defence spending to 5 percent of GDP would require an annual increase in spending of 875 billon dollars. These extra debt will have an impact on the creditworthiness of countries, the agency warned.
But there is little danger to be feared from the European Commission, which normally is supposed to force member states back into line if they loosen the budgetary reins. Commission President Ursula von der Leyen already proposed in Munich to activate the escape clause for the criteria. This was also done during the Covid crisis. Defence expenditure would then not count towards the budget deficit.
The more debt countries want to take on, the higher the interest rate will be that lender will demand. That is why interest rates rose in all EU member states, but most in Germany and The Netherlands. They are the most creditworthy creditors and their creditworthiness would be affected relatively the most. A question is also whether Germany will maintain its famous debt brake, a constitutional prohibition on excessively large deficits.
