War, peace and democracy in Europe — Part 2 | Number Theory

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The first part of this series compared the costs of the ongoing Russia-Ukraine conflict for both countries and how the US is trying to put pressure on both of them to end the hostilities. Irrespective of how the conflict ends, the rest of Europe faces difficult policy choices which are linked but not confined to the fate of Russia and Ukraine. Here are four charts which describe this situation.

The headquarters of the Euroclear headquarters in Brussels, Belgium. (Bloomberg)

War, peace and democracy in Europe — Part 2

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  Europe is faced with a low growth and growing debt environment

  When compared with the US, the compound annual growth rate (CAGR) of real GDP of major European economies since the Covid-19 pandemic is much lower. In fact, even when nominal numbers are taken, the European Union, since the Covid-19 pandemic, saw a CAGR of 6.4% according to IMF. This is lower than the 7.5% nominal growth recorded by the US during the same period. EU’s debt-GDP ratio, on the other hand, has been rising consistently over time and it is unlikely to come down as far as IMF projections go. To be sure, things are different across major economies in Europe.
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  This is happening at a time when demographic burden is rising and so are its fiscal costs

  Europe’s welfare systems are under growing strain as social protection spending rises and the demographic profile shifts decisively towards older populations. Data from the Organisation for Economic Co-operation and Development (OECD) shows that France has spent more than 23% of GDP on social protection, which refers to public spending designed to support households and individuals facing specific social risks or needs, for much of the past two decades. In fact, the EU as a whole spends nearly 20% on social protection. The pressure behind these numbers is clear in the old age dependency ratio, which is the share of those aged 65+ against the working age population of 20-64 year. Across the European Union, the dependency ratio is forecast to approach around 50 by 2040. These shifts mean fewer workers supporting a fast-growing retired population, which drives up pension, healthcare and long-term care costs. Any attempt to rejig these commitments is inviting a political backlash and therefore being seen as inimical to political fortunes. Unlike in Russia, most European governments have to face democratic competition to stay in power.
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  Growing military spending burden will only add to the problem facing European countries

  This is where the Russia-Ukraine war became an extremely bad call for Western Europe in hindsight. What was seen as an absolute necessity to establish the military primacy of the NATO alliance against Vladimir Putin’s Russia became a bad call once Donald Trump came back as US President and reiterated his demand that Europe foot a larger part of the military spending . Given the fact that the US’s spending share in NATO is much more than its European partners, which also shows in the total military spending by the US and Europe, a US withdrawal from NATO (remote as the possibility of this may be) entails two equally painful choices for Europe: either living in the shadow of a Russia which faces a weaker military deterrent or significantly increase their own military spending to compensate for the US dialing it down. In case of the latter, the money will have come from either higher taxes or lower welfare or a fiscal meltdown.
• What we understand...

  Whether or not western Europe can preserve its fiscal and social contract depends much more on its ability to resolve domestic economic contradictions of low growth, ageing population and rising economic competition from China which is eating into the manufacturing prowess of some of Europe’s biggest economies. The ongoing war in the continent is far from unimportant but is perhaps less consequential to peace and democracy outside the two directly involved countries than the initial rhetoric of so-called vanguards of liberal democracy claimed was the case.