GuShiio.com ① Standard & Poor’s released a report saying that if European NATO member states significantly increase defense spending as requested by US President Trump, their credit ratings may be affected;
② Trump was very dissatisfied with this as early as his first term. Last month, he said that defense spending of NATO member states should account for 5% of their GDP, a significant increase from the previous set of 2%.
Cailian News, February 15 (Editor Xia Junxiong)Standard & Poor’s, one of the world’s three major credit rating agencies, released a report saying that if European NATO member states significantly increase defense spending as requested by U.S. President Donald Trump, their credit ratings may be affected, although this may promote joint debt issuance in the region.
European countries ‘defense spending has almost doubled since the Crimean incident in 2014, but their average spending is still below NATO’s 2% of gross domestic product, while the United States accounts for nearly two-thirds of NATO’s military spending.
Trump was very dissatisfied with this as early as his first term. He said last month that defense spending of NATO member states should account for 5% of their GDP, a significant increase from the previous set of 2%.
Measured as a proportion of GDP, Europe’s military spending is still less than 60% of that of the United States-1.9% of GDP this year, compared with 3.3% in the United States.
Standard & Poor’s analyzed three scenarios: the first scenario is for European countries to increase defense spending to the current NATO GDP-weighted average level, which accounts for 2.67% of GDP; the second scenario is for military spending to the current level of the United States, which is 3.3%; and the third scenario is to reach Trump’s 5% target.
In the first scenario, the EU as a whole needs to increase defense spending by US$242 billion per year. In the third scenario, the number will soar to $875 billion.
S & P warned that the third scenario could particularly affect Europe’s credit ratings because it far exceeds the ability of governments to raise funds under normal circumstances and could put pressure on their credit status unless other expenditures are reduced.
Take Germany and France, the two core member states of the European Union, as examples. If Trump wants to meet the 5% requirement, the budget deficits of the two countries this year will expand to 4.6% and 8.9% respectively, while the current forecast of S & P is 1.7% and 6%, respectively.
For the UK, its budget deficit will deteriorate from the current forecast of 4.3% to 7%.
This means that almost all European countries must reprioritize fiscal spending, and most are currently facing pressure from slowing economic growth and rising social welfare costs due to population aging.
“The political consequences of cutting social spending to compensate for higher defense spending could be severe,” S & P said.
Collective action may be one solution. Standard & Poor’s pointed out that although major countries such as Germany have long opposed joint EU debt issuance, their positions may change in view of actual pressures. Such plans may include the United Kingdom (which has withdrawn from the EU) and Norway (non-EU member states).
“The specific details of any collective financing arrangement… will determine its credit rating,” S & P said.
