Europe: Brave new world – Standard Chartered

Europe’s ability to defend itself and Ukraine is probably greater than is perceived. But in the short term and in the case of an all-out war with Russia, a US backstop is irreplaceable. Europe likely to continue financial support for Ukraine, whilst ramping up its own defence spending. EUR 500bn extra funding could be needed over five years to boost defence spending to 3.0% of GDP. Growth impact will depend on how the money is raised, where it is spent, and reliance on imports, Standard Chartered's economists note.

Europe to continue supporting Ukraine, whatever it takes

"Initial impressions that the US might impose a ceasefire on essentially all Russian terms, with no consultations with either Europe or Ukraine, have been more nuanced of late, with Washington seemingly more open to European arguments that a peace deal at any costs would endanger the whole international security architecture. However, it posed the question of what would and could Europeans do without any US backing. Europe could do much more to (re)arm itself and Ukraine and act as a credible deterrent to any future Russian aggression. But short-term, in a scenario of an all-out war with Russia, Western Europe would still need the irreplaceable backing of the US."

"Irrespective of how the war unfolds, Europe will likely have to continue providing financial support for Ukraine, whilst also ramping up its own defence spending. We estimate the additional spending costs of increasing defence spending to 3.0% of GDP over the next five years in the order of EUR 500bn. EU states are considering various mechanisms to achieve this, from a relaxing of EU fiscal rules to repurposing recovery funds, as well as possible EU common borrowing."

"We explore how each would work in practice, and their likelihood given political interests. While a major increase in defence spending could have positive implications for growth, any benefit will be limited by how the money is raised (tax increases or spending cuts elsewhere would mitigate the impact), where the money is spent (R&D carries the biggest spillovers), the degree to which countries work together, and to what extent imports are relied upon."