As ECB cuts, EU learns it may have to pay for Kyiv’s defense as well as its own
(Originally published Dec. 13 in “What in the World“) After worrying Trump would stick them with the bill for their own defense, Europeans just found it’s likely to be much, much worse.
Incoming U.S. President Donald Trump reportedly told French President Emmanuel Macron and Ukrainian President Volodymyr Zelensky during their meeting in Paris Dec. 7 (a day that really will live in infamy) that, should he succeed in negotiating a ceasefire in Ukraine, European allies would have to police it not only by continuing to funnel weapons to Ukraine, but also by putting boots on the ground there. And, no, there wouldn’t be any U.S. GIs there with them, which recalls former President Lyndon Johnson’s famously broken promise of 1964: “We are not about to send American boys nine- or 10,000 miles away from home to do what Asian boys ought to be doing for themselves.”
But Trump’s determination not to send U.S. forces to protect Europe against Russia—and even to withdraw those already there—seems credible. Trump appears to support a ceasefire that would freeze fighting along the current front lines—lines that some have argued give Russia precisely what it wanted from the very beginning, control of Ukraine’s Russian-speaking Donbas and a land bridge to Crimea. But he doesn’t support letting Ukraine into the North Atlantic Treaty Organization, thereby committing all NATO members to its defense if Russia broke the ceasefire.
Trump has already put NATO’s European members on notice that he’ll abandon them to the Russian peril if they don’t boost their own defense spending to at least the NATO minimum of 2% of GDP. That has sparked a flurry of efforts to increase military outlays. Last year, European Union members of NATO boosted military spending by 10% to a record €279 billion ($293 billion) and are discussing raising the target next year to 3% of GDP. To facilitate that, members of the EU are discussing the creation of a €500 billion ($529 billion) fund to buy weapons jointly. And U.K. Prime Minister Keir Starmer will attend a dinner in February with his 27 EU counterparts to discuss possible defense cooperation—the first such meeting since Brexit in 2020.
“It’s time to shift to a wartime mindset,” NATO Secretary General Mark Rutte warned Thursday at the Carnegie Europe think-tank in Brussels. “And turbo-charge our defense production and defense spending.” Russian President Vladimir Putin, he said, intends to eliminate the Ukrainian nation and then turn to conquering parts of Europe. “Russia is preparing for long-term confrontation,” he said. “With Ukraine, and with us.”
How the EU will coordinate these spending increases in the near term is up in the air. Two of the biggest EU members—France and Germany—are in political crisis and largely unable to pass any new budgets. With predictions for economic growth in the 20-nation eurozone next year to slow to just 1.1%, the European Central Bank yesterday cut its benchmark deposit rate by 0.25 percentage points, to 3%. Investors expect the Bank of England, however, to hold rates steady next week amid concerns that new spending in the latest government budget will provide sufficient stimulus without lower rates. Against that backdrop, the ECB might see increased military spending as a welcome boost.
The problem for the EU is that the ECB is likely to have to cut rates more rapidly than the U.S. Federal Reserve, which must now contend with faster-than-expected U.S. inflation. The market is predicting the ECB will still need to halve its deposit rate, to 1.5% from 3%. That will continue to put downward pressure on the Euro against the U.S. dollar.
Economists worry that the combination of Trump’s promised deregulation, investment incentives, tax cuts, and tariffs will only accelerate the flow of global capital into the U.S. and its financial markets. That would force the ECB and other central banks to either defend their currencies with higher rates at the expense of growth or try to compensate for lower private investment by cutting rates even further and reviving inflation. Either course is political dynamite in economies already displaying increasing social fractures between young and old, rich and poor.