European governments are as soon as once more haunted by a tricky selection between financing the navy or spending on social programmes. That, at any price, is the narrative that has taken maintain since Donald Trump’s retreat from the postwar world safety order and the pressing strain to rearm Europe.
However to border the dilemma dealing with Europe on this method is an enormous mistake. Historical past teaches us that the political selection has by no means been about weapons or butter, however reasonably weapons or taxes.
The collapse of the Soviet Union within the early Nineteen Nineties appeared to shut virtually a century of world ideological battle, but it surely was additionally purported to make us all richer. With the top of the chilly warfare, Europeans would not have to uphold an costly navy equipment for territorial defence. Governments ditched conscription and walked again defence outlays. Cashing in on that so-called “peace dividend”, governments may spend on the home priorities of their liking, boosting non-military funding.
Final month’s Nato summit in The Hague confirmed how this tide has been dramatically reversed. Russia’s full-scale invasion of Ukraine and Trump’s unsure dedication to Nato signifies that European governments haven’t any selection however to speculate extra in their very own mutual defence. The peace dividend, as Kristalina Georgieva, the top of the IMF, acknowledged, “is gone”. Europe’s Nato members pledged to extend spending on “hard defence”, resembling tanks and navy salaries, from 2% to three.5% of GDP by 2035.
The query now could be how you can finance it. For some consultants, the one strategy to construct a warfare state that may deter Russia is to slash social spending. In any case, goes the deceptive argument, governments within the Nineteen Nineties splashed the financial savings from defence on costly welfare guarantees.
Even earlier than the Nato settlement in The Hague, the general public had been being softened up for the brand new actuality. In a TV tackle in March, the French president, Emmanuel Macron, warned residents that in a “more brutal” world, they must make finances sacrifices. Macron dominated out increased taxes. Denmark’s prime minister, Mette Frederiksen, determined to scrap a public vacation to finance increased defence spending. The UK has reduce savagely into its worldwide improvement help finances for a similar motive.
However Europe could be drawing the completely unsuitable classes from historical past if it weakened the welfare state to construct up the navy state. There’s one other method: as an alternative of slashing social spending, Europe’s governments ought to elevate taxes on firms and capital to finance deterrence.
Denmark’s prime minister Mette Frederikse, France’s president Emmanuel Macron and Finland’s president Alexander Stubb attend a Nato summit in The Hague, Netherlands, 25 June 2025. {Photograph}: Toby Melville/Reuters
Let’s take a look at what truly occurred within the Nineteen Nineties. Whereas slicing defence spending after the collapse of the Soviet Union allowed governments to extend social spending, it largely gave them room to chop taxes and finances deficits, which they did with nice zeal, because the Nineteen Nineties neoliberal consensus took maintain and tax competitors intensified.
Sure, the “peace dividend” helped to finance large will increase in social spending, however with ageing societies it was largely dedicated to pensions, well being and longterm care. Social safety for the working age inhabitants has fallen throughout Europe because the finish of the chilly warfare.
However from the mid Nineteen Eighties to 2023, company revenue tax charges fell by round half inside the Organisation for Financial Co-operation and Improvement (OECD). Capital positive aspects tax charges additionally dropped considerably: from as much as 53% within the early Nineteen Nineties to 26% immediately in Germany, or from as much as 30% to as much as 24% immediately within the UK for a similar interval. The “peace dividend” was actually a boon for the wealthiest in Europe.
Financial savings in defence not solely went to the personal sector by way of tax cuts, but additionally by way of decreased fiscal deficits. Germany’s adoption of its contentious constitutional “debt brake” in 2009 helped it to attain a balanced finances; one thing that may have been not possible with out slicing defence spending to the bone.
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Within the years forward, Europe can’t afford politically to position the burden of the defence buildup on probably the most deprived teams. Extra public debt, as Germany has now dedicated itself to, shall be obligatory. However debt is commonly a regressive tax, weighing extra on the poorest, as the rich personal a big share of the debt. Furthermore, if EU members don’t comply with frequent borrowing to finance the defence surge, as occurred throughout the pandemic, monetary markets might not let EU nations with a excessive debt load, resembling Italy or France, enhance deficit-spending on defence.
The “new normal” of upper defence spending ought to thus even be funded by growing taxes, particularly on company revenue, excessive wealth and capital positive aspects. This received’t be doable with out limiting tax competitors at a Europe-wide stage.
Certainly, the concept some European tax havens proceed to suck up company tax assets from others whereas they free-ride on their defence spending will grow to be more and more troublesome to maintain. France and Germany have lengthy pushed for the harmonisation of company taxes throughout the EU’s 27 members. The EU should now rein in tax-dumping nations resembling impartial Eire. Europe can’t obtain higher defence with out higher tax revenues.
And solely a defence buildup that’s supported by the broader public throughout Europe can run past the short-term momentum and thus become a reputable deterrence.
The expertise of “military Keynesianism” globally, and throughout historical past, has by no means been about weapons or butter, however weapons and butter. In a warfare, you not solely want weapons, but additionally a supportive inhabitants to function them. Retaining the peace on the house entrance is simply as necessary as holding the road within the trenches. Somewhat than slashing the welfare state to construct up the navy state, Europe’s leaders ought to take into consideration how you can enhance and modernise social spending. Solely the prospect of a greater and fairer world will hold our societies united and able to combating.
