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BofA on why European defense spending is unlikely to be so quick and easy
European defense spending looks set to move out of a years-long slumber as rising geopolitical pressures force the bloc to rethink its defense budget. But Bank of America Securities economists warn that boosting budgets to meet new NATO targets will not be 'quick and easy' for most EU countries.
'A ramp-up in defence spending is unlikely to be so quick and easy,' BofA economists said in a recent note, highlighting simulations showing that raising core defense spending to NATO-agreed targets of 3.5% of GDP would likely clash with the economic reality of stretched public finances, especially in major southern European nations.
BofA's simulations show that 'pushing core defense budgets to 3.5% by 2028 could increase government debt ratios between 2.4% and 4.1% above baseline levels' across these countries and others including Portugal and Greece.
Meeting the 5% threshold presents even greater challenges, with 'concerning debt sustainability implications, especially for Spain/Italy.'
France and Italy are still 'under the EU's Excessive Deficit Procedure,' while Spain's fiscal balances are 'vulnerable given limited progress on fiscal consolidation.'
Activation of defence funding instruments such as the National Escape Clause (NEC) and the Security Action for Europe (SAFE), two measures launched under the European Commission's ReArm Europe Plan/Readiness 2030, has yet to translate into large-scale budget increases among key players.
France, Italy, and Spain have not fully activated NEC, while Greece and Portugal have modestly utilized these measures.
The complexity of this political and economic balancing act implies that a significant ramp-up in defense spending is unlikely to be quick or easy.'Ultimately, some heavy lifting at the EU level will be needed to help ease the burden.
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