Europe’s on a war footing, and it’s going to turn the world upside down

It has taken three years, but Europe is at last putting its collective economy on an industrial war footing. The sums of money are eye-watering.

One leaked plan for German rearmament circulating in Berlin proposes a 400 billion euro ($675 billion) blitz of extra spending on national defence, buttressed by another 500 billion euros to rebuild Germany’s infrastructure.

Another leaked plan revealed by Corriere della Sera talks of converting Italy’s struggling car industry into a revamped ecosystem of weapons production, with subcontractors across Lombardy and the Veneto supplying the German armaments plants much as they now supply car components for Volkswagen, Mercedes and BMW.

Ukraine’s Volodymyr Zelensky, Britain’s Keir Starmer and France’s Emmanuel Macron in London on Sunday.Credit: AP

“It is becoming obvious to everybody that defence spending is the way to offset job losses in the car industry,” said Holger Schmieding, chief economist at Berenberg Bank.

What is also becoming obvious is that Donald Trump either wants a Russian victory in Ukraine, or is so besotted with the TV reality show of his peace deal that he will smash America’s alliance system out of pique if thwarted.

Ursula von der Leyen, the president of the European Commission, joined the bidding on Tuesday with an 800 billion euro “Rearm Europe Plan” using emergency powers under Article 122 of the Treaties, the immediate riposte to Trump’s overnight outrage.

It was the war – not the New Deal – that lifted America out of the Great Depression. Military revival could do much the same for a Europe trapped in economic defeatism.

Funds are to be rushed into air defence, artillery, missiles and drones, with a target of raising average EU military budgets by 1.5 percentage points of GDP over four years. The mechanisms are vague. The direction of travel is clear.

The immense figures under discussion in Berlin would have been politically unthinkable a week ago, before the total loss of faith in US friendship.

If enacted on anything close to this scale, such a high-octane blast of military Keynesianism will entirely change the economic and geopolitical shape of the world. It is the coming boom in Europe that we should all be betting on.

Bavaria’s premier Markus Soder is the weather-vane of our times, leading the call for a full-blown revival of German military power along with a joint nuclear deterrent in concert with France and the UK.

“We need a drone force of 100,000 drones, 800 new tanks, 2000 Patriot missiles and 1000 Taurus just for Germany as a protective shield like the ‘Iron Dome’. Only the strong will be taken seriously,” he said.

Europe is in roughly the same position today as America in 1939, when the US defence budget was 2 per cent of GDP and the miniscule US army ranked with the Belgian army. Spending rose to 5.6 per cent of GDP in 1941, 16 per cent in 1942, 35 per cent by 1943 and peaked at 41 per cent in 1945.

The surge was led by William Knudsen of General Motors, the corporate titan of the age who took the job at the US war department for a patriotic salary of $US1. Tasks were divided up. Ford built the biggest factory the world had ever seen at Willow Run in Michigan, able to produce a four-engine B-24 Liberator bomber every hour by 1944.

Chrysler rolled out the M3 medium tank through the freezing winter of 1941 in a factory that lacked walls. The Chrysler M4 Sherman, with a motor powered by five six-cylinder engines welded together, became the workhorse of allied armour, supplied to the British, Canadians, Poles and Free French.

M3 tanks being built at the Chrysler-operated Detroit Tank Arsenal in 1942.Credit: AP Wirephoto

Technology is more complex today: the idea remains the same. “It won’t be car factories suddenly making tanks, but suppliers have skilled labour that can be switched to defence as the auto industry shrinks,” said Schmieding.

It was the war – not the New Deal – that lifted America out of the Great Depression. Military revival could do much the same for a Europe trapped in economic defeatism and learnt helplessness for two decades. It is a way of achieving the turbo-charged growth of the Draghi Plan by other means.

The trade-off between defence and welfare is one of the great fallacies of modern politics.

Much of the technology underpinning US economic hegemony has its origins in the Pentagon: the internet was an offshoot of the Advanced Research Projects Agency, initially conceived as a computation network within the US defence complex that could survive a nuclear first strike.

Silicon Valley, once an orchard of apricots and a third of the world’s prunes, began making radars and aerospace for the US government in the 1940s. It turned to integrated circuits needed by NASA and the Pentagon during the Cold War. Google’s origins lie in grants from US agencies for intelligence surveillance.

A study of OECD states published by MIT’s Review of Economics in January found that government spending on defence research drives rapid productivity growth by crowding in higher private investment.

The moral of the story is that Europe can kill two birds with one stone, defeating perma-slump at home and Vladimir Putin’s predatory imperialism abroad at the same time.

Sir Keir Starmer has proclaimed the new gospel, describing his defence industrial strategy as the spearhead of economic growth and a path to leadership in AI and quantum computing.

The German plan for military and economic rearmament was drawn up by four leading institutes from across the political spectrum, designed to hold the Christian Democrats and Social Democrats together in a grand coalition.

Chancellor-in-waiting Friedrich Merz has jettisoned two of his core political doctrines in a matter of days: a lifelong defender of Atlanticism has all but given up on America; and a champion of ordoliberal fiscal rigour is suddenly searching for ways to amend to the German constitutional debt-brake while there is still a chance in the old Bundestag.

Once the new Bundestag takes over in late March, Putin-Versteher on the hard Left and the hard Right have the votes to block it.

Europe will find the money for weapons because it has to.

The EU has a 90 billion euro line of untapped funding from the COVID recovery plan that can and will be used. It is sitting on 200 billion euros of frozen Russian assets likely to be tapped to pay for weapons sent to Ukraine and to beef up the formidable arms industry already created by the Ukrainians themselves, and which must not be allowed to fall into the hands of the Kremlin.

Half the task is to turn Ukraine into “a steel porcupine”, in von der Leyen’s words.

The coalition of the willing will have to rearm mostly outside the EU structure given the vetoes of Hungary and the Russophile bloc.

Joint debt issuance is needed to shield high-debt states from a bond market attack, but this can be done through a new agency akin to development banks, and should include the UK, Norway and Canada.

The details are fundamentally trivial. Non-US Nato has a combined GDP of $US30 trillion ($48 trillion), 14 times the Russian economy.

It can bring Putin to the table by hammering him on two fronts at once: a) through an arms race that Russia cannot afford; b) through choking Putin’s oil revenue by paralysing his mercenary “dark fleet” of tankers in the Baltic, and by equipping Ukraine with missiles able to reach Russia’s Black Sea oil terminals.

The worst of all outcomes is a false peace that neutralises Ukraine, leaving Putin free to rebuild his war machine while his arms factories are firing on all cylinders.

It would allow him to concoct a story of abuses against ethnic Russians in the Baltic states as a pretext for further attacks before Europe is strong enough to hold the line.

The coalition of the willing must act with lightning speed. Otherwise Putin may be tempted to strike while he has a perishable advantage. We are approaching the point of maximum danger.

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