Europe is increasing defense and security spending. We are no exception. However, economists warn of higher debt.
In a situation where the United States is moving away from closer cooperation with Europe and Russia continues to attack on Ukrainian territory, the vast majority of statesmen from the old continent agreed that it is necessary to strengthen their own defense and security. What can this all mean for Czech Republic and what impact will it have on the economy?
The chairmen of parliamentary parties did not participate in Thursday's meeting about defense, which was convened by Prime Minister Petr Fiala. In fact, two heads of political groupings represented in the parliament were absent. Andrej Babiš, the chairman of the ANO movement, and Tomio Okamura from SPD, both declined the offer. Babiš noted in this context that this issue is nevertheless a priority for him. But obviously, this is not enough. Parliamentary elections are approaching, and so he is now refraining from the unpopular increase in such expenditures. Okamura, whose voters are to some extent pro-Russian sympathizers, is a different caliber. He clearly doesn't want to antagonize his most loyal supporters, who would regard his participation in such action as a betrayal of Putin's regime.
Nuclear Threat
Nevertheless, an increase in resources for the Czech Republic is inevitable. Trump's threat of military abandonment of Europe is predestining us to start taking more care of ourselves.
There are more reasons to worry in light of Russian aggression in Ukraine. In addition, the New START treaty, which limits the nuclear arsenal of Russia and the United States, expires next year. According to the Federation of Atomic Scientists, both powers currently have over five thousand nuclear warheads. In the case of China, it is approximately 500, France 290, and the United Kingdom 225 warheads.
Growing expenses
Last week, the Czech government also decided to gradually increase defense spending by 0.2 percent of gross domestic product annually until 2030. By 2030, we should be spending three percent on defense.
In the meantime, neighbouring Germany has announced that it will set up two giant funds totaling 900 billion euros, which are supposed to finance armaments and infrastructure. This is the most significant turn in German economic policy at least since the country's reunification in October 1990.
All this will result in new budget tensions, however.
"Greater indebtedness of Europe means deeper deficits, thus significantly stronger inflationary pressures, which should lead the Czech National Bank to reduce its base interest rate even more slowly than has been expected so far. And because deposit rates in banks, such as savings accounts, are fairly closely linked to this rate, they could be more favorably interest-bearing in the coming period than has been previously thought,"
LP-Life economic analyst Lukáš Kovanda said.
However, this is not the only consequence of measures to strengthen defense. Borrowing costs are rising not only in our neighbors, but also in the United States, Japan and Australia. The Czech Republic also does not avoid similar impacts.
"The development strongly reflects in the increasing costs of the resources that banks use to cover the provided mortgages. So, for example, the rate of a five-year crown interest swap increased most noticeably last Wednesday from last April. This rate is quite closely tied to mortgage rates with such frequent, five-year fixation. Therefore, for banks, covering these mortgages is now even more expensive than this time last year,"
Kovanda adds.
Analyst Petr Barton brings a slightly different perspective. According to him, on the contrary, lower interest rates would alleviate our industry.
"But that would help everyone. The industry could, for example, be helped if the Czech planning procedures finally stopped obstructing construction,"
Bartoň commented for LP-Life.
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Higher taxes
The analysis of XTB company claims that EU countries may not be able to avoid increasing taxes as defense spending is expected to increase. This is despite the fact that such a step will be unpopular with voters. We cannot expect that enough money could be raised through cuts in other areas. According to the cited source, EU defense spending has been increasing since 2014 when Russia controversially annexed the Ukrainian peninsula Crimea in violation of international law.
"The gradual growth of expenditure was not fast enough. That's why we now talk about various action plans, loans, funds, and other sources of money that are to release up to 800 billion euros in the following years for the rearmament of Europe,"
explained to the Czech News Agency the chief economist of XTB Pavel Peterka.
While the average debt in the European Union is 82 percent of the gross domestic product, in Italy it reaches 137 and in France 112 percent, he further analyzes the study. Peterka warns that in such a case, Europe could approach a debt trap, where more indebted states would have to be dealt with by the more budget-responsible ones in the future. However, it stands that defense and security are among the primary tasks of each state. That's why these expenses also cost something. At a time when we are considered hostile by Russia, it applies twice as much.
Sources: own questioning, ČTK, Wikipedia
