Defending Europe Without the United States with Guntram B. Wolff

What should we know about Europe’s defence industry? What capabilities does Europe need to develop to deter the Russian aggression? What are the consequences of the German debt brake reform? And is a common defence single market possible?

Leszek Jazdzewski (Fundacja Liberte!) talks with Guntram B. Wolff, a Senior fellow at Bruegel. He is also a Professor of Economics at the Université libre de Bruxelles (ULB). From 2022-2024, he was the Director and CEO of the German Council on Foreign Relations (DGAP) and from 2013-22 the director of Bruegel. Over his career, he has contributed to research on European political economy, climate policy, geoeconomics, macroeconomics and foreign affairs. He regularly testifies to the European Parliament, the Bundestag, and speaks to corporate boards. In 2020, Business Insider ranked him one of the 28 most influential “power players” in Europe. Tune in for their talk!

Read the analysis: www.bruegel.org/analysis/defendin…mates-what-needed

This podcast is produced by the European Liberal Forum in collaboration with Movimento Liberal Social and Fundacja Liberté!, with the financial support of the European Parliament. Neither the European Parliament nor the European Liberal Forum are responsible for the content or for any use that be made of.

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Transcript

Hello, this is Leszek Jezdzewski, welcome to Liberal Europe. I have a very special guest today, Guntram Wolff, who is a senior fellow at Bruegel, who is also a professor of economics at the Université Libre de Bruxelles, and he is a former head of Bruegel and of German Council of Foreign Relations. Guntram Wolff, welcome to the show.

Thanks for having me.

So, you’ve been for a long time Europe’s chief economist, if I may say so. And I wanted to ask you, what does economists see looking at the economics of the defense industry in Europe?

Defense industry is characterized by a high degree of fragmentation. It is one where the orders are done by national ministries and national procurement agencies, and in a relatively small way. So, meaning we are procuring small number of weapons for every individual weapon category. There are lots of different types of weapons across Europe, and the end result is of this fragmented market is that the costs are actually very high.

So, we have very high costs per unit, and we actually also have low production numbers. And I think the combination is really quite problematic at a moment where we want to seriously increase our spending on defense and seriously increase our capacities, right? I mean, if you have a fragmented market and you increase spending by a lot, the end result is going to be a lot of higher costs, a lot higher costs, but not an improvement in the quality and in the quantities. And so, this is what we have to look at now.

We have to make sure that we move away from this fragmentation and towards, I would say, a more integrated market with more competition, therefore lower costs, better quality, and higher quantities.

Right. You recently wrote a paper, which is jointly for the Kiel’s Institutes and the Bruegel, the Kiel Institute for the World Economy, and the Bruegel together with Alexander Burlykov, Defending Europe Without the US, the first estimates of what is needed. So, let me start by asking you, what do we need to keep on supporting Ukraine, providing that there will be no support whatsoever next year from the US, perhaps even this year?

Well, I think this paper really is a paper that we wrote because of the United States and the political change in the United States, and frankly speaking, the blatant breach of trust between the United States and Europe at a moment where they started discussing about Ukraine’s security without involving Ukraine and without involving European partners. It became clear to, I think, everybody that this is a completely new United States that is actually very problematic for us, very problematic for us because it undermines our own security interests. And so, so that means for Europe, we have to step up, we have to support Ukraine, we have to support Ukraine to sustain its fight against the aggression of Russia, because if we do not do this, Russia will advance further on the battlefield and might one day actually occupy much larger parts of Ukraine.

And so, this is about deliveries of weapons, it’s about financial support, it’s about strategic support and many other types of support. We are, as Europeans, providing already more than half of the support, even if you look narrowly only at the military support, Europe is already providing half of the support, the US is the other half, and so now we have to step up and basically replace the US support. Financially, that’s not such a big problem. The US military support has amounted to around 20 billion per year, which is a bit more than 0.1% of EU GDP. So, I think it’s financially totally feasible.

Right. You are also describing the recent Russia’s buildup of capacity of production and refurbishing of the old stockpiles of the Soviet arms. You consider those scenarios, one unlikely in which Ukraine has a sort of ceasefire or some hostilities at least stop, and the more likely one in which we need to still support Ukraine. Ukraine is still fighting. What is Europe, what is EU currently lacking to match recent Russia’s buildup, especially if, as you rightly said, US support cannot be really counted upon anymore?

Well, I mean, I think we need to understand that Russia is in a full war economy setting, it invests huge amounts of money, of its budget into defense, and its own defense industry has massively increased. So, the production numbers have increased a lot in Russia. And so, Europe needs to be able to match that to have an effective deterrence. And that means we need to have more tanks, more traditional, conventional military material that is used in conventional warfare. So, that’s very important. And it’s the base of European defense. And that’s the kind of stuff that also Europe can produce and will be able to produce in larger quantities if there is more demand for it.

What is much more difficult to replace is indeed the US support and the strategy leadership and the strategic enablers, so-called strategic enablers that the US provides, namely, things such as satellite communication, satellite intelligence, gathering, and strategic airlift capacities. I mean, these are the kinds of things that currently the United States provides to Europe and where at the moment there’s no immediate substitute and we cannot build this overnight. So, we have a gap there.

And that gap needs to be closed as quickly as possible. And that means a lot of investments in that space. Some of these investments need to be done at the European level and not just at the member-state level.

You also point out that currently, if the US is not part of Europe’s defense, the lack of troops and significant lack of troops is a reality. 300,000 US troops might not be actively taking part in the defense of Europe. How could it be replaced by the fragmented European militaries? Do you think that it is possible to do it within NATO, expanding the collaboration between nation-states? Do you think the particular countries might take up the burden?

It seems that I think we are very far from this 50 brigades you are suggesting, ready to be deployed to the Baltics. It seems almost unfeasible without US that Europeans will be ready to do that.

I mean, the answer is yes, we have a big gap. We have a big gap in the short term. And that’s why it is so important to have Ukraine continue to be effective in its deterrence. So, we have to support Ukraine in order to also have the time to build up our own capacities. The own capacities can be built up.

These 300,000 is an estimate from war game scenarios as undertaken by various institutions. And I mean Europe has a lot of troops, right? I mean, it’s not that we don’t have troops, but our troops are fragmented, right? And so, the first best solution would of course be to integrate troops and move troops closer together and integrate them under joint command and similar things. Now, that we don’t immediately achieve either.

And so, I think we are really here in a space where we will have to do a combination of more national troops. And I think in particular, Germany will play a big role, will have to play a big role. German troop size has massively decreased since the end of Cold War.

We are now below 200,000 active troops. In the Cold War period, it was above 400,000. So, let’s say if Germany can increase by 50 or 100,000, its troop size, that of course would make a big difference. But I agree with you, in the very short term, there is no immediate solution.

It’s an important part of your paper, of your analysis, also the defense industry and the production. And it seems almost, it’s hard to understand, and I’m saying this also from the perspective of the sort of frontline country, in a way, that we still didn’t manage to build the capabilities for ammunition production for 155s or artillery or other essential in the war of the kind that Ukraine is currently fighting, because it seems very much an artillery war. Why do you think it happened that, I know, Rheinmetall, which has this capacity, I think spare capacity, is still not at the full swing of producing this ammo, even just for Ukraine, if it’s not for the stockpiles of Europe. What is keeping us from being this huge hub of ammunition production, and we still need to buy it in the following countries? And we can’t even have to defend ourselves. You say that we need 1 million for 90 days of fighting. I think it’s still quite a conservative estimate. So, what can we do to speed it up?

Well, I mean, the production of ammunition, such as the 155, has substantially increased in Europe, but it still is insufficient compared to the massive demand in Ukraine. So, I mean, just to give you a number, I mean, a company like Rheinmetall has increased its production from very, very few to over 700,000 at the moment.

And in my understanding, European ammunition production is set to reach 2 million this year. So, it’s a massive increase from essentially below 100,000 per year for Europe as a whole to 2 million, right? I mean, it is a big increase, but the increase has been too slow, given the huge demand in Ukraine itself. So, my view there is that, this is going to work.

I mean, so we are on track and we will have enough capacities for this kind of production. I also do think to be a bit on the optimistic side that if we start now ordering in larger quantities, key weapon systems, such as tanks, such as artillery howitzers, such as air defense, we will relatively quickly build up capacities in the course of two, three years to really come to much bigger production numbers, much bigger production numbers. And the reason why I’m optimistic is that basically so far the demand wasn’t really there.

I mean, governments did spend more, but not that much more. And let me just give you the example of the tanks. Germany didn’t order a lot of tanks before 2022.

The number of tanks Germany had went down from more than 3,000 in the Cold War period to 300, 350 or so in 2022. And since 2022, Germany only ordered another 125 Leopard 2 tanks. So, basically, these are small order numbers and they are supposed to be delivered only by 2030.

So, these are very small numbers. And obviously, with these kinds of small numbers, the industry is not really investing in capacity. And so, once you start ordering 500 or 1,000 tanks, I mean, these kinds of numbers, companies will invest in, I would say, industrialized production.

This industrialized production can take off relatively quickly in a country like Germany that has engineers, that has people who know how to run industrial robots, who can draw on their experience in the car manufacturing sector, and so on and so forth. So, I’m fairly optimistic on this kind of conventional warfare stuff, that with the political will and more resources mobilized, we will see a pretty significant increase in production numbers.

So, you mentioned the economic costs of the fragmentation of the European defense industry. What are the main obstacles from actually deeper industrial integration?

Well, the main obstacle to deeper industrial integration in defense is the fact that member states and domestic companies like to protect their domestic markets and their domestic industries. And they fear competition, and they fear the losses that this might imply in terms of some local jobs. And here comes the political economy trick.

We are now at a moment where defense budgets will be increased so much that even with more competition and more demand directed towards other countries, the overall pie is growing so much that defense industries across Europe everywhere will benefit. And so, this fragmentation and this protectionism of national markets does not make sense anymore. It makes not only no sense, but it’s extremely costly and prohibits a rapid build-up of capacities.

So, it was Clausewitz who famously said that war is the politics by other means. And I do believe it applies to the economics of defense as well, that it is first and foremost a strategic or political issue, as he sort of pointed out. And I’m wondering if in the situation in which Boris Pistorius, the defense minister of Germany, is warning about the potential war with Russia in 2029 and Lieutenant General Karsten Breuer, chief of defense of Germany, is warning that it might happen in 2028.

It doesn’t really matter when exactly, but this threat seems to be imminent or let’s say three years in this sort of situation is sort of imminent. And I think many countries feel that the only chance to prepare for such a scenario is to build up capabilities right now, meaning buy from the shelf, because if you order now if you get equipment in three, or four years, it’s still very quickly. Do you think that there is a sort of trade-off between one and the other? So supporting Ukraine, preparing for the sort of imminent threats from Russia, deterring these threats, and also building a long-term capacity to replace U.S. and building up the industrial capacity, which we don’t have, which might have a result in, let’s say, 10 years?

Well, yes, so there are trade-offs, and in the short term, there definitely are trade-offs.

I would nevertheless say that buying off the shelf from America, has two fundamental problems. The first problem is that the U.S. defense industrial base itself is overstretched. So it’s simply not true that you can just buy off the shelves.

If you buy in the United States, delivery delays have increased, and I looked at delivery delays. They have increased massively in the last couple of years. So it’s simply not true that if you buy, for example, a fifth-generation fighter jet, F-35 now, you get it tomorrow. You might get it in five years. So this is, I think, the first problem. The second problem is, of course, on a deeper level, it’s a political problem.

If you buy top-end gear from the United States, and the politics continues to be what it is, you might risk losing access to that gear if the president of the United States decides to do so. And so for high-technology stuff, such as the F-35, the dependence on the U.S. company is enormous, and the U.S. politics is enormous. And it’s basically clearly stated also in the various purchase agreements that a lot of the intelligence, the software, and the needs to be done in coordination and in agreement with the United States.

So at the end of the day, you buy a weapon, but it’s not your weapon, but it’s a weapon in the control of the White House. And I think that is really a problem, given the politics.

Well, I think you’re right. It’s the sort of political question now, which incentivized many Eastern European countries, including Poland, to buy American as a sort of additional guarantee doesn’t apply anymore, because it’s going to be switched off, like in Ukraine, and it’s time that it doesn’t fit U.S. goals. What I think is one of the biggest challenges in the past in building European capacity is that it has been seen by many as a sort of French way of trying to get rid of U.S. and just buy French or buy Italian or buy Swedish equipment and thinking more of supporting defense and economy rather than capabilities which were needed at the moment. I think it might not apply anymore because of the trade-offs that you mentioned with buying U.S. weapons.

I’m thinking now more about trying to incentivize the countries that might be lagging behind in terms of the development of their own industry. Do you think a sort of merging, takeover, strategic investment, joint projects, public-private partnerships might be possible in that particular branch of industry, so heavily shielded from the competition? Do you think we actually can apply a single market for the defense industry in Europe?

Well, there will be a lot of resistance to a single market for defense industry. I think we have to provide the right financial incentives to do so, and only if you provide the right incentives, this will happen. And the current proposals on the table are insufficient to achieve that. The European Commission has come up with some proposals on the defense markets, but they are insufficient. They will not achieve that. So, only if there are substantial rewards, financial rewards, only at that stage, we will be able to introduce more competition and more integration of the single market.

Perhaps one more point to add, I do not think that this single market will be an EU single market. I think it will be a single market of like-minded countries agreeing to cooperate on defense.

It might well include the United Kingdom and might well not include some countries in Europe that are politically seen to be too close to Russia or too little aligned with the strategic objectives of deeper defense integration.

I quite agree that we have to be creative in terms of this, thinking of including Norway and especially UK. And it might actually give incentives to completely new ways of integration inside Europe, not just EU.

There were a couple of important events recently regarding the reforming of the European players adapting to the situation. One was obviously the, well, EU Commission, White Paper, Europe Plan, the mobilizing of 150 billion for the security action for Europe, and altogether 800 billion in defense investments, which I think mostly are actually debt allowances. And I think even more importantly, Germany decided to reform its debt break.

Altogether, it’s 1 trillion euros, so it’s more than double of the current budget spending. Half of it is supposed to go to the defense investments and the other half to infrastructure. Perhaps you can say whether do you think it is what you demand from European decision-makers? Do you think it is what’s actually, especially I’m thinking of Germany, do you think this is the right track and how it’s going to impact Europe’s capabilities and wider Europe’s economy?

Well, from a security perspective and a military perspective, it is great news that Germany can now increase its borrowing for defense spending.

I think that’s very important and the reform of the German debt break indeed was necessary. I don’t think here is the place to discuss whether the design of the reform is done in the best way. I think it could have been done in a better way, but I think the core is we will be able to increase defense spending in Germany and the domestic fiscal constraint has substantially loosened.

At the same time, the European Commission is proposing to loosen the European fiscal rules. To the extent that the European fiscal rules are constrained on defense spending, that will also allow countries to actually borrow more and spend more on defense. Unambiguously, these two things in combination are positive for defense spending.

What is missing is a truly European element of funding defense. What is that European element? Well, basically, the only thing the Commission is proposing is this 150 billion safe instrument, which is a lending instrument to member states. The financial advantage of lending to member states is extremely small for most countries that really want to invest into defense now. So, most countries are between Germany and Finland, just to put it geographically clear. So, the financial advantage of that is very limited and therefore it doesn’t provide the incentives needed to be taken up a lot. So, I don’t think this instrument will go very far.

I think it’s very important what you said because the Commission is very proud of this and I think a lot of people don’t really understand what this money is exactly. Last question, a sort of broader and more general. We are living in a time when many certainties don’t look the same anymore, including the way that the global economy works.

How do you think Europe needs to adapt? – I said Europe because maybe not just the European Union – adapt to these new rules of the game, which Trump is trying to impose on the world. Do you think it’s going to be a major change or do you think it’s mostly just Trump is talking the talk, but in the end things might just be very similar to what they are right now?

Well, I mean, I think we are at the moment where we will see how it will develop, but certainly I think the changes that are happening in the US are so big and so frightening that it will impact the global international order and also the global international financial and monetary system.

So, I think we are at a moment where a lot of global capital and global investors are reconsidering their exposure to the United States. So, if that starts to happen in earnest, we are really at a watershed moment. And so for Europe, this is a big threat because Europe has been so much in alliance with the United States, and the transatlantic relation has been the core of, I would say, the international order. At the same time, it’s also really quite an opportunity for Europe. And if we get this right, we can attract a lot of capital. I mean, that’s what we are seeing already.

There has been a lot of equity capital moving from the US to Europe already in the last essentially six weeks. I think that can accelerate, but if it wants to accelerate at some stage, we have to offer also attractive investment opportunities. And so that means we need to have a growth strategy.

We need to really invest in capacities to grow. And that’s why the second pillar of the German debt break reform. So the opportunity to invest more into infrastructure is actually very important. And we need to get that right. We need to invest more into the physical and the digital infrastructure in Europe so that corporate investments become more interesting. And if they do, we could actually attract a lot of global capital to Europe.

It would very fundamentally change the international system the way it works. So I think we are really at a beginning of a new era. It might not be a completely new era if self-correcting forces in the US gain strength. But at the moment, I have to say the opposition in the United States towards this new administration is quite limited. And so I think we are really at the moment going in a direction of quite a fundamental change.

Well, it sounds like a very ambitious program and also a promise for Europe that this adaptation, costly adaptation might be actually opportunity, not just for defense industry, but for economy as a whole. Gunther and Wolf, thank you so much for being at the Liberal Europe with us.

Thank you so much for having me.