The US and its allies face a US$10 tril reckoning in the race to rearm
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A new era of global rearmament is underway, with the US and its allies facing a potential $10 trillion in additional commitments over the next decade. European Union nations are considering increasing their defense spending to as high as 4% of their GDP, in order to meet the North Atlantic Treaty Organization's (NATO) targets. The aggressive actions of Russia and the expansion of the Chinese military are driving the need for increased defense capabilities. The US, already allocating 3.3% of its GDP on defense, would see its borrowings increase to 131% from 99% over the next decade if it pushed its military budget to 4%. The implications of increased defense spending include potential fiscal challenges, such as deeper levels of borrowing, significant budget cuts, or tax increases. The surge in military budgets is a global phenomenon, with China's defense spending projected to grow by 7.2% in 2024. The question of how to reconcile increased defense commitments with finite tax revenues and growing welfare and health needs is becoming a pressing political issue. NATO members are unlikely to agree to a firm commitment to spend 4% of GDP on defense in the near future. The issuance of jointly-backed euro bonds is a potential financing option, but higher interest rates could increase debt servicing charges. The opposition to joint bond issuance from fiscal hawks in wealthier nations like Germany adds to the complexity of the discussions. NATO's plan includes overhauling its defenses, increasing troop readiness, and investing in new technologies to maintain an advantage over Russia. The alternative to increased defense spending is also a consideration, as failing to spend the money could have negative consequences for countries, economies, and investors.



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