”Europe’s plan for joint defense spending and further softening of fiscal rules is a big moment. *U.S. exceptionalism has also been challenged by weaker U.S. growth, a trend that may have room to run.* The amount of overall stimulus for Europe may prove exaggerated, given that spending is likely to be slow. Europe in general, and Germany in particular, plan significant increases in defense spending at a time when U.S. growth has been softening. That combination is putting U.S. exceptionalism at risk, as we explore in a new Citi Research note from Adam Pickett and his Global Macro Strategy team. We explore this shift by considering multiple key points. For Europe, joint defense spending and further softening of fiscal rules is a big moment. EU Commission President Ursula von der Leyen has announced a EUR800 billion package with three parts. The first is the EUR150 billion ReArm Europe Fund providing joint borrowing for defense spending. The second is the activation of the escape clause in the Stability & Growth Pact, which creates fiscal space of 1.5% of GDP that EU member states can use for defense spending. The third is allowing cohesion program funds — ordinarily earmarked for reducing economic disparities between member states and promoting sustainable growth — to be diverted to defense-related investments.”
Morten W. Langer
