The bill that was always coming due

The New York Post reports that US War Secretary Pete Hegseth has called on European allies to take primary responsibility for their own continental defence, framing the project as a 'NATO 3.0' reboot of the alliance. The Fox News account adds that Hegseth has announced a six-month review of American force deployment in Europe. One may have views about the manner of the announcement — the bluntness, the timing, the particular messenger — but the underlying fiscal arithmetic has been clear for decades, and I find I cannot pretend otherwise: a security arrangement in which one party bears the preponderance of cost while others free-ride is not a durable arrangement. It is merely a deferred reckoning.

I wrote after Versailles that the economic consequences of a political settlement are always underestimated by those who negotiate it in the flush of the moment. The inverse applies here. The economic consequences of a security withdrawal — even a partial, conditional, or merely threatened one — are being underestimated by those who have grown comfortable assuming the guarantee will hold. European governments have, in the main, kept defence spending well below the NATO two-percent-of-GDP benchmark for most of the post-Cold War era. That was a choice, and like all choices it had a shadow cost: the implicit American subsidy freed fiscal space that Europe redirected toward social spending. There is nothing ignoble in that choice, but the subsidy is now visibly conditional, and the adjustment cannot be painless.

Here is where I must insist on a point my critics have always found inconvenient. The straightforward response — 'European governments must simply spend more on defence' — collides immediately with the very household analogy I have spent my career arguing against. If every European state simultaneously cuts civilian public investment to fund a rapid military build-up, the aggregate demand consequences across the continent could be severe. The paradox of thrift operates at the international scale just as it does at the national one. A co-ordinated, deliberate approach — one that treats the new defence requirement as a genuine public investment programme, financed through borrowing at long maturities where fiscal space exists, and through European-level instruments where it does not — is not profligacy. It is macroeconomics.

I am aware that some will reach for the opposite error: insisting that because austerity is dangerous, no adjustment is required at all. That will not do either. The adjustment is required; the question is how to sequence and finance it so that it adds to productive capacity rather than crowding out the civilian investment — green infrastructure, education, health — on which long-run growth depends. This is precisely the kind of problem that warrants the deliberate architectural design of nations sitting around a table, which is to say, exactly the kind of problem I spent the last years of my life trying to build institutions capable of solving.

I cannot speak to the operational details of modern alliance structures, the precise burden-sharing formulae, or the engineering of European defence bonds — those institutional forms emerged after my time and I defer on their mechanics. But the macroeconomic principle is as old as my General Theory: when private (or, in this case, allied) demand for a public good is withdrawn, the state — or in this instance the community of states — must decide consciously whether to fill the gap, and how. Dithering is itself a choice, and it is rarely the cheapest one. The six-month review Secretary Hegseth has announced, whatever its politics, at least forces that decision into the open. On that narrow point, clarity is preferable to the comfortable indefiniteness that preceded it.