Former European Central Bank President Mario Draghi said Germany’s decision to ramp up defence spending is a “game changer” but warned there are risks when it comes to how it’s implemented.
The size of Germany’s commitment and the constitutional changes it entailed are among reasons why the move marks a turning point, Draghi told _Bloomberg Television’s_ Joumanna Bercetche on a panel at the HSBC Global Investment Summit in Hong Kong on Wednesday.
What worries the former Italian prime minister is how the European Commission handles the shift in policy. “If this is not properly managed, what happens is that Germany will rearm itself but the others would not,” Draghi said.
Germany has moved to unlock hundreds of billions of euros in debt-financed defence and infrastructure spending. The measures, which passed their final legislative hurdle last week, end decades of German austerity and usher in a new period of deficit spending designed to boost Europe’s biggest economy and modernize creaking infrastructure.
German leaders have been forced to act after Donald Trump pulled back from US commitments to European security, laying bare the increased threat to the region from President Vladimir Putin’s Russia.
The US president’s actions have forced the hand of European policymakers, Draghi said, adding that one of the consequences was “basically to tell us, ‘you’ve run out of time.’”
The message, according to Draghi, was that “you proceed to defend yourself or you are defenseless.”
“Now, to be defenseless in this new climate is not very pleasant, because we have an enemy, which is Russia,” he said.
Draghi has long been telling Europeans that they need to boost their competitiveness in a rapidly changing world.
Last year, his _Draghi Report_ provided detailed recommendations to the European Commission on creating a capital markets union, repatriating Europe’s vast savings surplus and funding innovation and growth. Draghi recently told the Italian parliament the jump in competitiveness now needs to include European defense through integration of European armed forces and joint spending.
#### Trade war
Another challenge confronting Europe is Trump’s approach to global commerce.
The US escalated a global trade war this month by imposing a 25% tariff on steel and aluminum imports, which led the European Union to announce its own retaliatory duties on politically sensitive American goods.
Trump is preparing a “Liberation Day” tariff announcement on April 2, unveiling so-called reciprocal tariffs he sees as retribution for levies and other barriers from other countries, including longtime US allies.
While there are calls within the EU for a forceful response, Draghi said the bloc shouldn’t allow itself to be lured into retaliating, given it’s far more reliant on trade than the US or China.
“If Trump builds a tariff wall, it’s not in our interest to build a tariff wall,” he said. “We need to ask ourselves, do we retaliate or not?”
Source: Bloomberg