In a “toxic” mix of budgetary, the NATO Summit Agreement evolves (June 24–25, Hague), with Greece being called upon to invest an additional 2% of GDP in defensive coststo reach the new 5% of GDP by 2035, which is expected to put a “bomb” on the already long -awaited current account.
As stated in newsit.gr Of the 3% of GDP that Greece spends on defense spending will have to reach 5%, with the difference of 2 percentage points translated to +25 billion euros, or an average charge of 2.5 billion euros/year for the next 10 years.
The problem is that Greece will have more “expenses”, how these extra costs will “keep up” with the EU stability pact, but also for a third, decisive, factor, in a field that really “hurts” the Greek economy.
This is because, for example, a country such as France, which has rich production of defense equipment, will be expected that this rapid increase in defense spending will boost domestic industry and give national development points. Something that cannot be the case in the case of Greece.
What does Greece produce and not?
Based on defense spending about half of previous years (45%-50%), they are headed to equipment, and the rest to other costs of expenditure (regional materials, maintenance, staff salaries, etc.).
Thus, for example, total defense spending of 2024 was about 7 billion euros, and of which € 3.2 billion was spent on defense systems equipment.
The problem lies in the fact that Greece does not produce such systems, and is forced to introduce them.
Thus, if Greece increases its defensive costs from 3% to 5% of GDP, that is, from about 7 to € 11.5 billion a year, and the current ratio is maintained where about 45–50% of expenditure is directed to equipment – which are almost entirely imported – then the annual imports of 3 billion euros are currently imported – at at least 5.2–5.75 billion euros. That is, the equipment of imports will increase by approximately EUR 2-2.25 billion per year, burdening the current account balance, if there is no compensation for corresponding exports or domestic production.
Of course, the details of the agreement approved by the EU Summit on June 26, and in particular the part regarding joint supplies, but despite any European flexibility, are clear that new requirements lead to imports of equipment, with the domestic industry at present.
How much will the current account balance be burdened?
It should be noted that Greece’s current transactions are already over € 85 billion annual imports of goods & services.
Thus, if the increase in equipment imports of equipment reaches EUR 2–2.25 billion per year due to the rise in defense spending from 3% to 5% of GDP, then the total burden on Greece’s annual imports will range between 2.35% and 2.6%. This additional flow of imported capital equipment, if not compensated for corresponding exports or domestic production, enhances the trade deficit and enlarges the deficit in the current account balance.
Since Greek exports are on a downward trajectory, but also the fact that the international environment does not favor their increase (trade war, geopolitical crisis), expectations of imports of imports are meager.
The above means that the pressure to find the necessary funding are intensified.
Where will the money be found?
Under other circumstances, and in particular, based on the preceding stability pact, Greece would be able to “meet” the new needs as it now produces strong primary surpluses (in 2024 it was € 11.4 billion, ie about 4.8% of GDP).
However, in the new Stability and Development Pact, logic is shifted from the primary surplus target to control the rate of growth of public spending. It is no longer only important if a country has a “surplus” or a “deficit”, but if it increases its net expenses within the limits set by the Commission on the basis of its debt course.
This means that Greece cannot fund additional equipment imports by increasing expenditure, even if it has a primary surplus, unless other spending (eg health, education) or … hopes for a new European regulation, as the new EU road map of the EU. As a result, the appeal to new debt loan and debt enlargement is rather inevitable…