The era of austerity ends with a bang and not a whimper.
On Tuesday the Bundestag, as the German national legislature is called, voted to allow a huge increase in defence and infrastructure spending, altering its strict debt rules and marking a U-turn for Europe’s beacon of fiscal stability. As a result, a staggering €500 billion ($543 billion) will now be earmarked for infrastructure spending in the next decade.
Analysts expect this to result in the German economy staging a rebound later this year and next year. It also means that we have the most emphatic European response to efforts being made by the administration of US President Donald Trump to ramp up American prosperity by playing a zero-sum game with its biggest economic rivals and partners. From April 2, Mr Trump hopes to make American goods more competitive by imposing trillions of dollars’ worth of tariffs on China, the EU and others.
This is exactly why Europe’s largest economy needed to shape its own destiny and potentially that of the Eurozone and its partners. Not even the prospect of a bond markets tantrum could stop Germany’s incoming chancellor, Friedrich Merz, from doing “whatever it takes”.
Until now, politics in Europe since the 2008 global financial crisis has been focused on maintaining the toxic orthodoxy of pumping as much money as possible into sustaining government debt issuances while reigning in spending elsewhere. And investors have been quick to punish any governments they deemed to be acting against this, labelling them as imprudent. However, now it doesn’t seem as if the prospect of higher borrowing costs will act as a deterrent any longer to more expansive policies.
We should cheer this sea change and wish good riddance to what has been a lost decade and a half. We might even anticipate a renewal of European competitiveness, its edge lost long ago to the US and China as well as more dynamic economies such as the UAE and Singapore.
Last year, in a highly anticipated report, former European Central Bank president Mario Draghi called for additional investments of at least €750 billion to €800 billion each year – or about 4.4 to 4.7 per cent of the EU’s gross domestic product – for decarbonisation, digitalisation and defence, for the bloc to catch up with global competitors such as the US and China.
During a hearing with legislators in Italy on Tuesday, Mr Draghi, previously the country’s prime minister, quipped that Europe had “a single market for toothpaste, but not for artificial intelligence”. A fair point in truth. While the US and China have both offered their generative AI propositions in ChatGPT and DeepSeek, Europe’s is conspicuous in its absence.
The challenge for the EU is “existential”, Mr Draghi said in September, according to The New York Times. If Europe cannot effectively compete and, in turn, provide its people with security and prosperity, he said “it will have lost its reason for being”.
Competitiveness – not austerity – will be the driving force in politics now. Not just in the US and Europe but everywhere. Countries and regions will be increasingly vying to attract investment and talent and spur innovation, not just through spending but with well-communicated regulations and policies.
Why should the effective communication matter? Look at the US today: whether Mr Trump’s policies are well-advised or not, much of their impact is being diminished by the noise and controversies surrounding every decision and order. That might partly be down to the nature of American politics, but it is also being fuelled by the tone and posture taken by the current White House.
“The erratic pace and tone of Trump 2.0 is taking a toll on the stable economy the president inherited, denting growth prospects and leaving Americans more downbeat than they have been in years,” The Washington Post reported this week. Also this week, the Federal Reserve held key interest rates steady and echoed the Post’s sentiment about the outlook.
In an increasingly competitive landscape, the biggest advantage could go to economies that are perceived to be the most stable. This has been a challenge for Europe, much less so for China, for example.
For the UAE, it would be a very good metric to be judged by.
According to the IMD World Competitiveness Yearbook 2024, the UAE ranked seventh globally. For the third consecutive year, it was top of the Global Entrepreneurship Monitor report, recording a rate of 7.7, a record high since the report’s launch. It also ranked first globally in the Quality of Air Transport Infrastructure Index within the 2024 Travel and Tourism Development Index.
According to a report issued by the UN Conference on Trade and Development last June, the UAE ranked second globally after the US in the number of new foreign direct investment projects in 2023, with 1,323 new projects, representing a growth rate of about 33 per cent compared to the previous year.
That is an enviable track record that is underpinned by a journey that has seen policymaking and initiatives constantly updated and tweaked over decades to increase competitiveness and put the Emirates in a very strong position for the years ahead. Other countries should take note.
