Market Pulse

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Market Pulse

If much of the spending is directed toward the US, anyway, as Trump may wish, the stimulative effect on European aggregate

demand will be muted.

Figure 1 - Europe: Non-US NATO Defense Spending as a Share of GDP, With IllustrativeProjection to 2035

Source: NATO

So how does this matter for the EUR? To motivate a more bullish outlook for the EUR - if there is one - we must view the

commitment to higher defense spending as more than just a fiscal stimulus.

First, if Europe's commitment to higher defense spending gets Putin to back down and negotiate a peace earnestly in the medium

term, or it gets Europe to "win" the war in Ukraine against Russia, that would come close to looking like a Reagan-Thatcher victory

over the Soviet Union. It could certainly invigorate investment into Europe and motivate private investment on the premise that

a "peace dividend" could benefit the European economy as a whole. (The USD, of course, did very well in the 1990s, after the fall

of the Soviet Union.) Even a monitored truce followed by limited, reversible sanctions relief tied to Russian compliance with its

terms could cause the EUR to rally, as traders begin to anticipate a full-fledged peace. The prospect that there could be a truce

in the medium term was explored in a Bloomberg article yesterday, here, Moreover, it would automatically jump-start a process

by which Ukraine would join the EU, and eventually the euro area, strengthening it with its population, military committments,

industrial base, and the size of its market.

Second, there is another way that Europe's security agenda can help the EUR, and this is the more important one: Europe's

security agenda could be the start of a series of institutional reforms that could produce more economic and political