Lagarde: “Higher defense spending could push up inflation”

Brussels – Too little so far; the risk now is of investing too much all at once. On defense, there is a risk of a complete mess by the EU, and the European Central Bank is beginning to look at the desire to invest in heavy industry with some apprehension. “Trade fragmentation and higher defense spending in a capacity-constrained sector could in principle push up inflation,” ECB President Christine Lagarde warns, participating in the XXV conference on the ‘ECB and its observers‘ organized by the Goethe Institut in Frankfurt.

The rush to rearm — a result of a volatile geopolitical environment defined by the European Commission in its ‘Rearm Europe’ plan — may produce undesirable effects on the cost-of-living index that Brussels, as in other capitals, probably did not consider enough. The hope, in this sense, is that in the face of the risk of a new rise in inflation due to the increase in defense spending, “US tariffs could also lower demand for EU exports and redirect excess capacity from China into Europe, which could push inflation down,” Lagarde added. A paradox, then: the EU-US trade war could benefit Europe.

Lagarde touches on the topic of defense not so much because it is topical but because it relates to the uncertainties of an increasingly unpredictable environment. Without explicitly referring to US President Donald Trump or the actions of Russia and China, the ECB chair notes that “established certainties about the international order have been upended.” Some alliances have become strained, while others have grown closer. We have seen political decisions that would have been unthinkable only a few months ago.” In a context where “indicators of geopolitical risk stand at levels not seen since the Cold War,” she further warns, “shocks do become larger, the persistence of inflation could in some circumstances be greater.” 

So, this is how the contribution to accelerated defense spending could have adverse effects. For this reason, the ECB president concludes, “Any future shocks we face will therefore have to be assessed through this framework.” What are these negative scenarios around the corner? She lists them herself: “Energy price shocks and supply chain disruptions or a large increase in spending on defense or infrastructure.” When armaments are a problem, even without having them.