Why Europe Has to Choose Guns or Butter

An economist’s dream, the above headline from yesterday’s Wall Street Journal is the perfect example of what we mean by economics. Instead of money, it is all about cost. Defined as sacrifice, cost is what we don’t do. So yes, it could be the money we did not spend elsewhere. But also, the cost could instead be the sandwich we did not eat when we had pizza for lunch.

Indeed, to define economics, we just need to remember that Choosing is (always) refusing.

Europe’s Tradeoffs

Butter For Guns

Our story starts when the Cold War ended. Less worried about a Russian threat, Europe spent trillions on social programs. Germany reduced its army from 800,000 to 180,000. Military spending sunk as low as Italy’s and Spain’s 1.5% of GDP.

Currently, Germany’s budget will get a Kindergeld boost of 3,000 euros to all families for each child (up to 25 years old). In Görlitz, the university is free. At the same time, publicly funded construction includes a renovated train station and a new hospital wing for senior citizens. In addition, taxpayer money funds welfare payments and subsidies. As a result, Germany’s social safety net is a relatively high 27% of its GDP.

During the pandemic, CNN called Europe’s safety net the gold standard. In 2020, CNN cited Europe’s wage support programs that included offsetting lower compensation for shorter hours during a temporary disruption. For one year, Germany paid 60% of a worker’s previous salary; France paid 75%. Also institutionalized, the European system’s health insurance was ready for the pandemic.

I drew the green arrows to highlight (what appears to be) Europe’s tradeoffs between social and military spending:

Guns For Butter

The current increase in Germany’s defense budget equaled what it needed for military pay increases. However, to make the guns and butter swap. military bases need to be converted from the sports centers and senior citizen residences that they are now used for. They needed much more to support Ukraine and to update equipment. Then though, less will go to schools and infrastructure and other social initiatives.

Our Bottom Line: Opportunity Cost

Rather than a menu of several choices, the opportunity cost of a decision is its most attractive alternative. Consequently, it is our most “expensive” sacrifice.

To use opportunity cost for decision-making, completing this table can come in handy:

My sources and more: This WSJ article inspired today’s post and provided many of its facts. From there, for European economics, I always return to the Bruegel “think tank.” Also, this PBS article comparing US and Europe’s safety nets was an ideal complement. And finally, do take a look here at #6 for Europe’s high tax rates.