War economy: what are we talking about?

With the end of the Cold War and then the fall of the Berlin Wall, European governments and populations have embraced a pacified vision of their continent, at least in terms of armed conflicts taking place or affecting their territories. Since the 2000s, the conflicts have intensified – but are generally considered to be “elsewhere” on the planet. Terrorism is on the rise, but it is not a declaration of frontal war between states. This is not a conventional war.

Unlike the United States or China, European countries have reduced their military budgets, drastically since the late 1990s, and/or transformed their armies into reserve armies. The population is no longer trained, because this type of expenditure is considered sterile and useless. The Russian-Ukrainian conflict has undermined this security. Then, with rising tensions between Russia and NATO, Emmanuel Macron, especially the French president, made it clear that we are in a war economy. The term was widely used and published. But what exactly does it cover?

The war economy can be approached from a restrictive angle. In this case, the term refers to the ability to increase production, especially of weapons. It is precisely this concept that is being promoted in France today as it involves: “returning production capacity to the center of our concerns”: faced with the conflict initiated by Russia in Ukraine, the French defense industry entered a “war economy” for several months. The goal: to be able to provide a long-term effort if necessary for our armies or for the benefit of partners, the Ministry of Defense writes on its website.

This French announcement should be put into perspective. The effort that needs to be made is all the more important today because government spending has been reduced since the 1960s. In the period from 2013 to 2022, France has increased its military spending by 15%. but the starting point is not the same). In addition, this increase in expenditure must be put into perspective when we note that during the same period Ukraine experienced an increase of 1.661%.

Affected economic situation

The term “war economy” can also be understood in a broad sense. If in this case it is more protean, it represents some key features whose actual scope varies according to the direct involvement of the country in the war, according to the stage of preparation or engagement in the conflict and according to the limited position to more or less broad support. It is not necessarily limited to a single effort limited to the military-industrial complex, which includes, in addition to the public sector of the military, the private industrial sector (suppliers of the necessary equipment and services). In this case, the war economy can completely structure and reshape the cyclical characteristics of the economy. If involvement in the conflict is strong and directly affects the territory, economic growth declines. Public spending on the war effort is intensifying, including tax revenues, already reduced by the decline in growth. Public debt is growing.

This redistribution of production towards a war economy destabilizes the fabric of production and segments it: those deemed useful versus those deemed irrelevant to the goal pursued. Repositioning of demand in certain sectors leads to strategic reorientation of companies. Employment in turn is affected. The total volume is reduced and its composition between different sectors is revised. As far as prices are concerned, inflation is asserted under the effect of a reduction in the range of goods for everyday consumption on offer.

Foreign exchange can develop in different ways depending on the commitment of the country, the need for external resources, the generalization of conflicts and the practice of embargoes. However, as the capacity to export goods is limited, the trade balance decreases. Reflecting this degraded situation of wealth creation, present and future, weight of debt, material destruction and population expansion, especially young adults, burdening future available skills, exchange rate, currency, in general, depreciates and interest rates increase, revealing a level of uncertainty. At the same time as the subsistence economy is developing, the informal economy is also emerging. In this context, the state – a public force – strengthens its prerogatives and assumes the role of a conductor with an expanded scope. Two reasons explain this movement: the need to transfer private initiative that was more or less dormant and the desire to protect the nation.

Capital outflow restriction

The state then sets priorities, arbitrates, orders and plans the organization of target production. He redirected fiscal and monetary policy to support this war effort. Thus, what is considered essential is protected: defense sites, aid (often linked to government orders/requests) to the private military-industrial sector, the energy sector, means of communication, such as emergency medical aid structures. In order to ensure food for the population and the army, agriculture is also considered a priority. Since tax and financial resources are limited, they are oriented towards the prerogatives set by the state. Monetary policy aims to support the financing of the war effort: capital outflows are limited, the activity of banking and financial institutions is regulated to direct financing to sectors identified as strategic, the central bank is mobilized to purchase government debt securities.

Radical reorganization of the economy

Given these criteria, France today is not in a war economy in the broadest sense. This does not mean that the reorganization of the economy is not relevant. Indeed, we should be able to mobilize some of the levers attributed to the “war economy” to respond not to armed conflict, but to the colossal challenges posed by the socio-ecological crisis. Do we have time for long-term transitions? Doesn’t an emergency require a conductor who decides, plans, supervises when matters are of vital importance? So, how is the state apparatus organized and structured today to take over that function? Did not the liberal ideals that so dominated Western economies and that even spread further, together with the demilitarization of certain nations, at the same time deprive the state apparatus of these instruments and this ability to act in an extraordinary context?

The Planning Commission, which appeared in France after World War II, has disappeared. The close ties between the public actor and the private sector have weakened, whether it is about plans or leading long-term projects of industrial or regional equipment. However, they were instrumental in meeting certain challenges such as reconstruction in France. Or, for example, in the United States (a nation that – itself – has preserved its defense spending), public-private links through the military-industrial complex formed essential pillars of industrial policy in the 1980s integrated into “Star Wars”. The approach was then seen as necessary to restore the omnipotence of the United States, which had been eroded after the Iranian revolution and the hostage-taking of the United States embassy in Tehran. Therefore, beyond the discourse of state commitment, what means and structures are available to it to take on the role of conductor and support society in its capacity to cope with shocks? Shocks that will multiply with geopolitical tensions and socio-ecological crisis.

The original version of this article was published on Conversation