At the same time, the current situation is inevitably such that the European defense sector urgently needs additional funds, Koppel added in an interview given to ERR which follows.

In 1939, no one in Finland questioned where the money for weapons and ammunition would come from, or whether it would be forthcoming. It was a simple necessity to neutralize the Russian forces who crossed the border. In recent decades, the need for the printing of money has been highly controversial, most recently during the Covid crisis. And now, for the first time in decades, there is a situation where additional funds are urgently needed. Do you agree?

In hindsight, one can always make different judgments about whether additional funds were needed to resolve past crises or not.

Simply put, if countries had acted with fiscal discipline, they would likely find it much easier to allocate additional funds for defense and also to raise extra money from the markets. Perhaps the printing of more money wouldn't even have been necessary, but that would be an ideal situation.

Right now, the pattern looks very much like one of increased spending and rising deficits. But markets are seeing growing additional risks; they are seeing that this might generate inflation.

At the same time, these are understandable costs, which must be incurred. However, according to the markets, we will all pay for it via rising inflation.

At Thursday's emergency EU summit, the decision was made to relax the debt criteria for member states. Countries will be allowed to borrow independently, although some southern member states may not even take advantage of this opportunity, as they do not see the Russian threat as a major concern. However, some, including the cornerstone country, Germany, will likely use this option. How quickly will this increased spending reach inflation?

It is very difficult to say because if we look at the last inflation wave we had here, it actually took quite some time to artificially keep interest rates very low.
For quite some time, we engaged in so-called money printing before price increases reached consumer prices.

It reached asset prices quite quickly, for example, in stocks and real estate, but it took significantly longer to show up in consumer prices than many very smart people expected.

But if I look at how the markets have reacted to Germany's decision to make its spending dramatically more liberal, bond yields have risen sharply.

Additional money is being injected into the system that wouldn't otherwise be there, increasing overall demand and causing inflation.

Southern Europe is already in an unpleasant and risky situation.

The risks to member states are already high, while now additional risks are being taken on, injecting demand into the system that wouldn't otherwise exist. All of this tends to exert inflationary pressures.

Coincidentally enough, Europe's largest debtors are also the smallest spenders on defense expenditures, and these are all located on the Mediterranean. These countries would not up their defense spending at all if it were not for pressure from other countries, especially the U.S. ...

In fact, the problems facing these countries are also deepening. Germany has been fundamentally diligent in the context of its debt burden, while Italy has not been fundamentally diligent, yet both are on the same currency.

If risks and inflation are seen to be rising in Germany, it can actually be expected for the entire euro area. Southern Europeans may not be interested in boosting defense spending or taking on debt, but if borrowing costs rise across the entire euro area, then the borrowing costs for any problematic countries will also increase.

These could reach levels that are absolutely no longer comfortable for them.
This brings us to the point where, in some way, the European Central Bank must intervene again. The central bank must help create conditions to prevent borrowing costs from rising too high for problematic countries. In other words, in layperson's terms, we are once again heading towards money printing.

The problem arises when, at some point, discussions start about even more joint borrowing. On the one hand, joint debt issuing is understandable because the Russian threat is obvious.

However, we must still mention somewhere that this is a moral hazard. Because for those Southern European players who have not had any particular fiscal discipline, their motivation to behave even slightly more responsibly decreases even further.

So if you were the Estonian finance minister, would you say a definite no to joint borrowing?

From a purely economic standpoint, I would of course say no. This tends to lead to a situation where those who have behaved responsibly have to cover the cost of the lifestyle of those whose behavior has been, literally, carefree and reckless.

However, since we here are dealing with a serious situation — defense — perhaps people cannot express themselves in such a playful manner.

Right now, there are objective circumstances that may force us to look at things somewhat differently.

I wouldn't rule out that if joint borrowing is under consideration, Germany might think: Look, why do we have to cover the costs of Southern Europeans' ever-lasting spending spree?

Enormous sums of extra money have been pumped into Russia's economy to keep up its war machine, while a large segment of Russian society is still enjoying a rise in living standards due to these inflows. Could something similar happen in Europe?

I would not compare Europe to Russia in any way. Russia is a classically, thoroughly corrupt commodity exporter, differing from smaller thoroughly corrupt commodity exporters only in that it is large, and possesses nuclear weapons.

The European economy has its problems — for instance, we have essentially drained away our competitiveness in today's world — but it is still more complex, and structurally speaking in better health.

As for injecting additional capital into the system, we already have precedents, ranging from the Greek debt crisis to the pandemic.

Only this time, these processes may perhaps move faster.

Is there any equilibrium point in a situation where the choice is between geopolitical risks and printing money?

It is not directly viable to answer a question like that. The processes currently underway may end up in a situation where, at some point, printing money becomes required; that is extremely likely.

But if we consider the darkest scenarios, which is easier to endure — rising prices or falling missiles? Well, rising prices are easier to endure.

In recent months, we have come to admit to ourselves that there is a lot of naivety with the green transition, while Europe's competitiveness has declined. We are looking for a new boost to restart the economy. Does loosening up the debt rules allow us to continue as before?

Certainly not. The intentions behind green policies are fundamentally correct, but the way they have been pursued so far strongly gives the impression that it was seen as a type "free money" and the luxurious behavior for the good times, when it was possible to afford it.

Moreover, if the world's largest economy (i.e., the U.S.) determines that green issues are not a priority as such, and this largest economy has already advanced far beyond Europe in competitiveness, then there is no way around it.

The green issues need to move downward on the list of priorities, simply because we urgently need to improve defense capabilities.

But this requires additional funding.

With all this, we must ensure that the economy functions well enough to avoid any overall impoverishment.

If overall impoverishment happens, the external pressures will be compounded by an unpleasant and perhaps unbearable level of internal tensions.

And a mess like that is something we surely do not need.

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