Exchanging Our Social Stability for a Military Shield? - Pietiek 0 10

Although the necessity for urgent defense strengthening is beyond doubt, the measures for its implementation reveal a number of critically weak points that could lead to a serious internal 'fiscal failure' before the end of the decade, writes Uldis Osis on the Pietiek.com portal.

Firstly, the government has already fallen into the trap of the illusion of the 'exceptional clause.' This refers to the record funding of the defense budget amounting to 2.16 billion euros, based on the so-called 'national exceptional clause' of the EU. This mechanism allows Latvia to borrow significant funds, bypassing traditional budget deficit limits. This means that now there is again 'more money than ever...' - only this time even more.

Friends, however, it is important to understand that this is a temporary solution based on debt, not a sustainable funding model. By relying on an 8.4 billion euro loan from the European Security Action Fund, Latvia is effectively accumulating a huge debt at a time when global interest rates are still fluctuating. If the growth of the European economy continues to stagnate, this will ultimately lead to high debt servicing costs, which will inevitably trigger severe austerity across all sectors (or will it finally trigger?!).

Secondly, discussions about retaining 30% of the aforementioned military expenditures for local businesses are certainly a noble goal. However, there is currently a lack of industrial reality for this. Latvia's defense industrial base, although rapidly growing in the drone sector, is still far from being able to effectively absorb such a huge influx of capital in a short time. These 'phantom funds,' which are essentially intended for local innovations, risk being lost in administrative expenses or inefficient enterprises, as creating new innovations and bringing them to fruition in technologies and finished products takes much longer.

Thirdly, the government's plan to increase the local capital market from 1% to 9% of GDP by 2027 may be the most risky stage of the strategy. This growth target of 900% is historically unprecedented and is based on a level of investor confidence that will be difficult to maintain in a country on the 'front line.'

Currently, Latvia is winning in the 'race of expenditures,' but losing in the 'race of sustainability.' If the country does not transition from the familiar and so far comfortable model of borrowing and spending to a truly innovation-based defense economy, the year 2026 may be remembered not as the year Latvia strengthened its security, but as the year it mortgaged its social stability in exchange for a military shield that it cannot afford to maintain in the long term.