We want to help Ukraine fight the Russians; become less dependent on China; re-industrialise; invest in climate policy; and cope with the demographic shock. We have not done the maths. 

What's happening in Germany right now should serve as an early warning indicator of what happens when you are trying to do too much at the same time. It is the first country to hit the hard budget constraint. This is because Germany has tighter fiscal rules than others. A ruling by the German constitutional court in November enforced those rules in the strictest possible manner. Elsewhere, the EU's own fiscal rules are also kicking back in this year. So far, governments have not taken them very seriously. But that will change for next year's budget.

The French government ran a fiscal deficit of 4.9% in 2024, with no real fiscal consolidation in sight. We could be a couple of downgrades of French government debt away from another sovereign debt crisis in the eurozone. With Giorgia Meloni, Italy has a prime minister who succeeded avoiding the radar screens of the bond market vigilantes. But her government is also not addressing the fundamental problem of the Italian economy - the lack of productivity growth. Austerity now beckons everywhere.

Some of our fiscal problems are imposed on us by outside events. Germany spends 0.5 percent of its gross domestic product on aid for Ukraine. The UK spends 0.4 percent. France and Italy spend less than 0.1 percent- almost nothing (https://www.ifw-kiel.de/topics/war-against-ukraine/ukraine-support-tracker/). This is what happens when you hit the budget constraint. You can wrap yourself in a Ukrainian flag. But you cannot help. 

On top of that, there is a consensus among the European Nato members that they need to spend more on defence. Germany has been struggling to meet the Nato defence spending target of 2 percent of GDP - prompting Donald Trump to make the threat that he would not protect Europe from an attack by Russia. During the early phase of the Cold War - between 1954 and 1969, Germany spent 4.7 per cent on defence. (figures from warwick.ac.uk/fac/soc/economics/staff/mharrison/war_and_economy/13_cold_war_costs.pdf). Defence spending in most of the advanced economies fell in the 1970s and 1980s to approximately 3-4 percent (https://www.imf.org/external/pubs/ft/fandd/2021/06/military-spending-in-the-post-pandemic-era-clements-gupta-khamidova.htm). By the last decade, it was down to below 2 percent on average. In view of present and future geopolitical conflicts, defence spending will have to rise again - possibly back towards where it was during the Cold War.

Because central banks are finding it harder to gobble up government debt without creating inflation, it will be up to governments to set spending priorities. The big choice of Joe Biden's administration was the Inflation Reduction Act, probably the single most successful example of an industrial policy in history. After decades of stagnation, US industrial investment in the US exploded. But it came at Europe's expense. China is also flooding the world markets with subsidised exports. The result is de-industrialisation in Europe.

On top of this comes another shock: the retirement of the baby boomers, and the rising costs to subsidise pensions and to pay for old-age care. Everyone saw that coming, but few governments have made the necessary fiscal provisions. The British economist Charles Goodhart sees this as a driver for another financial crisis. 

The west is confronted with more or less foreseeable fiscal shocks - on defence spending, on ageing populations, global trade and subsidies wars - and on climate change. Defence spending correlates strongly with the perceived threat. The cost of ageing populations is also, to a large extent, a fixed cost. You cannot deny health care to those who need it. 

So what gives?

In Germany, we can already see where this is going. The German government is starting to roll back on climate spending and public sector investments. The Labour Party's decision to roll back on their climate spending plan is not as isolated as it may appear. Whenever countries implement austerity, it is investment that goes first. 

Green policies are an important part of investment. Germany's opposition, the CDU/CSU, has already started breaking out of the Green policy consensus in the EU by opposing key planks of the EU and the German Green policy agenda, including the EU's nature restoration law and Germany's own domestic heating bill. 

Until a few years ago, Germany basked in the delusion that it would become a global leader in green technologies. We now know that this is not so. China is the champion of the car battery and solar technology. The US Inflation Reduction Act is also luring green producers away from Europe.

Germany has even started to push back against the new value-based foreign policy, which its government has until recently advocated. Last week, the German government withheld support for one of the most important EU laws a under the current European Commission - a European supply chain law to force companies to ensure that none of their suppliers violate labour international standards, for example on slave labour or child labour. Germany already operates a much milder version of that law - and has discovered that even this version of the law exerts a high compliance cost on companies.

Germany is the canary in the coalmine - the country where the various fiscal collisions kicked in early. But Germany is not unique. 

European countries may choose different responses. Some may try to raise taxes. Some may try to get away with less defence spending than others. Most will reduce Green investments. One way or the other, austerity is coming to a country near you.