European leaders face a stark choice: ramp up defense spending to reduce U.S. reliance or preserve social safety nets. The war in Iran has intensified this tension, as Europe’s weakened militaries watch U.S.-Israel strikes unfold with limited leverage. Raising military budgets risks cutting welfare programs that aging populations depend on, with France estimating it needs to spend 3.5% of GDP on defense—requiring a 10% VAT hike or wealth tax boost. Germany’s low borrowing costs allow rearmament, but Italy and Spain lack fiscal space.

The Strait of Hormuz crisis has spiked oil prices, pressuring governments to address energy costs without triggering deficits. Experts warn a fiscal crisis looms if markets react to unsustainable borrowing.