Apocalypse soon? Britain ups its defence

The Economist.

Hello and welcome to The Intelligence from The Economist. I'm Rosie Bloor.

And I'm Jason Palmer. Every weekday, we provide a fresh perspective on the events shaping your world.

Government bonds are typically seen as a safe haven. But in recent months, yields on long-term American Treasuries have been so high that some investors are reassessing the risks of lending to Uncle Sam. Our correspondent explains all.

And a weirdly high number of French adults are finding God, the Catholic kind anyway. We ask why the number of baptisms is going up, discovering that part of the answer can be found online.

But first— A step change in the threats we face demands a step change in British defence. That's the claim made in the new 140-page Strategic Defence Review, a document that is supposed to make Britain safer.

"We are moving to warfighting readiness as the central purpose of our armed forces." As Keir Starmer said yesterday, the risks are clear.

Within a few years, Russia could have the capability to attack NATO, even as America shifts its focus and troops from the continent. European governments are rushing to develop a new strategy. And in Britain, security is one thing that even warring political parties agree on. They say that British defence is broken.

When we are being directly threatened by states with advanced military forces, the most effective way to deter them is to be ready. And frankly, to show them that we're ready. To deliver peace through strength.

The problem is that in a stretched economy, big promises require big trade-offs. And it's not yet clear that Britain is willing to make them.

This has ended up being a bold review. It's been a year in the making.

Daniel Franklin is a senior editor on the Britain desk at The Economist.

The central conclusion is pretty simple, that British forces must move decisively to warfighting readiness. The question that hangs over it, however, is whether the ambitions will be matched by the money.

So a bold plan, Daniel. What's actually in it?

Well, let's split it up into a couple of areas. First of all, there's the hardware.

We will now deliver up to 12 attack submarines protecting Britain's waters, scaling up the industrial base in Barrow.

The commitment to spend lots of money on, for example, up to a dozen future attack submarines compared with a previous cap of 7. There'll be new jets, the F-35As that the RAF might want to get and could potentially allow Britain to carry air-delivered nuclear weapons. And on the question of munitions, money to invest in new factories, to invest in new high-end missiles.

We will build thousands of new long-range weapons in the United Kingdom. To boost European deterrence.

So all this potentially over a number of years could end up making British armed forces considerably more lethal than they have been up to now. That's the military hardware. There's also reforms to the way that Britain will fight, to the organization of the armed forces.

We will create a hybrid Royal Navy blending drones with warships, submarines, and aircraft to patrol the North Atlantic and beyond.

Very much drawing on the lessons that have been learned in recent conflicts, particularly in Ukraine, where drone warfare has been of primary importance and where the flexibility and integration of forces has shown to be a key capability.

Daniel, one of the government's taglines was that a step change in threat needs a step change in defense. Is this a step change? How much of this is actually new?

Well, there's quite a big change, but it's not quite as new in some cases as meets the eye. So it looks as if the government is counting some of the commitments that were previously in the works. So for example, only about half of the £4 billion on autonomous systems is truly new money. The other question is whether it's not just new, but whether it's enough. So the estimates of how much money would be needed to replenish rapidly depleting munitions in a hot conflict is considerably greater than is allowed for in this review. And I think all that leads into the real question that hangs over this review, which is whether the overall sums of money are going to be enough to do what these plans lay out. Now, the government increased the amount of spending on defense as a share of GDP this past year from 2.3% 2.5%. It did that by taking an axe to overseas aid. But from here on, it gets harder. There's the ambition to move to 3%, but there isn't a firm commitment. 3% of GDP is perhaps the bare minimum that might be needed to achieve a lot of these goals, and even that may not be enough. A NATO summit later this month, there's going to be talk probably of 3.5% commitments for NATO members. So behind all these grand plans for military procurement, military kit, military reorganization is the huge question of the money that will actually be behind it.

And the other question, Daniel, is, is this enough to repel Putin? This is the whole point, right?

Yes, Putin and potentially other future threats. And the warnings coming out of certain military quarters are that Russia could be ready within rather few years to go beyond Ukraine and launch further attacks on European countries. And the point is to be ready for that and to send a message to Russia and any other potential aggressors that that will be deterred. And a lot of this spending is pushed into the future, so the credibility of those plans is going to be under, I think, a lot of scrutiny in the coming weeks and months. As spending plans are laid out, not just for defense but for the broader economy. There's nothing you could argue more important than defense, but there's also lots and lots of competing demands on the budget. So as the government wrestles with these competing priorities, the question will be whether the very valid aspirations for defense stand up in the face of what will seem equally pressing demands from elsewhere.

So, Daniel, do you think this review can deliver? Is it all going to happen?

That very much depends on the spending decisions that are taken in future, and we're going to see that hotly debated in the not-too-distant future because the show moves on to defense ministers meeting in Brussels and then a NATO summit in The Hague later on. And they're very much on everyone's minds, the demands from America that Europe do more for its own defense. There'll be big figures of increases in defense spending as aspirations for NATO members, and even the amounts envisaged in the review are not firm commitments yet. So that is really going to be the heart of the matter. How much money is the British government going to put behind these ambitious, potentially transformative plans for national defense?

Daniel, thank you so much for talking to me.

Thank you, Rosie.

Yields on America's 30-year government debt have been hovering near 5% for weeks now. That had been a totemic figure for the bond market for a while.

Josh Roberts is our capital markets correspondent.

Most people thought that long-term borrowing costs would never go much higher because demand would be so great at that level that big institutions would snap them up. But after Donald Trump's plans to raise government borrowing by trillions over the coming years, it's no wonder that investors are now reassessing the risks of lending to Uncle Sam.

So Josh, where is American borrowing now at?

America's government has been borrowing a lot recently, $2 trillion over the past year, and that's before the coming budget bill lowers tax revenues. That figure is so vast, it's quite hard to get your head around. It amounts to about 7% of America's annual economic output, its GDP. And one way to think of it is that America has never borrowed this much per year outside of wars, recessions, deep financial crises. And at the moment, we are not in one of those situations. The economy is doing quite well. Now, with the government borrowing this much money, even at the best of times, investors would be reassessing how much they should charge to lend, bond yields in other words. But actually they have other worries too at the moment. They're starting to question the safe haven status of American treasuries.

So Josh, give me some context here. Why are government bonds generally seen as a safe haven and why is that now under threat?

Well, lending to the government of a rich country ought to be a very safe bet. They can mint their own currency and they can collect tax revenues in order to pay back the debt and meet the interest costs. So there really should be no reason for them to default on the debt. That's why government debt is seen as a safe haven. However, when government spending is very high, as it is at the moment, what the government is doing by spending more than it taxes is raising demand for goods and services, and that can push prices up. It can cause inflation. If it injects a dose of inflation into the economy, it's not just that the government is borrowing a lot and testing investors' appetite in that way. It's that inflation starts to erode the value of the debt it's previously issued, which makes it less advantageous for investors to hold it. It makes them less willing to lend to the government. And that can lead to a self-fulfilling spiral where borrowing costs go up and up. And that's the sort of thing that investors get worried about when government deficits are high, as they are at the moment. And by the way, this isn't just a problem in America. Governments across much of the rich world are spending more than they're taxing to a degree that they have not usually done outside of recessions before.

So how much of what's currently happening in other countries is down to uncertainty about US policy with tariffs?

Well, a lot of it is down to what's happening in America. We're seeing government borrowing costs rise across much of the rich world, so Britain, in Japan, in Germany in recent weeks. And part of this is just because America's economy is so big. If its government is borrowing a large share of its economic output, that tilts the demand for savings and investment globally, and it pushes up the cost of capital everywhere. But also we're seeing a significant amount of uncertainty emanating from America that affects other countries as well. Essentially, the whipsawing of tariffs being arbitrarily determined one minute, delayed the next minute, challenged in the courts the next minute. It means that investors really don't know where American trade policy is going to end up at the moment. They don't know to what extent America is isolating itself, to what extent it will pull out of the world trading order. They don't know to what extent America will remain the linchpin of the financial system as a result. And that means that uncertainty around the whole world is very high because we don't know the extent to which growth and inflation are going to be hit everywhere. And those things are key for determining government bond pricing.

Given that that uncertainty isn't going to go away, what might happen next?

Well, uncertainty is the enemy of bond traders because they want to know that they're going to get the payments that they were promised and that those payments are still going to be worth as much as they were because inflation hasn't eroded them away. So as long as policy uncertainty remains as high as it is at the moment, it's difficult to see long-term borrowing costs coming down much. And we are actually seeing other trends which push them up as well. For example, German long-term government borrowing costs rose particularly sharply after Germany announced plans to spend far more on defence and infrastructure. That's not actually necessarily a bad thing. The reason government borrowing costs for them rose was because all this spending is likely to reboot Germany's economy and make it grow more quickly, which tends to push government bond yields up as well.

So what does all of this mean in practical terms for governments and for us as consumers?

Well, if borrowing costs are going up, that means that governments are having to pay more interest as they borrow more and more. Eventually, that can't keep going. Eventually, that needs to mean that government deficits come down. They start to either tax more, spend less, or both. Otherwise, a growing share of their budget ends up going on interest costs rather than public services. Something we're also seeing happening at the moment is that governments are being tempted to switch from issuing long-term bonds, whose borrowing costs have gone up the most, to issuing shorter-term bonds. When you borrow more shorter-term debt, you might pay less for it at first, but if interest rates subsequently rise, you end up rolling that debt over more frequently and absorbing the cost of interest rates going up more frequently. For example, if governments had borrowed a lot more longer terms during the 2010s when rates were much lower, their interest bills would be lower now. So one of the things that higher long-term borrowing costs does is incentivize governments to take further risks down the line.

So Josh, are there any safe havens now?

I don't wanna seem like I'm catastrophizing here. Lending to rich governments is still pretty much the safest form of lending any investor can do. And actually, if what's going on now is investors are reconsidering having all their eggs in one basket with US Treasuries and thinking, oh, maybe a more diversified portfolio of government debt that includes more European countries, for example, might be a good idea. They probably are building safe, diversified portfolios. It's very unlikely that things will go wrong for several rich governments at once. What is a bit more worrying is that what has happened over the past few weeks isn't an isolated event. Several times over the past couple of years, we've had short spells where bond traders suddenly get very jittery, where they drive yields up sharply. For a couple of weeks, which means bond prices fall. And then after a while, everybody relaxes, things go back to normal. The freakout, as it were, doesn't continue. But each time that happens, it raises the risk that something in the financial system breaks when investors are taking losses from these bonds falling in price. And each time it calms down again, you hope it's not going to happen again. But when it happens over and over again, that just raises the probability of something going wrong eventually.

Josh, thank you so much. Great to talk to you.

Thanks for having me, Rosie.

Brother Paul Adrian is not just any Catholic He's an influencer priest. He's got half a million YouTube followers. And he's busy. Over Easter, he says he received on average 5 requests every single day for baptisms. He's one part of a surprising trend that's tricky to understand: why so many French adults are having them.

Since 1905, France has by law been a secular state. And that means that there is freedom of religious practice in private spaces, but religious neutrality neutrality for the state.

Sophie Petter is The Economist's Paris bureau chief.

It's banned, for example, to display any religious symbols in public schools, in town halls, or in any official building. And even in the private sphere, less than 5% of the French attend a religious service on a weekly basis, and that's compared with 20% in Italy or 36% in devout Poland. Yet it's in France, of all places, where we are now seeing an unexpected surge in Catholic fervor.

By which you mean a surge specifically in baptisms?

Exactly. This Easter, just over 10,000 adults were baptized. That's a jump of 46% on last year, and it's nearly double the number in 2023. In fact, this year's figure was the highest since France's Conference of Bishops began monitoring such things 20 years ago. And it's not just older adults. The number of teenagers baptized this Easter was more than double the figure in 2023 and 10 times that in 2019. Now, of course, France isn't the only European country to report an upsurge in adult baptisms. Austria and Belgium this year also reported a big increase, but to a far lower number. It's the scale and the context that make the trend in France so arresting.

So what's going on here? Why, why are so many French people finding, well, the Catholic God?

Well, one possible explanation is the effects of COVID-19. Lockdowns were periods of solitude and loneliness and gave people lots of opportunity to think about perhaps the need for meaning in their lives. Some people took up yoga or turned to mindfulness, and others seem to have taken to God. If you look at the time it takes for an adult to prepare for baptism in France in the Catholic Church, that's 2 years. It corresponds exactly to the amount of time between the end of confinement and the beginning of this new season. One person who grew up in an atheist family in France, she told me that COVID was indeed the trigger that moved her to begin the path to baptism.

But this can't just be a sort of lagging pandemic effect. There's gotta be more to it than that.

Well, it's possibly something to do with the amount of time people spend on screens, working from home. Is it that people are looking for a non-virtual community and that the church provides that? It was interesting that nearly a quarter of the adults baptized at Easter in France last year were students and coming from very different economic backgrounds. There was a large proportion of them who were women. 3/5 of them were women. And strikingly, nearly a quarter came from a non-religious background. So this is not because they have grown up with any form of faith at all. They're clearly turning to it for the first time.

But what's your view on why we're talking about this happening in France? I mean, lots of other countries had lockdowns, have loneliness, have the search for meaning in lives?

Well, it is a puzzle, in particular because the Catholic Church in France, as in other countries, has been badly damaged by all sorts of abuse scandals, and the church has had trouble recruiting priests. It's often the case that churches on Sunday are empty. One chaplain I interviewed suggested that it could be the effect of the fire that gutted Notre Dame Cathedral back in 2019. France followed very carefully over the years, the extraordinary reconstruction of the cathedral. And he suggested that it was a form of resurrection and an invitation to faith. Others come up with other explanations, a link to perhaps Catholic nationalism in political life, or even a pushback against France's secular culture.

So whatever the cause though, Sophie, where does it end? Where does it top out?

Well, it's interesting because France doesn't share the televangelist culture that you see in America. But there is a growing number of Catholic influencers like Frère Paul-Adrien who are present online and on TikTok and other apps and seem to be attracting a growing following among young people. What's interesting for the Catholic Church is how to manage the tension between the new look online influencers on TikTok and other social media platforms and the more traditional and staid hierarchy of the Catholic Church.

Sophie, thanks as ever for your time.

It's always a pleasure talking to Jason.

Thank you.

That's all for this episode of The Intelligence. We'll see you back here tomorrow.