- Europe has reached record levels of military spending, driven by instability in Ukraine and pressure from the United States.
- The economic impact depends critically on the ability to substitute foreign imports with regional technological production.
- The increase in defense spending poses a fiscal dilemma between national security and the sustainability of social services.
It seems the time for tranquility is over. After decades enjoying what were called the peace dividends, Europe has awakened to a rather turbulent geopolitical landscape. The combination of the war in Ukraine, the rise of China, and a sometimes stormy relationship with Washington has led the Old Continent to decide shake the dust off their armaments and give a considerable boost to its military budget.
It's not just a security issue, but a true economic earthquake. We're talking about a race towards remilitarization which had not been seen since the late 1960s. While the rest of the world has grown at a moderate pace, Europe has embarked on a massive investment spree, attempting to close the security gap left by years of cuts and disinvestment in the defense sector.
Record figures and the boost from NATO
Looking at the numbers, the jump is impressive. In the most recent fiscal year, the European military bill rose by 12,6%, representing an increase of around 85.000 billion euros, reaching... record figure of more than 454.000 billion eurosTo give you an idea of the magnitude, this growth is five times higher than the global average, which remained at a modest 2,5%.
This phenomenon is not a product of chance. At the Hague summit, NATO countries agreed that security spending should aim to reach 5% of the Gross Domestic ProductThis target is divided into 3,5% for central defense and 1,5% for support expenses. Although some leaders, such as Pedro Sánchez in Spain, have called this commitment unreasonable because the country already has a Public debt is quite high and inflationary pressures, the general trend is upward.
On the European map, there are clear protagonists. Germany has become the engine of this growth, with a real increase of 18% in its military funding, reaching 95.000 billion euros. Berlin has been, essentially, responsible for a quarter of all growth of European spending in the last two years. This is in addition to the Nordic countries, such as Finland and Sweden, which have doubled their budgets compared to what they were spending just a few years ago.
The real impact on your wallet and GDP
This is where things get interesting. Does it actually add money to the economy, or is it simply a wasteful expenditure? According to Goldman Sachs analysts, the effect is positive but limited. The fiscal multiplier is estimated at 0,5, which means that for every one hundred euros investedGDP would rise by about fifty. But beware, there's a catch: this only happens if we stop buying from abroad and start manufacturing at home.
The big problem is that Europe is a regular customer of the United States, importing almost 80% of its arsenal. The Kiel Institute suggests that if a change in mindset can be achieved and American weapons replaced with high-end regional military technologyEuropean GDP could grow annually between 0,9% and 1,5%. In the specific case of Spain, it is estimated that reaching 2% of GDP in defense spending could create more than 25.000 jobs.
Winners, losers, and industrial challenges
- Productive fragmentation: Duplication of systems and lack of coordination between countries increase costs.
- External dependency: American technology remains the benchmark, hindering European autonomy.
- Fiscal sustainability: The risk that the increase in public debt will drive up interest rates on sovereign bonds.
The ReArm Europe plan aims to raise €800.000 billion over four years. To achieve this, Brussels proposes activating the escape clause of the Stability and Growth Pact, allowing member states to spend more without it being considered an excessive deficit. However, this is causing unease in the markets, as there are fears that financing rearmament will require... cut social spending or raise taxes, something the public wouldn't take very well.
The dilemma of the Welfare State
Historically, European countries have designed their economies to prioritize social services and stability. Investing so much money in the military could create a conflict of interest. While the Spanish government maintains it will not touch social spending, warnings have already been issued in the United Kingdom that... There could be adjustments in other items to balance the military accounts.
Despite everything, there is a silver lining. Arms races are often catalysts for technological innovation that ultimately benefit civilian industry. A 1% increase in GDP for defense could raise the long-term productivity by 0,25%Boosting sectors such as advanced manufacturing and technological services, provided that the industrial fabric has the capacity to absorb such an amount of investment.
The rearmament of the Old Continent presents itself as a double-edged sword: an opportunity to revive a somewhat dormant industry and reduce dependence on third parties, but with the constant risk of compromising the stability of public accounts and the social welfare model. In the end, Europe has had to resort to fear and geopolitical pressure to set in motion an economic machine that, otherwise, would remain stuck in a cycle of very poor growth.