"A massive military buildup across Europe could achieve what governments have failed to do in years: Jump-start a sluggish economy, seed new innovations and create new industries.
Countries from the U.K. to Germany and Denmark have announced vast increases in military spending to counter Russia's threats as the U.S. warns Europe not to take America's protection for granted.
For some economists, this could be just what the region needs to support an under-pressure manufacturing sector and unlock new engines for growth and exports.
There are numerous hurdles along the way, including a skills shortage, and the rewards might be unevenly distributed, they warn.
Rearmament could mean sacrifices in some areas as the peace dividend Europe has enjoyed since the end of the Cold War is unwound.
Yet recent economic research suggests the benefits of the dividend, which was used primarily to fund a steady expansion in the welfare state, might have been exaggerated.
The European Commission, the European Union's executive arm, this month unveiled a "ReArm Europe" initiative aimed at mobilizing about 800 billion euros, roughly $868 billion, for military spending.
In Germany, likely future Chancellor Friedrich Merz has floated plans to exempt such spending from the country's strict self-imposed debt limits. Denmark has said it would increase its defense budget to more than 3% of gross domestic product over the next two years, while the U.K. unveiled plans to boost military spending to 2.5% of GDP by 2027.
The investments, European Commission President Ursula von der Leyen said Sunday, could "trigger a powerful tailwind for important industries." Artificial intelligence, quantum computing, secure communication, satellite networks, autonomous vehicles and robotics all stand to benefit, she said.
Military spending affects the economy in multiple, sometimes contradictory ways. In the short term, it can employ idle workers and capital, and encourage private companies and households to spend and invest.
It also can divert state money from potentially more productive uses, push up borrowing costs and crowd out some private investment.
Longer-term, research suggests, military expenditure can increase the efficiency of the broader economy. Government defense contracts can foster economies of scale and spur innovations in civilian industries, economists say. The internet was built on protocols used in the U.S. Defense Department. (The internet is used by everybody from the very start. Ursula von der Leyen will not create the internet. The laurels of this are taken by previous American vice-president Al Gore (K.)).
"The consensus is really clear that [gross domestic product] does expand in order to accommodate defense buildups. It's not a fixed pie," said Ethan Ilzetzki, associate economics professor at the London School of Economics.
To be sure, producing munitions and warheads doesn't have the same economic benefit as investing in factory machinery or infrastructure. Weapons are intended to be stored or destroyed, rather than used to speed production or shorten journey times.
Yet, Ilzetzki estimates that increasing European military spending from 2% to 3.5% of GDP could raise the continent's economic output by 0.9% to 1.5%, based on his broad survey of the economic literature published for the Kiel Institute for the World Economy.
Conversely, falling military spending can coincide with slower growth. Annual GDP growth in the U.S. declined from about 4% in the 1960s to less than 3% recently as military spending slumped from 8% of GDP to less than 4%, Ilzetzki noted. In the EU, economic growth has halved since the 1960s as military spending declined by two-thirds.
One reason is that public investment in cutting-edge research during wartime or military buildups is lost in peacetime. A temporary increase in military spending of 1% of GDP could boost long-term productivity by 0.25%, Ilzetzki found. A 10% increase in government-funded military research and development can bolster private R&D by more than 4%, according to a 2019 study by economists Enrico Moretti, Claudia Steinwender and John Van Reenen.
"Perhaps we can find ways [to support cutting-edge research] that don't necessitate military expenditure, but so far there are few examples of that," Ilzetzki said. "It is difficult to imagine nuclear power emerging so early without World War II R&D or space-exploration technologies in the 1960s without NASA."
America's military R&D spending is 12 times the size of Europe's, according to a 2024 report on Europe's economic competitiveness by former European Central Bank President Mario Draghi. For the eurozone, increasing the ratio of government defense R&D to GDP to U.S. levels would result in a 350% to 420% boost to defense industry R&D, shows a Barclays's estimate.
Military spending also can provide jobs for idled workers with the right skills. German carmakers, for instance, have cut tens of thousands of jobs as global demand for the country's cars has softened. "The types of jobs created are exactly those jobs hollowed out in the middle of the income distribution . . . higher-paid jobs that don't require large amounts of education," Ilzetzki said.
There is a caveat: To maximize the benefits of higher military spending, Europe must build more equipment domestically. Other hurdles include finding enough skilled workers in an aging Europe, and a limit to how much highly indebted nations like France or Italy can borrow to finance their buildups.” [1]
1. World News: Europe Looks to Military to Boost Economy --- A planned defense buildup could create new industries, despite hurdles. Fairless, Tom. Wall Street Journal, Eastern edition; New York, N.Y.. 14 Mar 2025: A7.
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