Since the end of the Cold War, many European countries have reduced their military budgets in order to fund social and economic policies. Today, heightened geopolitical tensions, the war in Ukraine, and the announced reduction of U.S. engagement have highlighted Europe's vulnerability in terms of security and the need to put an end to the "peace dividends."

1/ Why is an increase in defence spending inevitable?

Despite the acceleration observed since Russia’s invasion of Ukraine in 2021, the European Union’s (EU) military spending remains insufficient. Estimated at $378 billion in 2024, the EU’s defence expenditures is only about one-third of that of the U.S (see Chart 1). As a percentage of GDP, the European defence budget reached 2%, below that of the United States, which stands at 3.4% of GDP. Only 15 Member States spend more than or equal to 2% of their GDP to defence, in line with 2014 NATO commitments (see Chart 2).

Europe lags behind in nearly all areas. In terms of active military manpower, European armies trail behind China, India, Russia, and the United States (see Chart 3). While equipment spending has increased rapidly since 2020, it has not yet led to a significant buildup of defence capacities in the region, which remain extremely limited. Available stocks of key weapon systems have significantly declined across key European countries over the last decades (see Chart 4). Most notably, Europe is heavily dependent on the United States for defense equipment. Between 2019 and 2023, 55% of Europe’s arms imports came from the U.S., compared to 35% during 2014–2018 (SIPRI 2024 database).

2/ Increasing military spending: how much and how?

In this context, the investment needs are considerable. If all European NATO countries aim to meet the potentially raised target of 3% of GDP by 2030, the additional required spending is estimated at over €300 billion compared to 2024 levels (see Chart 5). According to the Draghi report (September 2024), additional defence investments could reach €500 billion over the next decade to replenish the stockpiles sent to help Ukraine. The number could be much higher if the United States continues to scale back its military commitment in the continent.

Several initiatives announced in recent days represent a historic start to address urgent sovereignty issues. At the European level, the "ReArm Europe" plan aims to give Member States more flexibility, allowing them to increase military spending without worsening their public deficits (€650 billion over 4 years). It also allows the European Commission to borrow on the markets and lend to Member States (€150 billion). This notably follows the decision of Germany’s incoming chancellor, Friedrich Merz, to increase military spending by €400 billion while also boosting infrastructure investment by €400–500 billion over a 10-year horizon.

3/ What are the impacts on growth?

Such measures will have significant macroeconomic implications. We assume that those investment plans, if properly deployed, will allow Member States to raise their military spending to 3% of GDP. Our estimates suggest a positive impact of around 0.3% additional GDP growth per year in the eurozone. The multiplier effect is stronger in Spain and Italy (see Chart 6). These economies require more efforts, as their military spending relative to GDP remains below the 2% target, while Germany and France have already met the NATO goal. Furthermore, the share of spending allocated to military personnel is higher in these countries, suggesting stronger positive effects than those resulting from spending on equipment or infrastructure (1).

At the same time, higher military spending could trigger inflationary effects through a positive demand shock. This reflationary outlook would then reduce pressure on the ECB's policy rates (see email: "ECB: monetary policy is becoming significantly less restrictive").

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