Study: Higher defense spending can boost growth in Europe

Reuters Study: Higher defense spending can boost growth in Europe Article by Reuters • 1 week • 2 minutes reading time Berlin (Reuters) - According to a study, higher defense spending can boost economic growth in Europe and strengthen the industrial location. The gross domestic product (GDP) could increase by 0.9 to 1.5 percent per year, according to a study published on Thursday by the Kiel Institute for the World Economy (IfW). The prerequisite for this is that the EU states increase their military spending in the corresponding year from the NATO target of 2.0 to 3.5 percent of GDP and also switch from predominantly US to domestic high-tech weapons. "If the European governments do it right, they can keep the costs of military armament within limits," said study author Ethan Ilzetzki. "This means that Europe can decide on its military spending in the light of its regional security priorities, without being distracted by fear of economic catastrophe." The debate about Europe's ability to defend itself has gained urgency since the start of Russia's war of aggression against Ukraine around three years ago. Many countries have since increased their military budgets. Nevertheless, EU spending last year was reportedly just below the NATO target of two percent. The study contradicts the widespread assumption that higher military spending presents governments with a choice: "guns or butter". Additional money, labor and raw materials for military purposes are not traditionally exclusively at the expense of private consumption. However, economic growth could be lower or even negative if additional defense spending is financed from the outset by higher taxes. Europe's governments should therefore take on more debt to finance temporary increases in spending or the transition to permanently higher budgets. Above all, governments should ensure that a larger part of their military spending stays in Europe. Currently, around 80 percent of their procurement comes from companies outside the European Union. But only domestic production can generate significant economic activity. "If Europe could develop the next generation of defense technology and other weapons locally instead of buying them from the US, the economic impact of additional defense spending could go far beyond short-term fiscal multiplier effects and boost growth in the medium term," said IfW President Moritz Schularick. Increasing European defense spending from just under two to 3.5 percent of GDP would currently cost around 300 billion euros per year. "But the study suggests that this amount could generate a similarly high level of additional private economic activity if it were invested specifically in expanding Europe's military capabilities," said Schularick.