Defense Spending by EU Projected to Increase
Defense spending by European Union member states is projected to increase significantly in the next two years. Goldman Sachs Research estimates an annual defense spending rise of €80 billion ($84 billion) by 2027, which is about 0.5% of GDP and may modestly boost GDP growth.
Germany plans to exclude defense spending from budget controls and allocate €500 billion to infrastructure, potentially accelerating GDP growth. The economic impact will depend on the type of expenditure and its source, with a fiscal multiplier of 0.5 expected over two years.
Recent trends indicate increased spending on equipment, influenced by external supplies following the Ukraine invasion, although traditionally sourced domestically. EU manufacturers are expected to grow in arms production, potentially improving efficiency and economic impact over three years.
To fund higher defense spending, Europe might issue more debt or establish new lending facilities. National debt could be challenging due to fiscal constraints, while EU-level borrowing offers stability but involves a complex approval process. A combination of national debt, repurposed Covid borrowing programs (NGEU), and a new funding facility is anticipated to support military spending until 2026.
