Almost 20 years ago, back in 2006, at a summit meeting In Riga, NATO members pledged to commit 2% of GDP to defense spending. This year 23 of the alliance, 32 members look set to hit that target, up from just 6 as recently as 2018. But that target now looks grossly out of date. Europe needs to spend more on defense.
Russia’s invasion of Ukraine alone would be grounds for a serious step up in defense spending. But, European policymakers are also being forced to grapple with the fact that the United States security guarantees to the continent may now be less firm. Europe, as its politicians now mostly recognize, needs to take more responsibility for its security.
The confidential talks, which began during a meeting of alliance foreign ministers last week and could yet fail to reach full agreement, envisage a short-term pledge to hit 2.5 per cent and, by 2030, a target of 3 per cent, three of the people said. The new commitments would be formally agreed at next year’s summit in the Netherlands.
3% would be an ambitious target. According to SIPRI, which tracks global defense spending, Britain and France – the continent’s leading military powers – have not devoted 3% of national income to defense since the early 1990s and mid 1980s respectively. For many other European nations one needs to go as far back as the 1960s to find those sorts of levels of spending.
The United States devoted around 3.4% of national income – on SIPRI’s definition – to defense in 2023. That amounted to around $940B in monetary terms. By contrast, the European NATO members between them spent under $400B. On a per capita basis the scale of the difference is even clearer. US defence spending, again using SIPRI data, was $2,694.2 per head. That of Britain was $1,106.4, that of France was $946.6, and that of Germany $802.3.
If Europe is serious about materializing increasing defense spending, from around 2% of GDP towards 3%, what would that mean for the wider economy? This is the question the Clark Center’s European Experts Panel turned to this week.
Firstly the experts were asked, “The likely need for increased European public investment in defense should come with substantial reallocations of public budgets at the national and EU levels”.
Weighted by confidence, 34% of respondents strongly agreed, 58% agreed and 8% were uncertain. That is just about as close to unanimity as these polls ever get. The big question underlying that, as many of the respondents noted, is the issue of how to fund such an increase. Namely, how much would be debt financed and how much paid out of taxation either by raising rates or by cutting other spending programs.
Policymakers are already discussing a €500 defense spending vehicle funded by jointly issued debt.
The problem with Europe’s existing defense spending, as the work by the Kiel Institute aptly demonstrates is not just its volume but its efficiency. Europe doesn’t spend enough bucks on defense and it gets much less bang from them.
The contrast with Russia is instructive. Europe outspends its rival but seems to get far less in return. Take artillery systems as an example:
When it comes to artillery and other systems, European production has increased but remains low. According to France’s defence ministry, at the start of the Russia Ukraine war in February 2022, two Caesar cannons left the KNDS workshops each month. By October 2023, the company was able to assemble six of them per month and intended to increase this figure to eight by the start of 2024. In the same period, delivery times were also cut in half. Meanwhile, Germany has ordered 22 KNDS Deutschland since 2022. However, it was only in June 2024 that the PzH 2000 was placed back into production at the company’s facility in Kassel, Germany, with first deliveries scheduled in mid-2025. The 12 howitzers ordered in May 2023 are expected to be delivered in 2026, which suggests continued slow production rates. We estimate that production could possibly be around 5–6 PzH 2000 per year. The real constraint with PzH 2000 production will be the availability of hulls: since PzH 2000 and Leopard 2 tanks share the same hull, competition will be high. Russia’s production of howitzers, as a reminder, currently stands at almost 40 per month.
The problem, according to the authors of the Kiel report, is partially driven by Europe defense ministries typically making small batch orders with high costs per unit. For the defense sector, the lack of visibility on the future order book holds back investment in capacity expansion.
The Clark Center’s European Panel was asked if “greater use of joint EU-level procurement of military equipment and defense research/innovation would promote substantially enhanced capacity in Europe’s defense industry”.
Weighed by confidence 84% either agreed or strongly agreed. Larger, more coordinated European ordering at least has the potential to increase capacity.
But if the panel mostly agreed that higher defense spending would require a new approach to budgeting and that more European cooperation in the sector could boost capacities, there was more uncertainty when it came to the macroeconomic impacts.
Asked whether “increased defense spending would deliver a measurable boost to economic growth in Europe over the next five years”, a strong plurality of 63% (weighted once again by confidence) was uncertain, with 32% either agreeing or strongly agreeing and 4% disagreeing.
That uncertainty is understandable. The economic impacts of increased defense spending are hard to quantify without knowing either the magnitude nor the timing of the increase. Equally important are the questions of how it will be funded (with a deficit financed increase more likely to boost economic growth in the short term) and exactly how the money will be spent. The economics of increasing the amount of imports of military equipment by 1% of GDP look different from those of ordering 1% of GDP of new equipment from domestic suppliers.
In the end though, the question is a useful reminder that not every policy can be judged in terms of its impact on GDP and the economy. Europe is going to have to increase defense spending. There may be circumstances that lead to higher economic output, but geopolitics need rather than economic factors is, rightly, guiding the policy.
