(CLO) Massive increases in defense spending across Europe could achieve what governments have failed to do for years: jump-start stagnant economies, seed innovation and create new industries.
Unprecedented defense spending increase plan
Earlier this month, just hours after the US suspended military aid to Ukraine, the European Union proposed a $158 billion fund to boost military spending and support Kiev, the most ambitious defense spending package in the bloc’s post-Cold War history.
European Commission (EC) President Ursula von der Leyen hopes that the EU's total defense spending could increase by 800 billion euros this decade. Photo: EC
This 158 billion euro fund, raised through the issuance of EU debt, will focus on purchasing air and missile defence systems, artillery systems, missiles, ammunition, drones and anti-drone systems…
European Commission President Ursula von der Leyen also outlined a number of other steps the Commission is looking to take to raise hundreds of billions of euros, dubbed the “ReArm Europe” initiative. The initiative includes measures including relaxing EU financial rules to allow countries to spend more on their militaries.
The European Commission also wants to offer financial incentives to countries that shift money to defense spending. And the EU is also pushing to give its investment arm, the European Investment Bank (EIB), more power to lend to European defense companies, according to the Wall Street Journal.
Ms Von der Leyen said that if the EU's measures could increase the average military spending of member states by 1.5% of GDP, it would increase the bloc's military spending by 800 billion euros (about 870 billion USD) this decade.
Echoing Brussels, a number of European countries have also announced large increases in military spending. In Germany, incoming Chancellor Friedrich Merz is likely to propose a plan to exempt defense spending from the country’s strict self-imposed debt limits. Denmark will increase its defense budget to more than 3% of GDP over the next two years, and Britain plans to increase military spending to 2.5% of GDP by 2027.
Meanwhile, the European Commission has also outlined a plan, dubbed a new “defense white paper,” to fill gaps in the EU’s defense capabilities and support Ukraine as the US considers cutting military assistance to Europe.
According to a draft of the plan obtained by financial news company Dow Jones Newswires, the EU executive outlines a series of policies including prioritizing weapons production within the bloc, encouraging member states to cooperate on joint procurement, prioritizing investment in areas such as air and missile defense systems and drones, and easing some administrative procedures related to national defense spending.
The draft states that developing large-scale projects across Europe and joint procurement between member states will be key to addressing the capacity gap between countries. “Europe must take a giant leap forward in defence,” the draft says. “The EU and its member states must rise to this historic challenge.”
Driving economic growth
For some economists, a massive boost in defence spending could be just what the EU needs to support a stressed manufacturing sector and unlock new drivers of growth and exports.
Assembly area of the M-346 light attack and training aircraft of Leonardo Group, Italy. Photo: Leonardo SpA
Military spending affects the economy in a number of ways, sometimes counterproductive. In the short run, it can use up idle labor and capital, encouraging private firms and households to spend and invest. It can also divert public money from potentially more productive uses, pushing up borrowing costs and crowding out some private investment.
In the long run, researchers suggest that military spending can increase the efficiency of the economy as a whole. Government defense contracts can promote economies of scale and spur innovation in civilian industries, such as how the Internet was built on protocols used by the US Department of Defense.
“There is a really clear consensus that countries’ GDP will expand to match their defense spending,” said Ethan Ilzetzki, associate professor of economics at the London School of Economics.
Producing ammunition and warheads does not provide the same economic benefits as investing in machinery or infrastructure. Weapons are intended to be stored or destroyed, rather than used to speed up production or create utility. However, Associate Professor Ilzetzki estimates that increasing military spending from 2% to 3.5% of GDP could increase Europe’s economic output by 0.9% to 1.5%.
Ilzetzki also found that a temporary increase in military spending of 1% of GDP could increase long-term productivity by 0.25%. A 10% increase in government-funded military research and development (R&D) could boost private R&D by 4%, according to a 2019 study by economists Enrico Moretti, Claudia Steinwender, and John Van Reenen.
According to the 2024 European Economic Competitiveness Report by former European Central Bank President Mario Draghi, the US currently spends 12 times more on military R&D than Europe. Barclays Bank estimates that increasing the share of European countries in defense R&D to the level of the US would boost defense industry R&D by 350% to 420%.
Increased military spending can also create jobs for idle workers with the right skills. German automakers, for example, have cut tens of thousands of jobs as global demand for the country’s cars has softened.
“The kinds of jobs that are created are precisely those that are deeply in the middle of the income distribution… jobs that pay better and don’t require high levels of education,” said Associate Professor Ilzetzki.
A turning point for the European defense industry?
History shows that, on both sides of the Atlantic, war has spurred industrial development.
The American Civil War seemed to spur industrialization in the North, by stimulating investment in infrastructure, such as the first transcontinental telegraph line, and the expansion of railroads.
In Europe, the Franco-Prussian War of 1870 may have aided the nascent industrial base of the newly unified Germany, fostering large industrial conglomerates such as Krupp, BASF, and Siemens.
In the last century, President Richard Nixon's threat to withdraw US troops from the Korean Peninsula also spurred government support for military-related industries in South Korea, which nearly doubled from the late 1960s to the mid-1980s, according to research by Nathan Lane, an economist at the University of Oxford.
There is one caveat, however: To maximize the benefits of increased military spending, Europe needs to produce more equipment domestically rather than buying it from abroad.
And this is not what is happening.
According to the Stockholm International Peace Research Institute (SIPRI), arms imports into NATO member states in Europe doubled from 2020 to 2024 compared to the previous five years, and the US supplied 64% of those weapons.
A weapons display booth of the Rheinmetall Group (Germany). Photo: Meta-Defense
There are other hurdles, too. Finding enough skilled workers will be a challenge in an aging Europe. There are also limits on how much highly indebted countries like France or Italy can borrow to finance defense production.
But those reasons are unlikely to stop Europe from fulfilling its commitment to bolstering its defense capabilities in a way that reduces its dependence on the United States. One way to see that: Shares of European defense companies like Germany’s Rheinmetall and Italy’s Leonardo have soared this year, while U.S. arms giants like Lockheed Martin have slumped as investors anticipate more competition from Europe.
“With the changes coming, Europe will become a formidable military exporter,” said Professor Jacob Kirkegaard, senior fellow at the Peterson Institute for International Economics in the US.
Nguyen Khanh
Source: https://www.congluan.vn/chi-tieu-quoc-phong-dong-luc-moi-cho-nen-kinh-te-tri-tre-cua-chau-au-post338696.html
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