Can Tanks Rescue Growth? Europe's Defence-Spending Gamble

Europe has tied its economic fate to rearmament for the first time since the Cold War. European Defence Agency figures (eda.europa.eu) frame the scale: the 27 member states spent 418 billion euros on defence in 2025, up 20% in a single year. The 2026 projection reaches 454 billion euros, or 2.4% of gross domestic product. The climb that began with Russia's 2022 invasion of Ukraine is moving at a pace no living generation of European finance ministers has managed.

The leap looks extraordinary only against the slope that preceded it. In the early 1980s, European NATO members devoted roughly 3% of national income to defence; by 2020 the share had slid to 1.6%. That was the peace dividend in action: with no visible threat, every finance minister trimmed tank battalions to fund hospitals and schools. Nobody objected, because the cost was theoretical. In February 2022 the theoretical threat turned into war on the union's eastern edge.

The Hague decision: 5% by 2035

In June 2025 NATO leaders in The Hague formalised the turn. According to NATO, the alliance committed to spending 3.5% of GDP on core defence plus 1.5% on connected resilience — infrastructure, networks and civil preparedness — by 2035. The combined 5% roughly matches what many European states spend on their entire education systems. The trajectory will be reviewed in 2029, so the door stays ajar.

Not everyone is sprinting. Euronews reports that Poland topped the alliance in 2025 at 4.48% of GDP — outspending even the United States. Lithuania followed at 4%, Latvia at 3.73% and Estonia at 3.38%; Lithuania and Estonia aim above 5% from 2026. The map speaks plainly: proximity to Russia opens wallets.

The big economies move cautiously. According to Politico, France's president promised a 64 billion euro annual defence budget for 2027, yet with a deficit above 5% and debt past 110%, Paris still has no credible timetable. Germany amended its constitutional debt brake : defence outlays above 1% of GDP now sit outside the rule. According to the Bundesbank, the reform opens hundreds of billions in additional investment room through 2030. Eighteen member states also triggered the escape clause, permitting extra defence outlays of up to 1.5% of GDP above 2021 levels.

Can tanks grow the economy?

Behind the spending appetite lies two decades of frustration. Europe has endured weak growth, a productivity gap with America that refuses to close, and youth unemployment near 15%. Eurostat figures (ec.europa.eu) confirm the picture: euro-area youth joblessness hovered around 14.8 to 15% in autumn 2025. Growth is wanted from any source — and the military has entered the stage.

The theory is called military Keynesianism , and its logic is deceptively simple. Public money keeps circulating no matter who receives it: a euro spent on artillery shells becomes a factory wage, then a supermarket receipt, then another wage. Economists call this the multiplier effect , and the mechanism does not distinguish between building schools and building submarines. In an economy with idle factories and high unemployment, such a demand injection works at its best. In the short run, the case is hard to dismiss.

Over a ten-to-twenty-year horizon, everything hinges on who gets the money. Some giants are purely military: America's Huntington Ingalls sells 95% to governments and builds carriers and destroyers. Europe's champions straddle both worlds: Dassault builds the Rafale fighter and business jets from one engineering pool; Airbus gathers airliners, military transports, helicopters and satellites under one roof. Thales, Leonardo, Rheinmetall and Saab play similar double games. The theory: money flowing to these dual-use firms reopens production lines, repairs supply networks and trains the welders, technicians and systems engineers the continent lacks. When calm returns, that capacity could pivot civilian. The current drift runs opposite: Rheinmetall is converting civilian car plants to defence output — a bet that military demand endures.

Why the multiplier stays below one

Evidence trims the theory. ECB analysis (ecb.europa.eu) finds short-run defence multipliers mostly below one, with long-run growth effects muted outside research spending. According to the IMF (imf.org), the average multiplier sits near one but shrinks in import-dependent countries through leakage. The culprit is composition: about half of euro-area military budgets pays personnel, roughly 70% including maintenance and fuel goes to consumption, while research — the source of hoped-for spillovers — stays near 5%. At that mix the ten-year cumulative multiplier drops to 0.2: every 5 euros spent creates 1 euro of extra output over a decade. Directed toward investment and research, the multiplier can approach one. Then comes leakage: Oxford Economics figures cited by Euronews put roughly 40% of equipment spending outside the union — European taxpayers' money turning into production in Texas and Georgia. The EDA still reports 68% of 2025 outlays staying with European industry, while joint procurement languishes at 24 to 25%.

Then there is opportunity cost — economics' oldest tale: the broken-window fallacy. A boy smashes a shop window, the glazier earns money, and it looks like economic activity; yet the shopkeeper would have spent the same sum on a suit or a dinner. No wealth is created, money merely moves. A billion-euro warship and a billion-euro bridge look identical in national accounts on spending day; the gap opens over years. The bridge shortens commutes, cheapens freight and lifts firms on both banks every day it stands. The ship demands crew, fuel and refits, costing money by existing. This is the classic guns-versus-butter trade-off: every unit of steel, engineering and borrowing capacity sent to arms is taken from hospitals, schools, housing and power grids — and a continent weaning itself off Russian gas already has a long grid-and-housing list.