DID Press: Rising geopolitical tensions around Europe—ranging from perceived military threats from Russia to sustained pressure from the United States for greater NATO burden-sharing—are reshaping the European Union’s defense policy landscape. After decades of declining military budgets, Europe is now moving decisively toward higher defense spending.
In past decades, defense outlays steadily fell, with military spending as a share of EU gross domestic product dropping from 3.9 percent in 1963 to just 1.4 percent in 2010. The war in Ukraine and renewed U.S. pressure, however, have reversed this trajectory, pushing European governments toward a significant increase in defense expenditures.
According to current estimates, the European Union spent around 2.1 percent of its GDP—approximately $450 billion—on military expenditures in 2025. This marks a sharp increase compared with previous decades, and projections indicate the upward trend will continue. EU planning documents suggest defense spending could rise to nearly 5 percent of GDP by 2035, with part of this investment directed not only toward weapons procurement but also toward resilience, civilian defense infrastructure, and enhanced emergency-response capabilities.
Higher military spending is expected to have measurable economic effects. One immediate impact is GDP growth—provided that expenditures are channeled into domestic industries rather than imports. Studies indicate that increased defense spending could partially offset the contractionary effects of Europe’s fiscal policies in the coming years. Current projections suggest EU GDP could be between 0.3 and 0.6 percent higher by 2028 compared with a baseline scenario.
Employment growth is another notable outcome. Data show that jobs in defense-related industries increased by at least 10 percent in the first quarter of 2025 compared with the same period in 2021. In sectors such as weapons manufacturing, ammunition production, and naval shipbuilding, employment growth has reached nearly 20 percent, underscoring the sector’s role as a labor-market stimulus.
Technological spillovers from military research and development represent another potential benefit. Studies suggest that every euro invested in R&D can generate up to 11 euros in returns over a 25-year period. However, these gains depend on whether increased defense budgets prioritize innovation and technological development rather than focusing solely on expanding arms production.
Significant challenges remain. One key concern is Europe’s reliance on imported weaponry. Of the roughly $100 billion in additional military spending linked to the Ukraine war by the end of June 2023, only $22 billion was spent within the EU. This highlights the risk that continued dependence on foreign suppliers could limit the positive economic impact of higher defense budgets. Moreover, in a context of constrained industrial capacity, the defense sector may draw labor and resources away from other parts of the economy, potentially slowing broader growth.
Overall, higher military spending can support economic growth in the European Union, but its impact is likely to be limited and conditional. According to estimates by Goldman Sachs, the fiscal multiplier for defense spending is around 0.5—meaning every €100 in military expenditure adds only about €50 to GDP. Maximizing the benefits, analysts say, will require careful policy design, localization of production, and sustained investment in research and development.