New Geoeconomics and Defense Spending in Europe

Tasks

The Russian war of aggression against Ukraine has severely altered the security environment for Europe. After decades of extracting peace dividends, the European NATO members have pledged to respond to the new threats and increase their defence spending. In the first step of this project, we analyse which countries deliver upon their pledge and which countries continue to spend less than 2% of GDP on defence. In a second step, we show how sufficient fiscal means for higher defence spending can be provided in an economically difficult environment.

Results

2024 will be an important year for security in Europe. Russia’s imperial ambitions pose a serious threat to stability and peace. In the light of the 2024 United States’ presidential election, European countries may have to simultaneously strengthen their own defence capabilities and increase military support to Ukraine. This puts Europe in a dilemma. Governments have announced that they want to increase defence spending. But they need to find financially sound ways to do so. To meet the new security challenges within a difficult economic environment in Europe, policymakers should follow four general guidelines:

• First, implement growth-friendly policies. Economic competitiveness and growth will provide additional resources to ease the trade-off between defence spending and other spending categories in the medium term.
• Second, keep a strict focus on sustainable public finances. Public debt ultimately comes with high interest payments. In the medium term, interest payments will consume funds that would otherwise be available for defence spending or for other investments needed to move towards a green, digital, and competitive Europe.
• Third, governments need to review their spending behaviour to make sure that, for example, spending on subsidies and on the welfare state do not limit their ability to invest or to perform core government functions.
• Fourth, efficiency gains in the use of financial resources for building defence capabilities should be identified. This also includes a better coordination and collaboration at the European level.