Dutch defence spending faces short-run limits, long-run opportunities

De Nederlandsche Bank (DNB) analyzes the expected economic effects of increasing defence spending in the Netherlands. The study finds limited short-run gains due to tight labour markets and high import dependence, but identifies long-term opportunities with strategic choices and European coordination.

Tight markets and foreign reliance curb immediate impact

The Netherlands, along with other NATO members, committed to spending 3.5 percent of GDP on defence by 2035. However, higher defence spending will not automatically boost the Dutch economy in the short run.

Tight labour markets and high import dependence limit immediate gains, leading to higher inflationary effects.

Approximately 61 percent of public defence investment flows directly abroad, and Dutch defence manufacturing itself is highly import-dependent.

This high reliance on foreign inputs, combined with historically low defence-related R&D, significantly limits domestic spillovers and the scope for short-run economic stimulus.

Current labour shortages further increase the likelihood of inflation rather than output growth from defence personnel spending.

Dual-use strengths for a coordinated European future

In the long run, defence spending can create economic opportunities, but this requires clear strategic choices, European coordination, and a credible long-term investment plan.

The Netherlands, while lagging in core defence innovation, shows strong technological and production specialization in specific dual-use areas like semiconductor lithography and marine equipment.

Leveraging these comparative advantages through multilateral coordination is key.

This specialization demands high, upfront investments, necessitating private sector buy-in and a credible public long-term investment plan to achieve strategic defence goals efficiently.

Beyond the immediate boost

The study provides a sober assessment of the immediate economic benefits of increased defence spending, tempering expectations.

However, it effectively outlines a pragmatic path for the Netherlands to achieve long-term economic spillovers through strategic specialization and European collaboration.

This nuanced perspective is crucial for guiding policy away from short-sighted stimulus and towards sustainable industrial development.