Defence spending lifts euro area GDP by 0.4 percentage points
Additional defence spending will lift cumulative euro area real GDP growth by 0.4 percentage points over 2025-28, according to the European Central Bank. The inflation impact is projected to remain below 0.1 percentage points due to a heavy focus on capital investment.
Germany drives short-term fiscal push
Euro area defence spending in the Eurosystem projection baseline reaches 1.5 percent of GDP cumulatively over 2025-28, including 0.24 percent for Ukraine.
Germany accounts for more than 70 percent of this additional national expenditure.
Investment makes up 71 percent of the new spending, while intermediate consumption represents 21 percent and personnel just 6 percent.
This capital-heavy allocation lifts cumulative real GDP growth by 0.4 percentage points across 2025-28, peaking in 2026, while adding under 0.1 percentage points to inflation.
In illustrative risk scenarios where countries move toward NATO’s 5.0 percent of GDP target for 2035, the cumulative growth boost reaches 0.7 to 1.0 percentage points.
Industrial bottlenecks and import leakage
Long-term economic gains depend on overcoming structural fragmentation and severe research deficits.
Public defence research and development accounts for just 0.03 percent of GDP in the EU, compared with 0.3 percent in the United States.
Catching up to US levels could lift long-run EU GDP by 0.5 percent, as every €1 of public research spending generates nearly €2.5 in output.
However, roughly 50 percent of suppliers to top euro area defence firms are located outside the EU, creating import leakage.
Guns deliver growth only with domestic scale
Europe’s rearmament provides a clear short-term growth pulse, but its structural benefits remain doubtful.
Without joint procurement, massive spending risks subsidising foreign contractors rather than building domestic industrial capacity.
Fiscal exemptions expiring in 2028 will force highly indebted capitals into difficult budget trade-offs.