Defence spending lifts inflation before output gains peak
Defence spending raises consumer prices before output gains peak, European Central Bank (ECB) research finds. Estimates for up to 27 EU countries over 1999–2025 put the GDP multiplier near one at its peak, three to four years after procurement orders.
Orders reset the clock
Cristina Checherita-Westphal and Laust L. Særkjær use panel local projections to trace defence spending effects over five years.
They adjust Eurostat capital expenditure from delivery to order dates using the Stockholm International Peace Research Institute's arms transfers database.
This moves the peak GDP multiplier from around year one to years three–four; the five-year estimate rises from 0.3 to 0.6. For an increase of 1 percent of trend GDP in adjusted total spending, cumulative HICP inflation reaches about 1 percentage point in year one, 1.4 in year three and 1.25 in year five.
GDP deflator effects are generally larger.
Household consumption rises and net exports fall; aggregate private investment effects are statistically indistinguishable from zero.
Equipment carries a fiscal tail
Capital expenditure drives output gains, while personnel and intermediate consumption generate stronger inflation per euro spent.
Each additional euro of capital spending induces about 30 cents in personnel and maintenance costs over five years.
Low-debt countries' GDP multiplier peaks near 2.6 in year three; high-debt estimates reach about −1.3 in years two–three, but are imprecise.
Inflation effects survive alternative specifications from year one; the immediate response depends on recent observations and a residual category largely related to military aid to Ukraine.
No guaranteed growth dividend
The authors caution that historical averages may not capture capacity constraints in the current defence build-up.
Recent observations lower GDP multipliers, but the data cannot distinguish delayed gains from weaker effects.
The findings represent the authors' views, not those of the ECB or Banque de France.