Europe | An overview of the EU defense sector

Summary

The effort to increase the military and security capabilities Europe needs will be more sustainable the more it supports economic growth.

Key points

• Key points:
• To address this, BBVA Research analyzed the impact of defense spending across 27 EU countries between 1995 and 2023.
• Defense spending has had a cumulative fiscal multiplier of around 1.5 in the first two years, but its effect fades over the medium term due to the historically low share of investment in R&D (which fell from 3.5% in 2001 to 1.8% in 2023).
• We find evidence that capital spending, even when temporary, has multipliers above 2, compared to current spending or spending on intermediate goods.
• Large defense companies operate with higher leverage than the broader industrial sector (equity-to-assets ratio of 20% vs. 40%) and rely excessively on government advances, which already account for one-third of their balance sheets in 2024.
• Focusing a greater share of spending on R&D and capital, in line with the increase in spending we are seeing in European countries that invest more in defense and security, is the way forward. Reducing European fragmentation is an essential step along this path.

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