Europe | Buy Guns or Buy Roses?: EU Defence Spending Fiscal Multipliers

Summary

This paper delivers the first comprehensive estimate of the dynamic fiscal multiplier of defence spending for the EU-27 by exploiting exogenous accrual-based government defence outlays and a combination of linear and non-linear Local Projection methods.

Key points

• Key points:
• EU Defence Spending Fiscal Multiplier: a 1%-of-trend-GDP increase in defence spending raises EU-27 output by 1.4% in year 1, peaks at 1.6% in year 2, and then gradually converges back to zero in the medium term.
• Spending Composition Matters: capital-intensive outlays drive positive aggregate effects, while personnel and intermediate consumption show much weaker.
• Sources of Non-Linearities: fiscal multipliers are significantly larger when i) the economy is in a low growth position, ii) there is ample fiscal space, and iii) reliance on military imports is low.
• Fiscal multipliers are depressed when both compressed fiscal space and high imports reliance coexist
• Multiple policy implications are derived from the analysis as regards to the type of spending, timing of it and the role of coordinated procurement.

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