Europe | Spending on defense, investing in the continent

Summary

Cutting military spending after the Cold War helped Europe reduce deficits, ease fiscal pressure and limit the crowding-out effect on private investment — boosting potential growth. The famous peace dividend.

Key points

• Key points:
• Europe reached a historical low in defense spending in 2015 (1.5% of GDP), which gradually rose again after the conflicts in Crimea and, more recently, the Russian invasion.
• To strengthen European security, the Readiness 2030 plan was launched, which will mobilize some 800,000 million through 2030. Defense spending is gaining weight in Europe.
• With the intention of contributing to the debate, at BBVA Research, we estimate that between 1995 and 2023, one unit of military spending increased GDP by 1.8 units in the short term, but that it did not produce permanent effects on the level of GDP.
• Our analysis suggests that if Europe wants to make every euro more effective, it should time defense spending with the economic cycle and channel more of it into investment — particularly technological R&D.
• It also means strengthening European supply chains to minimize leakages and maintain fiscal credibility so that the stimulus does not evaporate into higher funding costs.

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