Defense spending and its short- and long-term macroeconomic impacts

KUALA LUMPUR, 26 SEPTEMBER 2026 —

Published as part of the ECB Economic Bulletin, Issue 6/2026. Most European countries have committed to increasing their spending on defence over the coming decade. This trend is underpinned by efforts towards reaching a higher target for defence spending by the North Atlantic Treaty Organization (NATO) and by recent European initiatives aiming to accelerate investment in defence and strengthen Europe’s strategic autonomy.

Most European countries reduced their defence spending over the past three decades, following the end of the Cold War. This reallocation of public resources supported other policy priorities. However, it has also contributed to underinvestment in defence capabilities, a fragmented EU defence technological and industrial base (EDTIB) and a growing dependence on non-EU (primarily US) suppliers for critical military systems.

Such fragmentation implies significant economic costs through duplicated procurement, limited economies of scale and reduced incentives for innovation capacity. Rebuilding defence capacities and strengthening the EDTIB will require sustained funding, greater coordination across EU Member States and more integrated procurement strategies. Several EU-wide initiatives now support growth in defence spending and the EDTIB. The Readiness 2030 plan was launched by the European Commission in March 2025.

First, the plan supports an increase in defence spending at the national level. Accordingly, under the Stability and Growth Pact (SGP), the activation of the national escape clauses (NECs) allows EU Member States to increase investment and other defence spending beyond previously agreed limits. The deviation is limited to a maximum of 1.5% of GDP during the period 2025-28 and is conditional on preserving medium-term debt sustainability.

Second, the plan includes the Security Action for Europe (SAFE) instrument, with a total capacity of €150 billion, to provide loans to EU Member States to foster defence investments through common procurement. Third, the Readiness 2030 plan tasks the European Investment Bank with widening and scaling up the scope of its lending for defence and security projects. Finally, several other EU initiatives are boosting security assistance for Ukraine.

They may not have a direct impact on the euro area economy, but may contribute indirectly to improved security and military capability in Europe. [ 1 ] Aggregate euro area spending on defence could increase by almost 1 percentage point of GDP over the next decade and reach 2.5% of GDP in 2035, according to JANES budget database.

[ 2 ] A breakdown by type of expenditure shows that in the medium term procurement will likely drive the increases in spending, while over longer horizons spending on personnel as well as on operations and maintenance are expected to dominate (Chart 1). Investment in defence research and development (R&D) in the euro area is marginal, in contrast to the expected contribution for the whole of NATO.

Higher defence spending in Europe has several macroeconomic implications. Military spending affects economic output through three principal channels: demand, supply and security (Dunne et al., 2005). In the short to medium run, government spending on infrastructure, military personnel and defence materiel stimulates domestic demand. The extent to which this affects economic activity depends, among other factors, on the degree to which the spending remains within the domestic economy.

In the longer term, defence spending can increase aggregate supply by increasing the economy’s capital stock and encouraging innovation and technological development. Finally, greater domestic security can help alleviate the negative effects of geopolitical uncertainty on consumption and investment (Brignone et al., 2026). In what follows, Section 2 takes stock of defence spending in the euro area countries and discusses defence spending statistics.

Section 3 shifts to the short and medium-term macroeconomic effects of increased defence spending, focusing on the horizon of the Eurosystem staff macroeconomic projections. Finally, Section 4 considers the longer-run influences on the supply side and economic growth. Defence spending as a share of GDP increased in most European countries in 2025 compared with 2024, although only four euro area countries are above 2% (Chart 2).

Classification of the Functions of Government (COFOG) data on defence expenditure are the key reference for analysing how much governments spend on defence using national accounts. It is also the metric used in the European fiscal framework for assessing the activation of the NECs.

According to these data, among the euro area countries that are NATO members, the Baltic countries and Greece spent more than 2% of GDP on defence in 2025, while Slovakia, Bulgaria and France were close to that threshold. By contrast, the expenditure of non-NATO euro area countries continued to be low (e.g.

Ireland 0.1% of GDP or, equivalently, 0.3% of GNI*, [ 3 ] Malta 0.5% of GDP and Austria 0.7% of GDP) except for Cyprus, which spent 1.8% of GDP. Compared with 2024, the estimated euro area aggregate increased slightly by 0.1 percentage points to almost 1.5% of GDP in 2025. The estimated average for 2025 is slightly higher than 1.5% of GDP when taking into account only NATO member euro area countries.

The defence spending-to-GDP ratios have increased for most euro area countries according to NATO data. The differences between the COFOG and NATO databases arise from several factors, as explained in Box 1. The differences between the two data sources generally widened in 2025, which may have been driven by timing differences in the recording of major purchases of equipment.

For example, COFOG 2025 data show a ratio of 1.5% of GDP for Germany in 2025, whereas NATO data indicate 2.2% of GDP. All the euro area NATO member countries, except Slovenia, have already reached 2% of GDP in defence spending according to the NATO measure.