Will higher defence spending boost euro area growth?

Abstract

Defence spending is expected to increase significantly in the euro area in the coming years. Until now, euro area defence spending has mainly consisted of consumption expenditure, such as personnel costs. If the spending increases to be made now are also of this kind, their growth effects would likely remain temporary and would support a number of specific manufacturing industries. However, the magnitude of the macroeconomic effects will depend on, for example, the domestic content of procurements and the allocation of the spending. If allocated to investment and research and development (R&D), the spending would improve growth in the economy. With moderate economic effects, higher defence spending – without fiscal adjustments – will also raise public debt. The impact on inflation, in turn, will remain moderate.