Goldman Sachs Research examines the economic impact of increasing defense spending in the European Union. EU member states are expected to raise annual defense expenditures by approximately €80 billion by 2027, reaching 2.4% of GDP. The fiscal multiplier is estimated at 0.5, meaning every €100 spent on defense could boost GDP by €50. A shift toward domestic production is expected to enhance the economic effect over time.
European defense spending has increasingly focused on equipment, rising to 33% of total expenditures by NATO’s European members. While European countries initially imported military supplies following Russia’s invasion of Ukraine, they have historically sourced most defense equipment domestically, with France, Germany, and Italy leading in local production. EU arms manufacturing has been expanding and is projected to grow faster than in the US.
To sustain higher defense spending, EU leaders are considering various funding strategies, including national debt, supranational borrowing, or repurposing existing financial mechanisms. National debt remains the most immediate option, but EU-wide funding, though requiring a longer approval process, would provide more stability. A potential "golden rule" could exempt defense spending from fiscal constraints, though it would require approval from the EU Council and Parliament.
The European Investment Bank (EIB) and the European Stability Mechanism (ESM) are also potential sources of funding, with EIB financing possibly aligning with the industrial expansion needed for increased military production. Goldman Sachs Research anticipates a phased approach, beginning with national debt, followed by repurposing pandemic-related funds, and ultimately establishing a dedicated defense financing facility.
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