Economic and Financial Effects of Rising Defense Spending

Martijn Boermans, Martin Hodula and Josef Simpartl

Research Briefs from Czech National Bank, Research and Statistics Department

Abstract: Europe is undergoing its largest rearmament since the Cold War, raising questions about the economic and financial consequences of higher defense spending. Drawing on a panel of 28 European countries, this brief finds that rising defense spending is associated with higher output in the short run while inflationary pressures build up only later, after about two to three years. The inflationary response is likely to be uneven: stronger where equipment is produced domestically and weaker where it is imported. Financial markets moved in parallel. Defense equity prices rose sharply in anticipation of higher spending, and European investors, including Czech households, increased their defense holdings markedly, reflecting both return expectations and geopolitical hedging.

Date: 2026-07
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Persistent link: https://EconPapers.repec.org/RePEc:cnb:rbrief:2026/03

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