Defence spending and its short and longer-term macroeconomic effects

Cristina Checherita-Westphal, Marta Rodríguez-Vives, Tibor Lalinsky and Miles Parker

Economic Bulletin Articles, 2026, vol. 6

Abstract: EU Member States have committed to substantially increasing defence spending in the coming years. According to Eurosystem staff baseline projections, defence spending – particularly on investment – is a notable factor supporting euro area growth over the short and medium term. Inflation effects are projected to be limited, though price pressures may increase over time. This is especially likely if supply cannot catch up with increased demand or personnel spending continues to dominate in line with past trends, as shown in an empirical analysis for the 27 EU Member States over 1999-2025. The composition of defence spending matters for both short and longer-term growth, with an increase in defence research and development (R&D) key to delivering long-run productivity gains. Illustrative simulations show that catching up to US levels of defence R&D could lift output and, additionally, encourage private sector defence R&D that could raise productivity growth. JEL Classification: E62, H56, F41, C32, C23

Keywords: defence spending; fiscal multiplier; productivity; research and development (R&D) (search for similar items in EconPapers)
Date: 2026-09
Note: 1790315
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