How to finance Europe's military buildup? Lessons from history

Johannes Marzian and Christoph Trebesch

No 184, Kiel Policy Brief from Kiel Institute for the World Economy (IfW Kiel)

Abstract: Europe must rapidly increase its military spending, but how? We collect 150 years of data to study what governments in similar situations have done. How were past military buildups financed? What was the relative importance of debt financing, budget cuts, and taxes? Our main finding is that budget cuts, e.g. on social or foreign affairs, were rarely used to finance military buildups. Instead, governments typically relied on a mix of deficit financing and higher tax revenues. The larger the buildup, the more dominant debt financing has been. In line with history and theory, Germany and Europe should again rely on debt financing to quickly increase its defense spending and military capabilities. To deal with the added debt burden in the medium run, governments could increase taxes, reduce subsidies and tax avoidance, and freeze the growth of social spending. Fiscal rules must not stand in the way of the defence of Europe. A warning example is the case of the UK in the 1930s, which refrained from significantly ramping up military expenditure and instead pursued a policy of balanced budgets and appeasement. Consequently, the UK was ill-prepared when Nazi Germany launched its attack. Germany should not repeat the errors made by Britain in the 1930s and should invest heavily in defense so as to deter Russia. To achieve this, defense spending should be excluded from fiscal rules both in Germany and Europe. A less clear-cut alternative would be the creation of new debt funds, such as a European financing mechanism or another "Sondervermögen" in Germany.

Keywords: Military expenditures; Fiscal multipliers; Innovation; Growth; Short- and long-run consequences of rearmament; USA; Europe; Militärausgaben; Steuermultiplikatoren; Innovation; Wachstum; kurz- und langfristige Folgen der Aufrüstung; USA; Europa (search for similar items in EconPapers)
Date: 2025
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