Edward Conard

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Upside of Inequality Oxford Unintended Consequences

AI Summary. European leaders are debating raising defence spending to 3.5% of GDP or more, a level not seen in continental Europe since the late 1960s. Sustaining that share from 1995 to 2023 would have required an extra $387bn a year across EU member states and $35bn a year for the UK, according to Financial Times calculations.

Valentina Romei, Sam Fleming, and Alan Smith Financial Times
Date Posted:

Raising EU defense spending to 3.5% of GDP from 1995-2023 “would have required EU member states to allocate an extra $387B/year.” Defense increases will likely require cuts in social protection, which rose from 36.6% of EU GDP in 1995 to 41.4% in 2020.

What would higher defense spending have cost Europe annually?

Core argument: European leaders are debating defence spending of as much as 3.5% of GDP or higher over the coming decade, a level not seen in continental Europe since the late 1960s.

European leaders are openly debating lifting spending to as much as 3.5% of GDP or higher in the coming decade, a level not seen in continental Europe since the late 1960s. Spending at this level between 1995 and 2023 would have required EU member states to allocate an extra $387bn a year to defence, according to FT calculations based on 2020 purchasing power parity (PPP) dollars. The uplift for the UK, which spent 2.3% of GDP on defence in 2023, would have been $35bn per year over the same period — roughly equivalent to annual public spending on housing and local amenities. Across the EU, social protection has grown as a share of total government spending, rising from 36.6% in 1995 to 41.4% on the eve of the pandemic, according to Eurostat.

Takeaways by Macro Roundup® AI

  1. European leaders are debating defence spending of as much as 3.5% of GDP or higher over the coming decade, a level not seen in continental Europe since the late 1960s.
  2. Spending at 3.5% of GDP between 1995 and 2023 would have required EU member states to allocate an extra $387bn a year to defence, according to FT calculations in 2020 PPP dollars.
  3. The UK, which spent 2.3% of GDP on defence in 2023, would have needed an additional $35bn a year between 1995 and 2023, roughly equivalent to annual public spending on housing and local amenities, according to FT calculations.

Related Articles:

  • German Borrowing Costs Soar By Most Since 1997 on ‘Historic’ Debt Deal — Germany's incoming governing partners agreed to exempt defense spending above 1% of GDP from the constitutional borrowing limit, create a €500bn off-budget vehicle for debt-funded infrastructure, and loosen borrowing rules for states. Goldman Sachs estimated the package could lift German growth to as much as 2%, versus its 0.8% forecast, if approved and implemented quickly.
  • What Military Catch-Up? — Years of European defence underspending have created a stock problem—depleted weapons, hardware, and technology, plus gaps in operational capacity, full-spectrum battlefield capability, and personnel—that higher spending can only fill slowly. Europe's cumulative shortfall against NATO's 2% of GDP target is about €850bn, and exceeds €2,650bn measured against US spending near 3.5% of GDP.
  • The Intellectual Spoils of War? Defense RD, Productivity and International Spillovers — The authors estimate that a 10% increase in government-financed R&D, largely defense, is associated with a 4.3% rise in privately funded R&D across OECD countries, indicating "crowding in" rather than "crowding out." They also find international spillovers raise private R&D abroad, though the overall effect on US productivity growth is modest.
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