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European governments are doing something they haven't done since the end of the Cold War. They are rapidly increasing military spending. Since Russia's invasion of Ukraine in 2022, EU defense spending has grown rapidly, jumping by more than 20% in 2025 alone. And by the end of this year, they are expected to be 75% higher than in 2021. At first glance, this seems surprising for an economy in a For the better part of two decades, the European economy has been the sick man of the developed world. The continent has seen stagnant growth, stalled productivity, and anywhere be considered a national emergency. So is this just reckless spending? Maybe not. Because there's an old, somewhat uncomfortable idea in economics that says pouring government money
into almost everything, including tanks, can be a real boost to an economy that badly needs it. So what is really happening to Europe's military spending and why now? Can this really boost the European economy? And if so, at what price? Just because GDP growth in most European countries has slowed down doesn't mean it has to happen in your country. This is where Trading 212 comes in. Trading 212 makes it much easier for people to invest and increase their net worth. But, unlike most politicians, this does not happen at the expense of increasing government spending.
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threat, the political rewards for cuts were immediate, and the costs of cuts were entirely theoretical, meaning that every finance minister who cut a few tank battalions instead funded a hospital block, and no one complained. This is how defense spending among European NATO members fell from around 3% of GDP in the early 1980s to around 1.6% by 2020. Then came February 2022, and a threat that had been theoretical for three decades turned into war on the eastern edge of the European Union. What followed happened quickly by government spending standards, meaning it still took years, but it got things moving. In addition to EU countries increasing defense spending by 20% in 2025, defense investment, that is, money actually spent
on new equipment and research, rather than on wages and fuel, has more than doubled since 2021. In June 2025, NATO formalized all of this at its summit in The Hague. Members agreed to spend 3.5% of GDP on basic defense by 2035, plus another 1.5% on defense infrastructure and resilience. Let's call it 5% of GDP overall, which for context is roughly equal to how much many European countries currently spend on their entire education systems. Now, not everyone is in the same hurry. As you probably guessed, it is the countries bordering Russia, Kaliningrad, or Belarus that compete the most Poland's spending already amounts to approximately 4.5% of GDP, the highest in NATO. That's about 1 euro out of every nine the government collects from general revenue, and
closer to a fifth of the central government budget, which is a huge share to be handed over to a single department. Lithuania and Estonia have committed to going beyond 5% by 2026, meaning they are reaching the alliance's 2035 target more than a decade early. Now, larger economies further from that border have made large commitments of their own, albeit markedly less aggressive. The UK's path is much more gradual than that of the Baltic countries, as it is constrained by its own fiscal rules. France is in a more difficult situation. With a deficit of over 5% of GDP and debt of over 110%, it has yet to set an official deadline for achieving NATO's 5% target. Instead, France has pledged to spend €64 billion on defense by 2027, but this is a
fixed amount, not a percentage target, and it barely exceeds France's defense spending of around 2% of GDP, which they already have. The situation in Germany is different now. Germany actually has real fiscal space to move, and it has used it. The country even amended its own constitution to loosen the debt regime, a rule written into the basic law back in 2009 and mandatory for federal borrowing since 2016, in particular to allocate defense spending above a threshold of about 1% of GDP. And Germany is not the only one finding space by changing its own rules. Across the bloc, 18 countries have activated an escape clause in the bloc's fiscal rules that allows them
to spend up to an additional 1.5% of GDP on defense, notably above 2021 levels, without technically breaching the deficit limits Even with a reasonable shift in the rules, it is still a debt. And a debt of this size is usually accompanied by an expectation of repayment. Europe, more than most, needs something to demonstrate this, as the continent has had almost two decades of fairly weak growth, labor productivity has barely budged compared to the United States, and the eurozone youth unemployment rate is expected to be around 15% by 2025. So Europe really wants growth from almost anywhere it can get it. And there is a long-standing idea in economics that says the military can be one way to achieve it. It's called
military Keynesianism, and the logic is quite simple. Government spending stimulates the economy regardless of what it buys because money doesn't stop moving once the government hands it over. The euro that initially buys an artillery shell still ends up in the factory worker's salary, and that worker spends it in the supermarket, and the supermarket pays its employees, and so on. Economists call this the multiplier effect, and it's the same mechanism whether the government is building schools or submarines. So, in the short term, there are indeed sound reasons to believe that military spending helps the economy. When growth is weak and youth unemployment is so concentrated, a large and sustained infusion of public funds is exactly the kind of
crude tool that gets people back to work quickly, even if it's not the smartest use of money. Crude tools have their place, and an economy with idle workers and idle factories is exactly where they work best. But what will happen in 10 or 20 years? Well, a lot depends on which company actually receives the check. Some of the largest defense companies are, in fact, purely military businesses. For example, Huntington Ingalls builds aircraft carriers, submarines, and destroyers, and not much else. About 95% of its sales go to government customers, which means that the money that comes in tends to stay within the segregated military economy. But many of Europe's largest manufacturers are on both sides of the military-civilian line. Dassault builds the
Rafale fighter jet and the private jet in the same company, using duplicate engineering teams. With Airbus, it's the same story, but on a much larger scale: commercial airliners, military transport aircraft, helicopters, and satellites-all under one corporate roof. And Thales, Leonardo, Rheinmetall and Saab are, to varying degrees, on the same line. So, the theory goes something like this. Invest in dual- use companies now, and you are not only buying weapons, but also rebuilding industrial capacity at the same time. You are paying for the restoration of production lines, for the restoration of supply chains that have collapsed, and,
most importantly, for the training of a generation of machinists, welders, systems engineers, and programmers, who are currently not available in the numbers that Europe needs. And when the military side eventually slows down, which historically always happens, this industrial capacity can return to civilian aircraft, automobiles, railroads, or electronics. This is an optimistic version, and it is not stupid. Although it is worth noting that the trend is now going in the opposite direction, as Rheinmetall is repurposing civilian automobile plants for defense production, rather than the other way around, which is reason to believe that military demand will persist. Whether any of this will work depends extremely on one detail, namely where the
money physically goes. If the government spends its defense budget on its own manufacturers, the money is recycled. They are converted into wages, which are converted into consumer spending, which in turn are converted into income for local businesses, and some of it is returned to the treasury as tax. If the same government buys its equipment from a manufacturer in another country, the incentive effect largely disappears along with the money, which is largely why European governments fight so hard to keep military production in-house, even when buying ready-made equipment from abroad would be cheaper and faster. Although, to be fair, domestic production is favored for other strategic reasons. No one wants their air force
to be dependent on a supplier who might decide, for completely unrelated political reasons, to stop supplying them. And when a country depends on foreign suppliers, governments want to at least fully track what is actually in their supply chain. Although sometimes this is impossible. Chinese- made printed circuit boards and everyday electronics have found their way inside multi-million dollar Western military drones, and it is almost impossible to completely get rid of them without building an entire separate supply chain. This is a fascinating rabbit hole in itself, but we don't have time to delve into it here, so we'll cover that in our next newsletter. If you are interested, you can register using
the link in the description. As we have seen, there are real reasons to believe that increased military spending stimulates the economy. But does this happen in practice? Economists measure how much you get from government spending using what's called the fiscal multiplier, which is simply the amount of additional economic output you get for every euro spent by the government. A multiplier equal to one means that a euro spent creates a euro of additional production, so you break even in terms of growth. Anything above one means that spending is truly generative, because the money continues to work after the government lets go of it. And anything below one
means that some of that money is lost, moved around, or spent on things that don't rotate. Studies of defense spending tend to end up below unity, with most estimates clustering somewhere between 0.3 and 0.8. The reason for such a low average is not so much related to the destruction of tanks, but to what eurozone's defense spending is personnel costs, i.e. salaries, pensions, and benefits for people already working in the state. When you add operation, maintenance, fuel and general upkeep, consumption costs account for approximately 70% of the total. Research and development, which is the part that generates the technological spillovers that everyone points to, amounts to less than 5%. If
European consumer spending remains the same, the estimated 10- year cumulative multiplier would be only around 0.2, meaning that over the course of a decade, every €5 spent generates around €1 of additional output. Not 1 euro per year, but 1 euro in total. So, if the same money were spent primarily on investment and research, rather than on wages and maintenance, this multiplier could grow to 1, and in the most optimistic scenarios, even higher. But this requires very large expenditures, sustained over many years, aimed at an innovation ecosystem capable of absorbing them and turning them into commercial products. Europe is clearly not in that position right now, which is a polite way of saying that the continent's track record turning research into scalable
companies has been its central economic weakness for much of the past three decades. And on top of all this, there is the problem of leakage of funds. Almost 80% of procurement spending went to suppliers outside the EU, most of them American, meaning that a significant portion of the money spent on defense is paid for by European taxpayers, borrowed against European balance sheets, and then transferred to factories in Texas and Georgia. All else being equal, it's still money that buys real potential. They just don't buy much European growth along the way. So, so far we have considered whether the money that Europe has invested in its military can contribute to economic growth, but there is a question that we have not yet asked. What
could this money do elsewhere? The simplest way to explain this is the broken window fallacy. You may well have met her before, so let's briefly review it. A child breaks a store window and the store owner pays a glazier to repair it, which looks like an economic activity. But if the window hadn't broken, the store owner would still have spent that money elsewhere. Maybe for a new suit or maybe for a delicious dinner. So, no new wealth was created, the money just moved. Defense spending has exactly this trap. The jobs are real, the factories are real, the contracts, the salaries, the cities that are being rebuilt around the shipyards - all of this is absolutely real.
Just like the glazier's actual payment, the question is what would those same workers, factories, and euros do differently. Invest a billion euros in warships versus a billion euros in cities, and on the day the money is spent, the two instruments will look virtually the same in the national accounts. The difference only becomes apparent over time. The bridge pays for itself over decades. It reduces travel time. It allows freight carriers to transport goods more cheaply. It makes businesses on both sides of it more productive and adds a little economic value every day when it sits idle, doing nothing much. A warship requires constant maintenance, crew, fuel, repairs, and eventually replacement. After construction, it
no longer produces anything. Its existence only costs money. This is not an argument that a warship is useless because a warship does a job that a bridge cannot do. But these are different types of purchases, and only one of them is comprehensive. This is really just a modern version of an old idea in economics called "guns versus oil." A country has a limited number of things at any given time. So much labor, so many factories, so much steel, so many engineers, so many euro loans before the bond market starts asking questions. Every one of these resources that goes into weapons cannot go into oil, meaning hospitals, schools, housing, energy infrastructure, or anything else it could build. And in the case of Europe, the tension is exacerbated by the
fact that the continent has a pretty long list of things it urgently needs to build, from power grids to housing and energy infrastructure, which it has been reworking since it started to turn away from Russian gas. So, to be honest, military spending probably isn't a big economic stimulus, but it's probably better than nothing, given the state Europe's economy was already in. Now, the only problem with everything we've discussed so far is that it's all been focused on one question: Does military spending help the economy grow? But it's worth taking a step back and asking whether this measures what we really care about. GDP is simply the total value of all final goods and services that a country produces in a year. It
takes into account activity, not whether any of it actually helped anyone. All that is really being asked is, has the money moved? Imagine the best option for European rearmament. The multiplier becomes strong, money stays in the country, industrial capacity recovers, and GDP actually grows over the course of a decade. Nothing in itself tells you whether Europeans have become healthier, safer, more educated, or happier. Compare this to an indicator like infant mortality, which is one of the most sensitive indicators used by economists to determine whether a society is truly functioning, because infant mortality rates reflect access
to healthcare, nutrition, sanitation, maternal education, and general living standards, all compressed into a single number that is very difficult to fake. A euro spent on a neonatal incubator and a euro spent on a warship are reflected in GDP in the same way, but they are not at all equivalent in terms of whether a child survives. The same goes for life expectancy, mental health, how safe people feel when they return home, how much free time they actually have. All of this tends to change regardless of economic growth. A country can increase its production for years while daily life slowly deteriorates if this growth does not reach ordinary people or is not directed at things that improve their lives. Of course, none of this means that defense spending is
wrong, because a country that cannot defend itself has no right to discuss quality of life at length. But this means that the economic question we have been focusing on only tells us part of what we need to know about defense spending. The question of whether rearmament benefits the European economy is obvious. And the answer is a conditional " yes" in the short term and a rather weak " maybe" in the long term. The better question is probably whether it improves the lives of the people who live there. We already made a whole video about why Europe's economy came to a standstill, so we wouldn't want to But, if you're curious, you can click on it on your screen. Thanks for watching, friend.
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