Guns and Growth: Increased defense spending could significantly boost Europe’s economic growth and industrial base if outlays are targeted at high-tech, regionally made armament

The paper’s main conclusions are as follows.

* There is broad consensus that the economy expands to accommodate at least part of the increased defense spending, production, procurement, and employment. There is some disagreement on the magnitude of this expansion and whether military spending crowds out or stimulates the private sector. The effects will depend on the context, including the ECB’s response and the source of financing. A conservative estimate is that the Europe-wide GDP will grow by 0.9% to 1.5% if defense spending increases from 2% to 3.5% of GDP. This implies only a limited tradeoff between armament and private consumption in the short run in the short run.
* GDP growth will be smaller, possibly negative, if the increases are financed with tax increases rather than borrowing. Increases in defense spending should be mostly financed through public debt. This is particularly true of temporary increases in spending. But permanent buildups should also be initially financed through public debt, because of the durable nature of defense procurement.
* The evidence is clear that military spending is no more harmful in recessions than in economic booms, so that spending should either be countercyclical or smoothed over the cycle.
* The long-run productivity gains from military spending may be substantial. The best examples of public research and development are for military applications and there is evidence of spillovers to the private sector. A transient 1% of GDP increase in military spending could increase long-run productivity by a quarter of percent both through learning-by-doing and R&D. The returns to public R&D are particularly high and may pay for themselves. R&D spending has been identified as one of the three main keys to addressing Europe’s lagging productivity in the Draghi report.
* Nearly 80% of European defense procurement is imported from non-EU suppliers. Harnessing the long-run technological gains from military spending requires far more of European defense spending to be procured from Europe.

[https://www.ifw-kiel.de/fileadmin/Dateiverwaltung/IfW-Publications/fis-import/22f23418-d42e-4e19-8ebd-7e59a643a4d1-Kiel_Report_no2.pdf](https://www.ifw-kiel.de/fileadmin/Dateiverwaltung/IfW-Publications/fis-import/22f23418-d42e-4e19-8ebd-7e59a643a4d1-Kiel_Report_no2.pdf)