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Defence spending and its short and longer-term macroeconomic effects

Author

Listed:
  • Checherita-Westphal, Cristina
  • Rodríguez-Vives, Marta
  • Lalinsky, Tibor
  • Parker, Miles

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

Suggested Citation

  • Checherita-Westphal, Cristina & Rodríguez-Vives, Marta & Lalinsky, Tibor & Parker, Miles, 2026. "Defence spending and its short and longer-term macroeconomic effects," Economic Bulletin Articles, European Central Bank, vol. 6.
    • Handle: RePEc:ecb:ecbart:2026:0006:2
    Note: 1790315
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    Keywords

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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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