European Defence Spending Outlook

Investing.com — European defence spending is set to increase due to rising geopolitical tensions and trade uncertainties, although Goldman Sachs anticipates a modest growth boost.

> “Market participants have grown increasingly focused on a potential EU fiscal policy response via higher defence spending,” an analyst stated.

Defence budgets have already seen an increase following the Ukraine invasion, yet they remain below NATO's target of 2% of GDP in several member states. Potential funding methods include national fiscal deficits, repurposing Next Generation EU funds, or creating a multilateral defence funding facility.

The most feasible approach likely involves a combination of national deficits and European funds, but early implementation faces obstacles, particularly political uncertainty in Germany, France, and the necessity of EU institutional approval. Significant changes are not expected before 2025, according to Goldman.

Increasing defence spending to 2.25% or 2.5% of GDP by 2026 would raise the structural deficit by 0.3%-0.5% annually over the next three years.

The anticipated economic impact is expected to be limited, with defence spending multipliers estimated at 0.6 due to high imports and short-lived effects compared to investments.

Goldman estimates that the fiscal stimulus from higher defence spending would contribute little significant annual growth until 2027, potentially up to 0.2 percentage points.

A larger boost may occur if the expenditure reduces dependence on foreign inputs and expands Europe’s defence industry.