While Europe is not directly at war, it has been confronting an accumulation of risks and security challenges for several years. Among these, the war in Ukraine has served as a “defensive wake-up call” for European nations, reintroducing the term “war economy” into the European political lexicon. Suddenly, Europe found itself needing to ramp up the production of weapons and ammunition to support Ukraine on one hand and to rearm its forces on the other, necessitating a significant increase in military budgets and the search for exceptional resources for defence spending.
A “war economy” is typically defined as a structural shift in a nation’s economy through a set of measures aimed at mobilising and reallocating available national resources, dedicating the bulk of them to military expenditure during wars, impending conflicts, or crises, to ensure economic resilience under such exceptional circumstances. This increase in military spending usually coincides with a reduction in spending on developmental projects and social welfare. The term “war economy” was first used during World War I when governments of the warring nations imposed a comprehensive series of measures on businesses and industries to support the war effort. This included rationing consumption, withdrawing certain products from civilian markets, and placing a substantial portion of companies and resources at the disposal of the state to ensure the military had all the needed resources. For example, at the height of World War II, the United States managed to allocate 37% of its GDP and 90% of its federal budget to the military sector through such measures. Since Russia’s invasion of Ukraine, some European leaders, such as French President Emmanuel Macron, have asserted that their countries must adopt a “war economy” to confront current and future threats. This approach involves mobilising the economy to meet the military’s needs to “move faster, stronger, and at a lower cost” in response to the return of war to Europe. Former French Minister of State for European Affairs Laurence Boone and former Moldovan Foreign Minister Nicu Popescu have also called on the European Union to swiftly adapt its economy and regulatory framework to the new geopolitical reality. This study aims to analyse the impact of the Russia-Ukraine war on European nations’ economies and military forces.
First: The Impact of the Russia-Ukraine War on the European Economy
The general policy response of the European economy to the Russia-Ukraine war can be summarised as follows:
1. Boosting Growth and Competitiveness: Europe’s economic competitiveness and growth potential are under severe pressure. Low or negative growth is often accompanied by increased spending on social programs such as unemployment benefits. Conversely, increased growth generates additional tax revenues. The stronger the growth of European economies, the more resources will be available to facilitate the trade-off between defence spending and other types of expenditure. For an effective European war economy, governments strive to create an environment that enhances global competitiveness while avoiding policies that harm economic performance.
2. Maintaining Strong Public Finances: European countries are focusing on optimal resource allocation, efficient resource use, and maintaining a balance between revenues and expenditures while reducing public debt. High levels of public debt burden government budgets and limit future fiscal flexibility. High public debt is usually associated with increased spending on social services and reduced defence spending, a pattern evident in the defence spending cuts following the 2008 financial and sovereign debt crises.
Given that high public debt is often accompanied by high-interest payments (which can consume funds that could be used for defence spending), European nations aim to maintain strong and sustainable public finances that allow for increased defence budgets.
3. Restricting Consumer Spending: To increase defence spending, European governments are pursuing unified fiscal policies, through which they avoid inefficient financial policies, reduce non-essential government jobs, and curb spending on social services that prevent governments from performing essential functions like defence and security. To avoid a simplistic debate framing the current European economic situation as a choice between “guns and butter”, it’s important to point out that most European governments have yet to implement new austerity social policies. However, this is unlikely to continue given the costs associated with Europe’s demographic shift (an ageing population), which will limit fiscal space in many European countries. Therefore, European governments will soon need strong and decisive political measures to cut budgetary costs allocated to social services, particularly for the elderly, such as pension systems, to provide the necessary fiscal space for future defence spending.
4. Enhancing Defence Cooperation as a European Public Good: Europe is seeking more effective ways to cooperate in improving its defensive capabilities as a European public good. This involves taking more effective steps towards integrating European armies to increase efficiency and collaborate on equipment procurement and reallocating resources from within the EU budget to benefit the European Defence Fund.
This would send a strong negative signal to Europe’s adversaries, such as Russia, and a positive one to the European defence industries. Additionally, enhanced cooperation will have a less negative impact on citizens by balancing military spending at the national level while simultaneously demonstrating Europe’s readiness to adapt to a new security environment and reinforcing European cooperation, which continues to enjoy strong popular support.
These points highlight the gap between the historical perspective of a war economy and the current situation in Europe, as illustrated by Jean-Pierre Maulny, Deputy Director of the Institute for International and Strategic Relations (IRIS) and expert on military affairs, who said in a study published on the French Ministry of Armed Forces’ website: “Using the term ‘war economy’ does not mean that the French are at war and that our entire economy must shift to support the war effort. In this case, the war economy relates only to part of our industries, which must provide more necessary materials faster. However, this task is not easy”.
Second: Impact of the Russia-Ukraine War on European Militaries
The ongoing Russia-Ukraine conflict has had a profound impact on European militaries, resulting in increased military spending and budget allocations, as well as an overhaul of European defence industry strategies. The following sections will explore these consequences in more detail.
1. Increased Military Spending and Budgets: One of the most significant impacts of the Russia-Ukraine war on European militaries has been the substantial increase in military spending and budgets. According to the latest report by the Stockholm International Peace Research Institute (SIPRI), global military expenditure has risen for the ninth consecutive year, reaching a total of $2.443 trillion, the highest level ever recorded by SIPRI. This surge includes all regions of the world, especially Europe, Asia, Oceania, and the Middle East as illustrated in the Above figure.
The ongoing conflict between Russia and Ukraine has led to significant increases in military spending by both countries and has spurred a broad increase in military expenditure across Europe. Total military spending in Europe reached $588 billion in 2023, a 16% increase from 2022 and a 62% increase from 2014.
In Central and Western Europe, military spending reached $407 billion in 2023, marking a 10% increase from 2022 and a 43% increase from 2014. The United Kingdom’s military expenditure stood at $74.9 billion in 2023, a 7.9% increase compared to 2022 and 14% to 2014.
Moreover, the UK’s military budget accounted for 2.3% of its GDP in 2023. The British government has announced a long-term plan to raise this to 2.5% of GDP.
In Germany, military spending increased for the second consecutive year in 2023, reaching $66.8 billion, up 9% from 2022 and 48% higher than in 2014.
In early 2022, the German government pledged to meet NATO’s goal of a 2% GDP defence budget for member states by 2025. By late 2023, the government revised its spending plan, announcing its intention to achieve this target starting in 2024, given that the military budget last year was only 1.5% of GDP.
Furthermore, France is encouraging its military manufacturing companies to expedite the production of military equipment to meet the objectives outlined in the new French Military Programming Law (2024-2030), which calls for a sharp increase in the armed forces’ budget by 2030, with investments amounting to €413 billion.
Poland’s military expenditure reached $31.6 billion, following a 75% increase between 2022 and 2023, marking the largest annual increase among European countries. This spending accounted for 3.8% of Poland’s GDP.
Finland, which joined NATO in April 2023, saw a 54% increase in military spending, reaching $7.3 billion, or 2.4% of GDP. This surge was primarily due to Finland tripling its spending on acquisitions in 2023 to enhance its military capabilities, including the procurement of F-35 fighter jets, air defence systems, and the replacement of weapons supplied to Ukraine.
In 2023, military spending in Eastern Europe increased by 31%, reaching $181 billion, the highest level since 1990. This increase was driven by significant growth in Russian and Ukrainian military expenditure in the second year of Russia’s full-scale invasion of Ukraine. Military spending in Eastern Europe grew by 118% between 2014 and 2023. Since the Russia-Ukraine war began, the European Union alone has spent €100 billion on arms purchases since 2022.
2. Modernising European Defence Industry Strategies: The main drivers identified to support the accelerated growth of the European defence industry are centred on several key strategies:
Long-term Demand Organisation: This strategy aims to provide military manufacturing actors with a long-term vision.
Modernising Procurement Procedures: Efforts are being made to speed up contracting processes to ensure the rapid acquisition of necessary resources.
Enhancing Supply Security: Reducing external dependencies by relocating part of the production to Europe is a critical focus.
Export Support: There is an emphasis on making the European defence industry more competitive globally.
Investment in Vocational Training: Addressing human resource challenges is a priority to ensure a skilled workforce.
Access to Financing: Supporting the defence industry’s access to self-financing and private-sector investment.
There is a growing awareness in France, the United Kingdom, Germany, and Italy compared to other European countries, of the need to robustly support the defence industries, renew military stockpiles, deliver more weapons to Ukraine, and prepare for a potential full-scale conflict.
However, there is a clear paradox: on one hand, governments seem to expect more investment and risk-taking from defence manufacturers to be able to order more weapons.
On the other hand, these manufacturers expect long-term commitments from governments (future long-term orders) before investing sustainably in their military industries.
Moreover, government support for this industry remains limited even in Germany, France, the United Kingdom, and Italy.
Notably, it appears that there has been a lack of coordination among European countries on how to tackle these challenges, despite some issues requiring investments that exceed national capacities.
For example, there are only three major suppliers in Europe (located in Sweden, Germany, and Switzerland) for explosive gunpowder used in artillery shells. The same scarcity applies to the production of certain mechanical parts and electronic components for weapons. This is what the new ” European Defence Industry Strategy” (EDIS) and the “European Defence Industry Programme” (EDIP) aimed to address, both of which were introduced on 5 March 2024 by the European Commission.
Conclusion
The pursuit of a war economy is likely to continue in the coming years to enhance the future structure of European security. The war in Ukraine appears to be ongoing, and the Russian threat to other European countries may increase depending on developments on the Ukrainian battlefield.
Additionally, the next U.S. president may exert more pressure on Europe to increase defence spending or may reduce or halt military aid to Ukraine.
This will impact the defence budgets of European countries for 2025 and beyond. To ensure the operational advantage of the armed forces in an increasingly challenging geopolitical environment for European countries, defence spending is expected to increase in the short to medium term.
This could involve reallocating funds from other areas of government budgets, particularly social welfare, towards defence, to meet NATO’s goal of allocating 2% of GDP to defence budgets, as illustrated in the Above figure.
Source: AMECO (2023); International Monetary Fund (2023); NATO (2023a).
Successive European governments have benefited greatly from the peace that has prevailed in the continent since the end of the Cold War. However, they have failed to plan for the time when this peace might end. Now, they are not well-prepared to increase defence spending easily, and many are struggling to do so.
Europe needs to find innovative economic ways to achieve this goal without losing popular support, given the limited financial resources. This is a challenging equation with uncertain outcomes. Many international reports have already indicated that public debt levels and overall tax burdens are high in several European countries. Therefore, increasing the overall debt level or tax burden is likely to impose significant economic costs in the medium term. Moreover, achieving NATO’s target of a 2% budget allocation does not guarantee building defence capabilities quickly enough or with sufficient strength for effective deterrence. If Europe’s security situation deteriorates further and defence spending reaches 3% of GDP or more, European governments may face societal pressures that could lead to internal unrest.
The overall tax level in Europe is already, on average, 7 % higher than in Asia and 15 % higher than in America. Increasing the tax burden could severely harm economic growth and, consequently, additional government revenues. Therefore, European countries with a lower tax burden relative to their GDP will find it easier to meet NATO’s 2% target.
Furthermore, a significant part of the production capacity, as well as the legal and administrative procedures in Europe, have not evolved since the Russian invasion of Ukraine began. If the current procedures had been applied during World War II, the Americans would not have reached Normandy in 1944, and the Free French Forces under De Gaulle would not have launched in 1941.
Only with time, and in a security context with no significant changes, can Europe’s ambition for strong defence capabilities and sustainable public finances be realised, allowing them to progress together. This could mark a phase we might call “post-increased military spending” and “pre-war economy”.
War, which is increasingly taking on more complex and ambiguous forms, has become a permanent state, with no one exempt from its potential occurrence in an environment ripe with the struggle for survival. As Clausewitz defines it, war is simply a struggle between two entities for survival. It is evident that the four core concepts that makeup Clausewitz’s theory of war are strongly relevant in the context of today’s world: Chance, Friction, Uncertainty, and the Fog of War. ●
By: Dr Wael Saleh, Expert at Trends Research & Advisory
