The Economic Consequences of Rearmament

Note: This is the post promised last week about the economic consequences of European rearmament.

In my last post I criticised the premise that Europe’s rearmament was needed to meet an ‘existential’ Russian threat. The question which this post asks is: how is it to be paid for? And what further economic consequences can be expected?

The ReArm Europe Plan / Readiness 2030 proposed by the EU Commission in March 2025 aims to raise more than €800bn by 2030: €650bn by activating the fiscal escape clauses of the Stability and Growth Pact, €150bn through loans from the EC to members for common procurement, plus further possible sums through the European Investment Bank and a new Rearmament Bank. The combined effect of these measures would roughly double EU spending on defence over five years, from about 2.5% of GDP to 5%.

The most striking thing about the rearmament plan as thus laid out is that it is to be financed entirely by borrowing. ‘Relaxation of Fiscal Rules’ means that EU members’ annual deficits will not be limited to 3%, or their debt to 60% of their GDP. The Commission itself will borrow to lend. There is no mention of taxes needing to be raised or civilian spending needing to be cut to make room for military spending.

The call for a doubling of defence spending comes against a background of economic stagnation and elevated indebtedness. European economies have barely grown since 2008, despite two huge monetary stimulus packages following the banking collapse of 2008–09 and the Covid-19 epidemic of 2020–22. This is not the stagnation of contentment – as may be the case with Japan – but stagnation brought on by rising impoverishment.

Close to zero real growth and rising inactivity rates have meant that governments have had to borrow more to keep up social spending: the average public debt to GDP ratio of EU states rose from the low 60s in 1994–2008 to between 80 and 90 between 2008 and 2024, and this despite their commitment to ‘austerity’. Given multiplying social problems, Europe badly needs higher growth.

The UK and Germany are the main current European examples of somnolent economies. The UK’s growth rate has been almost zero since 2008; QE and asset booms have enriched the top, leaving more than 20% of its population in poverty, including 4 million children. Over 20% of its working-age population is classed as economically inactive. Alone among the G7 countries, Germany has had two consecutive years of recession, the collapse of its export growth model and loss of cheap Russian energy having led to a shrinking of domestic demand.

Both countries are strong candidates for a Keynesian ‘stimulus’. But neoliberal economics stands in the way. What ails these countries is not sufficiently grave to require emergency treatment. And short of this, neoliberals believe that it is only through public austerity that private investment will be set free.

Those who wish to reignite public investment but find fiscal rules standing in the way realise that they need a compelling political project to overcome resistance of markets and experts. This is where military spending comes in. If national security is at stake the virtue of austerity yields to the higher virtue of keeping us all safe.

In a previous post I called this approach ‘military Keynesianism’. Keynes himself understood that full employment often depends on wasteful public projects. This is because in uncertain times savers are likely to hoard money instead of investing it. He gave as historical examples of wasteful spending pyramid-building in ancient Egypt, cathedral building in medieval Europe, and ‘even wars’. War is a classic case of wasteful spending on a huge scale.

War and war preparations offer the grand political project needed for governments to justify increased public investment. If they can plausibly claim both that rearmament is needed on security grounds and that it will stimulate economic growth they have a winning story. And this is exactly what is happening. Thus Lord Coaker, Britain’s Foreign Office Minister, speaking in Parliament on 3 June: ‘We will make defence an engine for growth to create jobs and increase prosperity in every nation and region of the UK… The lives of workers in Barrow, Derby and Govan… are being transformed not just by this defence investment but by the pride and purpose which comes with defence work.’

In the same spirit, Germany’s parliament has abolished the ‘debt brake’, introduced in 2009 to make federal borrowing impossible. Under a constitutional amendment approved in March, any defence spending above 1% of GDP is now exempt from the debt brake’s borrowing limits. The German government is empowered to borrow ‘whatever it takes’ to safeguard its security, and thus expand domestic demand to offset falling foreign demand.

One might just shrug one’s shoulders at the political cynicism. ‘It’s unfortunate’, one might say, ‘that the only politically feasible way of bringing about more public investment is by linking it to defence needs, but militarised public investment is better than none at all.’ In fact there are serious economic and moral issues involved in any project for economic growth based on military spending.

The economic objection has been put by Yanos Varoufakis. (See his speech to European Parliament 10 June.) Production is undertaken for the purpose of consumption. If military goods are not truly ‘consumed’ in the economic sense, an economy whose growth depends on military production requires frequent wars to use them up. Otherwise the armaments will pile up unused, and the temporary fillip they give to demand will collapse.

Plausible though the argument is, it is not conclusive. True enough, guns are not ‘consumed’ like butter. But they can still ‘go bad’ due to depreciation, obsolescence, and the changing nature of warfare. So they can be replaced and updated just like any other civilian good. Further, a sizeable share of defence spending spills over into the civilian economy where it continues to multiply even after the end of the original stimulus.

However, an economic policy based on military logic has consequences which go beyond the strictly economic. The diversion of a sizeable share of production from civilian to military use requires the invention or ratcheting up of security threats. Further, the more militarised an economy is the more powerful will be what Eisenhower called its ‘military-industrial complex’, one of whose chief aims will be to procure and test new weapons ahead of the enemy. Thus even if economic militarisation does not lead ineluctably to actual war, it creates a war mentality which makes war more likely.

Keynes said that wasteful spending was better than no spending, but it would be more sensible to build houses, schools, and such like. It is a sign of the poverty of neoclassical economics and the degradation of public thought that, to get a polite hearing, the case for public investment has to be made in security terms.