Can Europe’s New Military Spending Help Its Economies?

The continent’s leaders hope a surge of investment, to fill a security void left by the United States, can ignite growth. It won’t be easy.

From Brussels to Berlin, leaders across Europe are getting ready to spend hundreds of billions to rebuild their armies. The spending, they say, is necessary to prepare Europe for the dangers of a world where the United States no longer guarantees its security.

But many of them are also hoping that the surge of money will have another important effect: revitalizing the continent’s slumping industrial sector and opening a new front for economic growth.

That connection between defense investment and competitiveness is one of the topics European leaders are likely to discuss when they meet in Brussels on Thursday, after the European Commission publishes a long-awaited paper on the future of European defense on Wednesday.

“Economic strength and Europe’s plan to rearm are two sides of the same coin,” Ursula von der Leyen, president of the European Commission, said in a recent speech, calling the potential investments a “powerful tailwind for important industries.”

But whether that will be the case is far from certain, and the challenges to Europe’s actually making it happen are enormous.

While there is a growing consensus that new military spending is likely to offer some boost to European economies in the near term, just how much will depend on how well that money is spent and where.

Most European economies have relatively modest defense industries, though France and Germany in particular are seeking to grow theirs. For decades, Europe has depended significantly on imports of American arms and equipment, particularly when it comes to the most sophisticated weapons. That makes the continent not particularly well suited to absorb new military spending immediately.

But European leaders are keen to change that, in order to keep tighter control over their own security and to best reap the economic impact from that investment.

President Emmanuel Macron of France is pushing allies, including Germany, to buy French missile-defense systems instead of American ones. Portugal’s defense minister said last week that the country might replace aging fighter jets with European ones, not American-made F-35s, citing concerns over the Trump administration’s embrace of Russia.

The European Union’s recently unveiled 150 billion euro loan program — about $163 billion, meant to finance shared military development — will prioritize European-made products, officials announced on Wednesday. Member states must ensure that 65 percent of the costs of what they buy comes either from within the E.U. or from partners including Ukraine and Norway.

But building out Europe’s modest military industries to meet those ambitions will take time.

Friedrich Merz, Germany’s likely incoming chancellor, laid out the challenges to lawmakers on Tuesday, before Germany’s lower house of Parliament voted to loosen constitutional limits on debt to allow billions more in spending to revamp the country’s military. The measures must now pass the upper chamber and survive legal challenges before becoming law.

“Now we need to rebuild defense capabilities, in part from scratch, with a technology-driven defense and procurement strategy, with automated systems, with independent European satellite surveillance, with armed drones and with many modern defense systems and, above all, with reliable and predictable orders that should go to European manufacturers whenever possible,” Mr. Merz said.

European nations have increased spending on defense by nearly a third since 2021. But even combined, their annual military budgets remain less than half of the United States’. Defense industries employed just under 600,000 Europeans last year. By comparison, automobile manufacturers alone employed more than three million.

In some cases, like tanks and missile batteries, Europe will need to scale up existing industries or repurpose other industrial production lines. In others — including drone technology and some of the most cutting-edge weapons and military support equipment — Europe will need to build its own rivals quickly to compete with American players. Defense officials caution it could take years to pull that off, if not a decade.

And there is a risk that when European nations buy close to home, they will want to buy domestically rather than from Germany or France — duplicating efforts across the bloc. Europe already has some redundancy problems in defense. Ukraine, for example, has been sent at least 17 kinds of howitzers, not all of which use the same type of shell.

If Europe’s new spending ends up being duplicative, both the economic and strategic benefits could be muted.

That is why some economists caution that the economic lift, while likely, might not be enough to buffer European governments against the populist backlash they have faced in recent years.

But if the European Union can add new industries with coordinated investment and purchasing, then the growth effects could be significant.

They might even be enough to help aging European countries temper a downward spiral of shrinking workforces and plunging investment, spurring new technologies that would spill over into civilian sectors and providing a more lasting benefit.

Much depends on how the new spending plans play out.

The philosophy, at the moment, appears to start with spending big — and staying close to home. In Brussels, E.U. officials have made clear that they want to build up defense production abilities across their 27-member bloc. To catalyze investment, they have pitched a €150 billion loan program.

They have also proposed loosening European fiscal rules so that individual nations will be able to spend more, which they estimate could unleash as much as €650 billion, more than $710 billion, in additional spending. Whether that much spending actually happens will hinge on whether national governments are willing to take on more debt for military spending.

Even with the challenges of buying local, many economists think that European growth as a whole will see some benefit from the defense buildup. Goldman Sachs estimated a modest bump in the eurozone in each of the next three years, with the largest benefit in 2027.

The Goldman economists upgraded their growth estimates in part because of the German plan to ease debt limits. But others tempered expectations.

The German military spending plan “is really about security,” said Clemens Fuest, an economist who is the president of the ifo Institute in Munich, and who helped advise Mr. Merz.

“It’s good for the country because we want to avoid war in Europe,” Mr. Fuest said in an interview. But, he added, “It’s not good in terms of, ‘It’s going to create more growth,’ or anything.”

Still, at a time when German automakers and their suppliers have shed some 46,000 jobs since 2019, some Germans wonder if it may be time to turn idled automotive factories into cutting-edge plants for tanks or drones.

The German arms maker Rheinmetall has already taken a lead role in scaling up the country’s weapons-production capacities. It has provided new jobs to dozens of workers from one of Germany’s struggling auto suppliers, Continental AG. It has also been in talks with Volkswagen about the possibility of taking over an underperforming factory near Osnabrück.

“If German taxpayer money is being spent, then we need to create German jobs,” Armin Papperger, Rheinmetall’s chief executive, told reporters last week, adding that he expected Rheinmetall alone to add 10,000 jobs in Germany over the next two years.

That growth may be felt beyond Germany, too. Since the outbreak of the war in Ukraine, Rheinmetall has built new factories in Spain, Lithuania and Romania, growing into one of the largest munitions producers in the West.

Every new factory creates 500 to 1,000 new jobs directly, and several thousand more in the surrounding area, Mr. Papperger said.

And even though France has limited room to borrow to scale up its own spending, it, too, could benefit from higher military outlays in the rest of the region, Goldman Sachs economists say. It hosts the largest military in the European Union and is a major arms exporter.

Vicky Redwood, an economic adviser at Capital Economics, wrote in a March 13 analysis that in general, increasing military spending by 1 percent of G.D.P. would lift growth by around 0.5 percent. Outside of Germany, she wrote, a “reasonable” estimate is that European nations will raise their military spending by 0.5 to 1.5 percent as a share of output.

But several factors could affect how much military expenditure boosts growth, she wrote. Those include how much of the spending goes toward research and development and how efficiently the spending is done. Nothing is certain.

Apart from Rheinmetall, “the others are rather smaller players,” said Marcel Fratzscher, president of the German Institute for Economic Research. “I have doubts that this will be the future of Germany’s comparative advantage, changing from building cars to building tanks.”