Macroeconomic Impacts of EU Defense Spending

IMF Working Papers, March 20, 2026

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Authors: Davide Furceri, Pedro Juarros, Saurabh Mishra, Anh D. M. Nguyen, Ana Sofia Pessoa, Alexandre Sollaci
Published: March 20, 2026
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9798229042499.001

Europe’s defense spending is undergoing a historic shift, with NATO members expected to reach 2% of GDP and discussions underway to increase targets to 5% by 2035.
This paper uses two complementary empirical approaches to examine macroeconomic consequences of European rearmament:
- An annual panel dataset covering 27 EU countries over the period 1989–2023.
- A novel high-frequency dataset of monthly defense procurement contracts from Opentender, covering EU-27 countries from 2009 to 2023.

Annual panel analysis (27 EU countries, 1989–2023) to estimate short-term effects and cross-border spillovers of national defense spending.
High-frequency causal identification (Opentender monthly contracts, 2009–2023) using:
- Fiscal news.
- Instrumental variables based on European aggregate defense procurement and each country’s geographic proximity to major adversaries.

Past national defense spending has stimulated economic activity in the short term.
Defense spending entails sizable cross-border spillovers.
Spending multipliers varied considerably across countries and over time; multipliers tended to be larger when:
- import intensity is low,
- fiscal space (captured by sovereign yields spread) is ample,
- public investment efficiency is high.
High-frequency estimates corroborate positive effects of defense spending on output and show that equipment procurement has the strongest relative impact.
Given the larger and more synchronized nature of the current European defense buildup relative to past national episodes in the sample, multipliers might fall below historical estimates, especially if monetary policy is not accommodative.

The macroeconomic impact of increased defense spending depends on country-specific factors: import intensity, sovereign yields spread (as a measure of fiscal space), and public investment efficiency.
Equipment procurement yields the strongest relative output effect among defense spending components, according to high-frequency procurement evidence.
Synchronized and larger-scale European rearmament may produce smaller multipliers than historical national episodes, implying that monetary policy stance matters for the aggregate macroeconomic impulse.