"Higher European Defence Budgets: A First Step, Production Needed, NATO's Rutte Says"

In the face of escalating geopolitical tensions and the ongoing conflict in Ukraine, European NATO countries are ramping up their defense budgets. This move, while crucial, is just the first step in a much larger strategy to bolster Europe's defense capabilities. NATO Secretary General Mark Rutte recently emphasized the need for increased defense production to match the rising budgets, highlighting the urgency and scope of the challenge ahead.

The current geopolitical climate, particularly the war in Ukraine, has significantly influenced the urgency and scope of defense spending increases in Europe. The conflict has led to a reevaluation of defense capabilities among European NATO countries, with defense spending on the rise. As of 2024, European defense spending stands at an average of 2.2 percent of GDP, up from an average of 1.6 percent over the past decade. This increase is driven by geopolitical tensions and the need to strengthen military capabilities in response to the conflict. For instance, Estonia and Latvia have announced commitments to spend 5.0 percent of GDP on defense, while Poland plans to reach 4.7 percent in 2025. Other countries are discussing increasing their defense spending to 3 percent or even as much as 5 percent. This surge in spending is aimed at rebuilding stockpiles and acquiring new and more modern equipment, such as uncrewed and autonomous capabilities, which are crucial for conventional and hybrid deterrence and combat-related defense.

The potential long-term security benefits of these increases are substantial. Increased defense spending is expected to have a fiscal multiplier effect, boosting GDP. Goldman Sachs Research estimates that every €100 spent on defense would boost GDP by around €50 over two years. This economic impact is based on the assumption that imports of military supplies gradually decrease and are substituted with domestic products, focusing on equipment and infrastructure. Additionally, the harmonization of equipment across the continent, scaling up of research and development, and improved efficiency in defense spending are expected to increase the economic impact of military spending, potentially resulting in a higher fiscal multiplier after three years.

However, Rutte warns that increased spending alone is not enough. He calls for a robust transatlantic defense cooperation and more defense investment to reduce the risk of future conflicts. "The two percent benchmark provides safety for the next few years, but it is inadequate in the long run," Rutte said in an interview with the Telegraaf. "Choosing to remain at this level is a political decision, but one I believe no one wants to make."

Rutte's concerns are echoed by other NATO officials. Deputy Assistant Secretary of State for European and Eurasian Affairs Douglas Jones said, "There is still work to be done. There are still allies that are not there, and those that are not there need to have a plan to get there soon as possible." Jones also noted that the increase in defense spending demonstrates that European allies are stepping up to more equitably share the burden.

The economic implications for member states are also significant. Goldman Sachs Research estimates that additional spending on defense will have a fiscal multiplier of 0.5 over two years. This means every €100 spent on defense would boost GDP by around €50. The forecast is based on the assumption that imports of military supplies gradually decrease and are substituted with domestic products, and that the higher spending initially focuses on equipment and infrastructure. This could result in faster-than-expected GDP growth, as seen in the case of Germany, which plans to exempt defense spending from budget control measures and allot €500 billion to an infrastructure fund.

Furthermore, the European Defence Agency (EDA) reports that in 2023, European defense spending increased by 10 percent to a record €279 billion, marking the ninth year of consecutive growth. This trend is expected to continue, with EU defense spending projected to reach €326 billion in 2024. Defense investments are expected to hit a record 31 percent of total defense expenditure, with research and technology (R&T) spending increasing to €5 billion in 2024. Procurement spending is also seeing sustained growth and could increase beyond €90 billion in 2024.

These increases in defense spending are not only about military readiness but also about economic stimulus. As defense spending increases, there will be growing opportunities for equipment to be harmonized across the continent, for research and development to scale up, and for efficiency to improve. Such changes would increase the economic impact of military spending and likely result in a higher fiscal multiplier after three years. This economic boost is crucial for member states, especially those facing economic challenges, as it can help balance debt with defense priorities.

In conclusion, while the proposed increases in European defense budgets are a significant step forward, they are just the beginning. To truly enhance Europe's defense capabilities, NATO countries must focus on increasing defense production and fostering robust transatlantic cooperation. Only then can Europe hope to meet the challenges of the 21st century and ensure the security of its citizens.