Policy Brief: Defense Expenditure in EU Countries

Assessing Spending Fragmentation and Integration Opportunities in the EU Defense Industry
Number: 105
Year: 2024
Author(s): Carlo Cottarelli

Defense expenditure in EU members rose by 50% (net of inflation) between 2015 and 2023, with an increase in the expenditure-to-GDP ratio (Figure 2, referring to the current EU members). The increase involved all EU members, including not NATO members during the period under consideration.

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This paper reviews the evidence on the level and the composition of defense spending in EU member states, concluding that major shortcomings severely reduce its effectiveness compared to the United States and to the main threats to European security.

More specifically:

  • The aggregate level of spending, while rising since 2015 as a ratio to GDP, to a 1.7% level in 2023 is still well below the levels at the end of the Cold War (2.5%) and the current level of spending in the United States.
  • Overall spending is not small compared with that of Russia alone, but its composition and fragmentation imply lower effectiveness for the same amount of expenditure.
  • The composition of spending is biased toward personnel compensations rather than equipment, infrastructure, operations, and maintenance. Indeed, the expense level for these items per unit of personnel is much lower than in the US. Furthermore, expenditure is particularly low for operations, including training. In other words, even when equipment is available, soldiers may not be trained enough to use it.
  • On the production side, the EU defense sector is small compared to the US, including at the level of individual military equipment firms, thus reducing economies of scale.
  • Europe is also much more dependent on imports from the US than the US is on imports from the EU. Such a dependence has been rising since 2014.
  • On the demand side, procurement is fragmented across EU members, leading to higher costs, and an excessive number of types of equipment. All this combined with an excessive reliance on “national champions” firms reduces competition and efficiency.

EU targets to overcome these problems do exist but have not been backed up by concrete decisions and money. If these problems could be overcome, there are likely to be sizable savings or, alternatively, a much stronger effectiveness given the current level of spending.

This said, much more work would be needed to quantify the potential savings from joint defense initiatives. The available estimates, ranging from 20 to 100 billion, are not at all reliable.

Unfortunately, there remain huge problems in strengthening coordination in defense. By far, the main problem remains the dominance of national interests, as Europe remains a collection of sovereign nation states, with limited trust for each other, and its defense remains the sum of 27 different armies, navy, and air force.

In any case, there seems to be broad agreement that, notwithstanding the desirable improvement of joint initiatives, enhancing defense capabilities in Europe will also require additional spending. Many have called for the use of common sources of borrowing including Eurobonds.

There are definitely advantages to common borrowing, including making it more likely for this to fuel joint spending initiatives.

However, one should always keep in mind that borrowing resources for defense spending does not imply that that spending comes at no costs, i.e. without implying that there is a need to choose between “butter or guns”.

Indeed, unless military equipment is provided from abroad (which is something that would further increase the dependence of Europe on the United States) real resources, in terms of workers, will have to be moved from producing non-military equipment to producing military equipment.

IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.

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