Tanks and missiles won't increase GDP? “Defense spending can only bring short-term growth”

Higher European defense spending will protect the continent against threats, but will generate a short-term increase in GDP if the funds are not directed, among others, to: for research and development work – say experts in the Financial Times.

The daily noted on Wednesday that although the UK alone will spend £36 billion a year over the next decade, “this will provide a short-term increase in GDP, although not necessarily as large as if the money were allocated to other areas.” According to economists, “this trend will only continue if money helps to improve competences, rebuild infrastructure and increase exports.”

According to the editorial team, defense spending “should stimulate innovation in smaller companies to increase productivity throughout the economy, not just increase the profits of large multinational companies that produce expensive equipment such as tanks and missiles.”

– European ambitions in terms of defense growth may need to be verified, said Louis Knight of Third Bridge, a capital research company, in an interview with the FT. The specialist warned that Europe's industrial base is “ill prepared for the continuous increase in demand.”

Another quoted expert, Claus Vistesen, an economist at the consulting firm Pantheon Macroeconomics, said that without additional production capacity, much of the new spending “will be inflationary, that is, we spend a lot, at higher prices, on the same goods.”

Prof. Ethan Ilzetzki of the London School of Economics said that “for governments facing severe fiscal constraints, it is usually better to invest in areas other than defense – transport infrastructure, energy transition or education.”

The newspaper noted that defense spending may bring long-term effects if, as the European Central Bank reported in its latest analysis, it is redirected, among others, to: for research and development work that increases productivity.

In the opinion of Guntram Wolff, an expert from the Brussels think tank Bruegel, if governments in Europe allocate their funds to new technologies related to the armed forces, “it may bring broader economic benefits.” Also prof. Paolo Surico of the London Business School supports this approach, but notes that “public research and development in areas such as health care and education still bring greater economic benefits than innovations in defense.”

“Additional military spending worth 1% of GDP can increase production by up to 2% in the long run and increase productivity, provided that the money is spent on research and development,” writes “FT”, citing Surico's research. The expert estimated that “expenditures on research and development in the defense sector in Europe constitute only 0.04% of GDP in the entire EU and 0.12% in Great Britain; this is much less than 0.62% recorded in the USA, and the involvement of American venture capital in the activities of the defense industry is much greater than in Europe.”

From London Marta Zabłocka (PAP)

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