Self-sufficiency or fatigue – scenarios to bookend European defence spending outlook

The EU's defence spending ramp-up carries real consequences for growth, fiscal positions, and borrowing costs, but the range of possible outcomes is wide. We model two scenarios to bookend this uncertainty: a rapid drive for defence self-sufficiency, and a scenario where spending fatigue sets in. Neither scenario moves medium-term GDP dramatically – growth ends up 0.1-0.2 percentage points higher or lower over the next three years – but the self-sufficiency path puts considerably more strain on Europe's public finances.

In the self-sufficiency scenario, European NATO countries need to close a €1tn gap in equipment and personnel to reduce reliance on the US – €400bn more than our baseline already assumes. Despite the scale of this spending, the lift to GDP is modest and front-loaded, since defence multipliers are low and the need for speed pushes more of the spending into imports. The fiscal cost is steeper: long-term bond yields rise by 40-50 basis points in the most fiscally stretched countries, including Italy and Spain, though EU-level funding could help cap the increase.

The fatigue scenario paints a different picture. An end to the Russia-Ukraine war and a wave of European elections could push defence spending down governments' priority lists, with weaker public backing prompting some countries to cut expenditure by 0.5-1% of GDP by 2028. This would shave around 0.2 percentage points off Eurozone growth over the next two years, with the sharpest pullback in southern European countries furthest from Russia.

Download the report for more detailed insights.