As the European Union prepares to boost its defence spending to meet the NATO goal of 5% of GDP by 2035, concerns over financial market reactions are surfacing. However, these fears are overstated and should not hinder the bloc’s strategic ambitions.
According to the deputy head of global economics at PGIM Fixed Income, the key challenge facing Europe is not economic but political. While deeper integration and greater economic independence are essential, concerns that higher defence spending would spark market backlash are largely unfounded.
Economic Reality vs. Market Fear
The fear that financial markets will penalize EU governments for increased military spending risks stalling necessary progress. Yet, the EU’s economic fundamentals are robust. Its collective debt-to-GDP ratio stands just over 80% — significantly lower than that of China, Japan, the United States, and the United Kingdom. In addition, historical evidence shows that markets have responded positively to EU-wide borrowing efforts when they are structured with a clear purpose — as seen during the pandemic response.
Scale of Investment Is Manageable
To match Russia’s recent 6% of GDP military spending, the EU would need to invest approximately €120 billion annually. That represents just 0.6% of EU GDP — a modest sum when compared to the massive fiscal responses mobilized during the COVID-19 crisis, which were ten times greater.
Rethinking Budget Trade-Offs
There is a common assumption that higher defence spending must come at the expense of social programs. However, this is not necessarily the case. With strategic planning, efficiency in joint procurement, and collective borrowing mechanisms, the EU can expand defence budgets while maintaining social commitments.
Issuing more collective EU debt for defence, structured to resemble sovereign bonds, could lower borrowing costs and deepen the capital market. This would also have the benefit of stimulating broader economic growth.
Growth Is the Ultimate Enabler
Perhaps the most effective way to support increased defence expenditure is to boost economic growth. The Eurozone currently lags with under 1% annual GDP growth. A return to the pre-pandemic average of 1.4% could easily offset the costs associated with enhanced defence capabilities.
Moreover, defence spending itself can be growth-enhancing — creating jobs, advancing technology, and stimulating related industries. Additional gains could come from better utilization of the EU single market. The IMF estimates that reducing internal trade barriers could boost productivity by 7 percentage points, far exceeding the costs of expanded military spending.
Political Integration: The Real Barrier
Despite strong economic arguments, the main obstacles are political. EU member states have been reluctant to cede sovereignty to a collective decision-making body, particularly on matters of defence and security. Yet, this perceived sovereignty is increasingly illusory. Many member states — notably Germany — rely heavily on external powers for security and energy needs.
True sovereignty, the article argues, can only be preserved and strengthened through collective action. By working together on defence, the EU not only enhances its strategic autonomy but also reinforces its economic and geopolitical standing.
Conclusion
The economic case for increased defence spending in the EU is compelling. Market fears are overstated, and the financial capacity clearly exists. What Europe needs is political will — to integrate more deeply, invest strategically, and recognize that cooperation enhances, rather than diminishes, national sovereignty. The time to act is now, before strategic gaps widen further.
