Investing.com -- An increase in defense spending in the euro area would likely impact the region’s public finances and gross domestic product (GDP), Barclays (LON:BARC) strategists said in a note.
According to the bank’s analysis, a rise in defense expenditure from approximately 2% to 3.5% of GDP by 2035 could enhance the euro area’s GDP by 1.6 percentage points (pp) compared to a scenario where spending does not increase. The report also mentioned that the current spending on equipment and infrastructure, which stands at 32%, could go up to 37%.
Barclays highlights the inefficiency in the current composition of Europe’s defense spending, which is managed at the national level with varying priorities and strategic considerations.
“Europe’s defense spending is low, but this is not the only problem – the composition of spending is likely inefficient, as defense is a national competency and decisions are made at the country level with distinct priorities and strategic considerations,” Barclays strategists noted.
But while a spending increase could lead to certain benefits, it would also have consequences for public finances and issuance of government securities, “which will depend not only on the growth impulse the additional spending will generate but also on the financing scheme adopted,” strategists explained.
Europe is facing an urgent need for funding as it looks to bolster its defense capabilities. With cracks emerging in the transatlantic alliance, the continent may have to double its annual defense spending.
Financing will likely come from a combination of national budgets, European Union funds, and possibly a new funding mechanism. Meeting these demands will require difficult financial choices, with previously untouchable priorities likely to be reconsidered.
Barclays does not foresee the creation of a new EU-level facility like the Next (LON:NXT) Generation EU (NGEU) fund for defense, nor an additional reform of the European Stability Mechanism (ESM) for this purpose.
Instead, the bank suggests that a special-purpose vehicle (SPV) with voluntary participation from certain EU and non-EU countries could be established to manage the additional spending.
“In our view, a well-designed pan-European solution that boosts spending, reallocates resources and promotes R&D would yield better results than merely reforming the fiscal framework to allow for national increases,” the bank’s team wrote.
The price of safeguarding Europe continues to climb. Russia’s invasion of Ukraine three years ago was already a major challenge. Now, just a month into his second term, US President Donald Trump has cast doubt on whether Europe can still count on American military support.