EU defense fiscal multipliers: An econometric approach
In this paper by Agustín García Serrador, David Sarasa-Flores, and Camilo Ulloa Ariza estimate EU‑27 defence‑spending fiscal multipliers using state‑of‑the‑art local‑projection methods. The authors build a panel for EU‑27 countries using accrual‑based central‑government defense outlays to construct exogenous defence‑spending shocks. They then estimate dynamic cumulative fiscal multipliers with linear Local Projections (Jordà, 2005), mapping identified defense shocks to future paths of trend‑normalized output and unemployment.
Findings
- A 1%‑of‑trend‑GDP defence‑spending shock raises EU‑27 output by about 1.4% in year 1, peaks around 1.6% in year 2, and then gradually returns to zero, with no strong long‑run level effect.
- Unemployment falls significantly and more persistently than output, indicating sizeable labour‑market effects.
- The positive aggregate effect is driven by capital‑intensive procurement; personnel and intermediate‑consumption spending have muted or even slightly negative multipliers once offsetting budget measures are considered.
- Multipliers are strongly state‑dependent: In deep downturns (left tail of the output distribution), two‑year multipliers reach roughly 1.75–2% of trend GDP. In expansions (upper tail), they fall to about 0.75% or even near zero at longer horizons.
- Limited fiscal space and high import dependence can push multipliers below one or even negative, while ample fiscal headroom and strong domestic supply chains keep them above unity.
Policy implication: defense spending can be an effective stabilization tool if it is capital‑intensive, timed counter‑cyclically, and supported by credible fiscal frameworks and resilient EU supply chains.
Buy Guns or Buy Roses?: EU Defence Spending Fiscal Multipliers
Authors: Agustín García Serrador, David Sarasa-Flores, Camilo Ulloa Ariza
From: BBVA Research
EU defense fiscal multipliers: A scenario simulation approach
Markku Lehmus, Jaakko Nelimarkka, and Lauri Vilmi use the Bank of Finland’s Aino model together with the Eurosystem’s basic model elasticities (BME) for the euro area to run two simulations of a staged 1% of GDP increase in defense spending across the euro area during 2026–2029. The two simulations differ in one key assumption:
- Simulation 1: All additional spending is procured domestically (from Finland/euro area), representing an upper‑bound GDP impact.
- Simulation 2: 50% of additional spending goes to imports from outside the euro area, representing a more realistic scenario.
In both cases, 50% of the spending is assumed to be financed through tax increases, and the authors evaluate effects on GDP, prices, trade balance and public debt.
Findings
- Under full domestic procurement (Simulation 1), euro area GDP is about 0.7% higher by 2029; under 50% imports (Simulation 2), it is only about 0.3% higher.
- The implied fiscal multiplier for defense spending is below one, meaning each extra euro spent generates less than one euro of additional output.
- Inflation effects remain moderate, though bottlenecks in the defense industry could amplify price pressures and push procurement outside the euro area.
- The biggest positive effects come from investment‑heavy and R&D‑oriented spending rather than personnel costs, which currently account for about 70% of euro area defense outlays.
Will higher defence spending boost euro area growth?
Authors: Markku Lehmus, Jaakko Nelimarkka, Lauri Vilmi
From: Bank of Finland
