We like more or less, geopolitical times have changed. Not only have we a strong armed conflict at the EU doors, but, with the change of guard in the White House, the American Pax is serious risk. Donald Trump, With a concepttion of the purely transactional and business -oriented world, it is forcing EU countries to take care of their own defense. Not only because it considers that the EU is benefiting free of the protection provided by the United States (what in English is known as Free Rider), but also for purely economic reasons: according to the report Draghi, Among mid -2022 and mid -2023, more than 60% of the military equipment acquired by the EU was bought from the United States. In this sense, an increase in public spending in defense in the EU will involve greater demand for US companies in the sector.
Indeed, the EU dependence with respect to the American Defense Industrial Base is very marked. But this is not due exclusively to the greater degree of technological progress in the American industry, but also that the material that occurs on the other side of the Atlantic is cheaper. And this is possible thanks to the greater degree of concentration of the American industry, which allows you to benefit from economies of scale. In terms of market structure, the defense industry is a quasimononopony; That is, there is practically a single plaintiff, which is the State. In the EU, each Member State demands, in addition to countries outside the EU, to the companies of its own country. This generates a strong fragmentation on the supply side. That is, EU defense companies are fragmented nationwide because demand is. And this not only generates a clear loss of economies of scale, but also has technical implications in the form of less interoperability.
Given this situation, the EU has gained hands to work, presenting, on the one hand, the White Paper on European Defense, which identifies investment needs in the defense sector and on the other, the Plan ReArm Europe, which seeks to provide new financial means to reinforce EU defense capabilities. He White Book It contains successful and interesting ideas, especially those related to the need to concentrate the demand of the Member States, not only for consumables, but also for more complex projects. It is about moving from the era of the dividend of La Paz, which according to the president From the Leyen It has already ended, to the dividend of collaboration.
Unfortunately, the Rearm Europe Plan presents financial solutions focused on facilitating indebtedness nationwide, non -mutualized. Specifically, it raises (1) the activation of a safeguarding clause to the newly released fiscal rules, to favor an increase in national public spending in defense of 1.5% of GDP annually and (2) the so -called SAFE instrument, with up to 150,000 million euros, which although it will be borrowing at smaller types to some countries such as Italy, France or Spain national. This, although apparently grants a clear advantage to Germany, with a public debt ratio on GDP slightly above 60% and therefore with large fiscal space, in the medium term it will entail an inefficient use of taxpayer’s resources and result in a lower increase in European defense capacity. In general, European public goods, such as defense, should be financed in a mutual way, that is, through transfers.
The pressure for Spain to increase public spending in defense is especially strong, to the extent that we are in line among NATO countries in public spending on defense on GDP, without having reached the objective of 2% (around 1.3% in 2024). It is true that despite this lower proportion, Spain has been able to contribute to air and naval missions of the I will take, while other countries that fulfill or exceed the threshold have not been able to do it. Obviously, that small EU economies meet the ratio does not necessarily imply that EU defense capabilities are reinforced. Therefore, it is important not to directly identify greater public spending in defense with greater defense capacities. And explain why it is important that above all the EU largest countries invested more and especially well in defense.
And then, the million -dollar question comes: can Spain benefit from a higher public spending in defense? Public spending is one of the GDP components, so if spending is increased, GDP will also do so. But this is a very simplistic analysis and it is necessary to have other elements into account.
First, it is key to analyze the composition of public spending and its destination. The public spending concept in defense is very broad and great features, covers three categories: (1) remuneration of military personnel, (2) intermediate consumption, such as ammunition or fuels and (3) investment. The greatest transformative impact at economic and industrial level will be given if the investment in equipment increases. But for this, Defense companies based in Spain have to benefit from orders from the Government of Spain or the EU, if joint demand platforms are rightly chosen. Otherwise, we will be increasing public spending to stimulate the economy of another country.
Secondly, it cannot be lost in view that Germany is preparing a strong fiscal expansion package with higher investments in defense and infrastructure. While this is positive to the extent that it will stimulate the German economy, the main EU economic engine, it can also have less positive implications. If the German public debt supply increases, the market access of other EU sovereigns can be complicated. There is nothing more to see the leap of 30 basic points that gave the profitability of the public debt to 10 years of the sovereigns of the euro zone when the German plan was announced.
Finally, although there are still billions of euros pending to receive and execute in Spain within the framework of the recovery plan, with a public debt ratio above 100% of GDP, increasing public spending in defense will take sooner or later to review other spending items or have to increase income.
In short, Spain can benefit from a higher public spending in defense. But both for efficiency and fiscal space reasons, for this it is key that the EU states concentrate their demand and that it also benefits the Spanish industrial base. It will not be an easy path, difficult decisions in budgetary matter will have to be made.
*Judith Arnal is the main researcher in CEPS and the Royal Elcano Institute.