---
title: "European Parliament ECON Committee study in Brussels; Macroeconomic and fiscal implications of structurally higher defence spending in the European Union; long-run consolidation pressures rise after 2028"
sdDatePublished: "2026-09-15T15:07:00Z"
source: "https://www.europarl.europa.eu/RegData/etudes/STUD/2026/784024/ECTI_STU(2026)784024_EN.pdf"
topics:
  - name: "government budget"
    identifier: "medtop:20000607"
  - name: "economic policy"
    identifier: "medtop:20000345"
  - name: "public finance"
    identifier: "medtop:20000608"
  - name: "legislative body"
    identifier: "medtop:20000615"
locations:
  - "Germany"
  - "Malta"
  - "Cyprus"
  - "Ireland"
  - "Poland"
  - "Austria"
  - "Netherlands"
  - "Lithuania"
  - "France"
  - "Romania"
  - "Hungary"
  - "Croatia"
  - "Portugal"
  - "Spain"
  - "Slovenia"
  - "Denmark"
  - "Finland"
  - "Luxembourg"
  - "Bulgaria"
  - "Latvia"
  - "Greece"
  - "Estonia"
  - "Italy"
  - "Slovakia"
  - "Sweden"
  - "Belgium"
  - "United States"
  - "Russia"
  - "Ukraine"
---


European Parliament ECON Committee study in Brussels; Macroeconomic and fiscal implications of structurally higher defence spending in the European Union; long-run consolidation pressures rise after 2028

Macroeconomic and fiscal implications of structurally higher defence spending in the European Union

Economic Governance and EMU Scrutiny Unit (EGOV)
Directorate-General for Economy, Transformation and Industry
PE 784.024 – September 2026
EN

Macroeconomic and fiscal implications
of structurally higher defence
spending in the European Union
STUDY
Requested by the ECON committee

External author(s):
Philipp HEIMBERGER
Meryem GÖKTEN
Juliane UNGER

ECTI | Economic Governance and EMU Scrutiny Unit (EGOV)

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PE 784.024

Macroeconomic and fiscal implications of structurally higher defence spending in the European Union

PE 784.024
3

Abstract
By temporarily exempting additional defence expenditure
from fiscal adjustment requirements within defined limits,
the National Escape Clause reduces the need for offsetting
spending cuts or tax increases over 2025–2028. We analyse
how much fiscal consolidation pressures under EU fiscal
rules could increase after 2028, once the clause expires and
higher defence spending becomes a permanent feature of
national budgets requiring financing. We examine key
factors shaping how higher defence expenditure affects
macroeconomic and fiscal outcomes across EU member
states.
This document was provided by the Economic Governance
and EMU Scrutiny Unit at the request of the ECON
Committee.

Macroeconomic and fiscal
implications of structurally
higher defence spending
in the European Union

ECTI | Economic Governance and EMU Scrutiny Unit (EGOV)

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PE 784.024
This document was requested by the European Parliament's Committee on Economic and Monetary
Affairs.

AUTHOR(S)
Philipp HEIMBERGER, The Vienna Institute for International Economic Studies (wiiw)
Meryem GÖKTEN, The Vienna Institute for International Economic Studies (wiiw)
Juliane UNGER, The Vienna Institute for International Economic Studies (wiiw)
CONTACTS IN THE EUROPEAN PARLIAMENT
Coordination: Giacomo LOI, Ronny MAZZOCCHI
Editorial assistance: Ovidiu TURCU
To give feedback or obtain copies, please write to: egov@ep.europa.eu
VERSION
Original: English
Manuscript completed in August 2026
BIBLIOGRAPHIC REFERENCE FOR THIS PAPER
Heimberger, Philipp; Gökten, Meryem, Unger, Juliane. 2026. Macroeconomic and fiscal implications of
structurally higher defence spending in the European Union, Brussels: European Parliament, EGOV.
For in-text citations: Heimberger, Gökten and Unger, 2026

DISCLAIMER
The opinions expressed in this publication are those of the author(s) only and should not be
considered as representative of the European Parliament's official position.

ARTIFICIAL INTELLIGENCE
Generative AI tools (GPT 5.6 Thinking) were used only to support language editing of the text. The
scientific content of the paper, including the research questions, conceptual framework, methodology
and analyses, was developed entirely by the researchers. No generative AI tools were used to
generate research ideas.
COPYRIGHT
© European Union, 2026
LICENCE
The reuse of this document is authorised under a Creative Commons Attribution 4.0 International
(CC-BY 4.0) licence (https://creativecommons.org/licenses/by/4.0/).
To use or reproduce elements that are not owned by the European Union, permission may need to be
sought directly from the respective rightholders.

Macroeconomic and fiscal implications of structurally higher defence spending in the European Union

PE 784.024
5
ABOUT THE EDITOR
The Economic Governance and EMU Scrutiny Unit provides in-house and external expertise to
support EP committees and other parliamentary bodies in shaping legislation and exercising
democratic scrutiny over EU internal policies.
To contact Economic Governance and EMU Scrutiny Unit or to subscribe to its newsletter please write
to:
Economic Governance and EMU Scrutiny Unit
European Parliament
B-1047 Brussels
E-mail: egov@ep.europa.eu
Manuscript completed in August 2026
© European Union, 2026

IDENTIFIERS
Print
ISBN 978-92-848-4282-7 | doi:10.2861/0892504 | QA-01-26-298-EN-C
PDF
ISBN 978-92-848-4281-0 | doi:10.2861/9955990 | QA-01-26-298-EN-N

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CONTENTS
LIST OF ABBREVIATIONS
7
LIST OF FIGURES
8
LIST OF TABLES
8
EXECUTIVE SUMMARY
9

INTRODUCTION
10

EU FISCAL RULES AND DEFENCE SPENDING UNDER THE NATIONAL ESCAPE CLAUSE
11
2.1. The national escape clause and the reformed EU fiscal framework
11
2.2. Defence spending across EU member states
12

ASSESSING THE NATIONAL ESCAPE CLAUSE FOR DEFENCE SPENDING
15

FISCAL CONSOLIDATION PRESSURES WITH STRUCTURALLY HIGHER DEFENCE SPENDING
UNDER EU FISCAL RULES
17

MACROECONOMIC EFFECTS OF HIGHER DEFENCE SPENDING
21

PUBLIC DEBT TRAJECTORIES WITH ALTERNATIVE ASSUMPTIONS ON DEFENCE
MULTIPLIERS AND INTEREST-GROWTH DIFFERENTIALS
23

BENEFITS AND LIMITATIONS OF COORDINATED EU DEFENCE SPENDING AND FINANCING
 27

RECOMMENDATIONS
28

CONCLUSIONS
29
REFERENCES
30
ANNEX
33

Macroeconomic and fiscal implications of structurally higher defence spending in the European Union

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LIST OF ABBREVIATIONS
AMECO
Annual Macro-Economic Database
COFOG
Classification of the Functions of Government
DSA
Debt Sustainability Analysis
ECB
European Central Bank
EDF
European Defence Fund
EDP
Excessive Deficit Procedure
ESA
European System of Accounts
EU
European Union
GDP
Gross Domestic Product
IMF
International Monetary Fund
MTFSP
Medium-term Fiscal-Structural Plan
NATO
North Atlantic Treaty Organization
NEC
National Escape Clause
R&D
Research & Development
SAFE
Security Action for Europe
SGP
Stability and Growth Pact
SPB
Structural Primary Balance
SIPRI
Stockholm International Peace Research Institute
TFEU
Treaty on the Functioning of the European Union
TPI
Transmission Protection Instrument

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LIST OF FIGURES
Figure 1: Defence spending in % of GDP in EU countries (2021 vs. 2024)
13
Figure 2: Structural primary balance (SPB) required at the end of the adjustment period to keep the
public debt ratio on a plausibly downward trajectory assuming additional defence spending
under the NEC
19
Figure 3: Sensitivity of the public-debt-to-GDP ratio to deviations in the interest–growth differential
under alternative assumptions about the effects of additional defence spending
25
Figure 4: Sensitivity of the public-debt-to-GDP ratio to alternative defence spending multipliers
26

LIST OF TABLES
Table A.1: DSA-based structural primary balance (SPB) targets to keep the public debt ratio on a
plausibly downward trajectory
33

Macroeconomic and fiscal implications of structurally higher defence spending in the European Union

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EXECUTIVE SUMMARY
Europe is moving towards a lasting increase in defence expenditure. Russia’s full-scale war against
Ukraine and growing doubts about the durability of US security commitments are placing the
governments of EU member states under mounting pressure to rearm. Against this background, this
study assesses the macroeconomic and fiscal implications of structurally higher defence spending
across the EU.
The European Commission has introduced several initiatives to provide greater flexibility for additional
defence expenditure, including a coordinated invitation for EU member states to activate the national
escape clause (NEC) under the EU fiscal framework, which 18 member states have taken up so far. The
NEC allows member states to deviate temporarily from their agreed expenditure paths by up to 1.5%
of GDP per year over the period 2025-2028, provided that the deviation reflects additional defence
spending. More recently, the NEC has been broadened, subject to specific limits, to cover fiscal
measures aimed at reducing dependence on imported fossil fuels. While the NEC provides temporary
flexibility, it is not designed to accommodate a structural increase in defence spending, for which
durable financing solutions remain lacking.
We provide a quantitative assessment of how fiscal consolidation pressures could increase after 2028,
once the NEC expires and higher defence spending becomes a permanent feature of national budgets
requiring financing. We show that the expiry of the NEC would increase fiscal consolidation pressures
in countries that use the flexibility to raise defence expenditure, including high-debt member states
that already face significant adjustment requirements even without additional defence spending.
To assess the effects of higher defence expenditure on macroeconomic and fiscal outcomes, we review
the relevant literature, focusing on short- and long-run output effects, inflationary pressures and
sovereign borrowing costs. Financing higher defence expenditure through tax increases or cuts to other
public spending once the NEC expires could weaken economic activity and trigger political opposition,
thereby raising the risk of instability. Moreover, unless EU member states limit non-productive defence
spending and place greater emphasis on investment and innovation, the output gains are likely to
remain modest at best.
Based on this review, we provide a quantitative assessment of how defence spending may affect public
debt ratios under different assumptions about its impact on economic output and the interest-growth
environment. Our results suggest that upward pressures on public debt will be stronger unless
policymakers organise the military build-up in ways that enhance its growth effects and contain
increases in sovereign borrowing costs. Implementing current commitments to structurally increase
military spending would be difficult to reconcile with the EU fiscal framework’s core objective of placing
public debt ratios on a plausibly declining trajectory.
We conclude with five recommendations:
First, use NEC flexibility selectively to avoid financing poorly targeted defence expenditure and future
fiscal adjustment pressures; second, allocate part of it to productive energy-security investment to
improve overall macroeconomic and public debt outcomes; third, strengthen European coordination
and common financing to reduce procurement costs, limit borrowing-cost disparities and enhance
overall macroeconomic gains; four, adapt the EU fiscal framework to provide a credible long-term
response to structurally higher defence expenditure; and fifth, strengthen European Parliament
scrutiny of the NEC and its post-2028 implications.

ECTI | Economic Governance and EMU Scrutiny Unit (EGOV)

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 INTRODUCTION
Europe is entering a period of structurally higher defence spending. Russia’s war against Ukraine, rising
geopolitical tensions, growing cyber and hybrid threats, and increasing uncertainty about the long-term
security guarantees provided by the United States have fundamentally altered the European security
environment (e.g. Wolff et al. 2025; Hildebrand et al. 2026). After decades of comparatively low military
expenditure and reliance on external security protection, European governments are now under strong
pressure to rebuild military capabilities and strengthen the continent’s defence industrial base. The
European Commission has launched the “Readiness 2030” agenda and initiated greater flexibility for
defence expenditure, including a coordinated invitation for EU member states to activate the national
escape clause (NEC) under the reformed EU fiscal framework (European Commission 2025a). The NEC
for defence expenditure allows Member States to temporarily deviate from agreed expenditure paths
by up to 1.5% of GDP annually between 2025 and 2028 to accommodate higher defence expenditure
(Council of the European Union 2026).
Structurally higher defence expenditure