Can defense become Europe’s economic growth machine?

Microwaves, GPS, drones, duct tape, the PC. That’s just a short list of household goods that trace their origin to military research labs. 

Their dual-use functionality is known as “military-civil fusion” in the parlance of the defense sector.

Now, with Europe about to unleash a flood of money into its defense sector, reversing decades of underinvestment, hopes are high that the continent’s dismal productivity record could tap into similar military ingenuity to turn things around.

Projects underway in Europe are already beginning to rival those of the United States in terms of ambition: from continental antimissile defenses to low Earth orbit satellite constellations that could provide alternatives to an increasingly unreliable Elon Musk’s Starlink.

The hope is that eventually all the investment drives technological innovation that spills over into the civilian economy, boosting productivity and paying for itself. 

But is that realistic, or just wishful thinking? There’s no doubt that in the short term, economic strain is unavoidable, and will require cuts elsewhere.

“This is about spending more, spending better,” NATO Secretary-General Mark Rutte said in a speech at the start of the year, acknowledging Washington’s long-standing complaints about Europe not doing enough for its own security. While two-thirds of NATO members now meet the alliance’s target of spending 2 percent of gross domestic product on defense, it’s still “nowhere near enough,” Rutte said.

Rutte is getting his wish. The European Commission has opened the doors to €800 billion in military spending. In parallel, Germany, Europe’s largest economy, announced a plan to spend a trillion euros to upgrade its rickety national army and repair its infrastructure.  

Robowars

Where public money goes, private business follows, and there is a burgeoning crop of new defense players emerging to meet Europe’s defense needs.

Loïc Mougeolle is a defense contractor whose ties to the military go back a generation. His father worked in nuclear deterrence for the French navy; he, in turn, worked nine years for a defense firm until co-founding his own defense company, Comand AI, in 2022, after Russia’s invasion of Ukraine.

“We will never be able to produce more than a strategic adversary like China,” said Mougeolle, who is chief executive of the Paris-based Comand AI. “What we need to do is to be able to conduct operations, 10 times, 100 times more efficiently than them. This is the starting point of Comand AI.”

Mougeolle said he’s developed an artificial intelligence-based platform that can parse orders, develop task sequences and analyze terrain, all with the aim of greatly accelerating military response times. With Comand AI, “one staff officer can do the job of four,” he said.

For now, Comand AI only focuses on the defense sector, but Mougeolle said the technology his company has developed has civil applications as well. For example, it could help fleets of delivery robots navigate terrain to reach their destinations. Or it could help deal with coordinated cyberattacks on private businesses.

Off to the space races

But entrusting new inventions that benefit everyday Europeans to innovative players like Comand AI, or European satellite and missile defense initiatives, is a gamble. While there is plenty of historical precedent, there is no certainty.

“Defense spending has been an important driver of technological advances in the U.S.,” said Chris Miller, professor at Tufts University and author of Chip War: The Fight for the World’s Most Critical Technology. “The Defense Department often funded basic research and prototyping that was then picked up by private firms and turned into world-changing civilian technologies, such as [micro]chips, GPS, or display screens.” 

Research from the Kiel Institute published ahead of the Munich Security Conference in February estimated that Europe’s long-term productivity could rise by as much as 0.25 percent for each 1 percent of GDP spent on military research.

“There’s increasing evidence that some of the biggest breakthroughs, particularly in the high-tech area of computation, are associated with R&D that was developed during the Space Race,” said Ethan Ilzetzki, author of the paper and professor at the London School of Economics. 

The competitive nature of war and the existential stakes at play encourage efficiency and innovation. While it’s perhaps not a precedent today’s EU would want to repeat (another Thirty Years’ War, anyone?), the intense rivalries of early modern Europe helped give rise to its technological supremacy in the 18th and 19th centuries.

“There is an incentive here to be at the technological frontier, and even to push the technological frontier,” Ilzetzki said.  

Plowshares to swords

Plans to boost continental defenses have already drawn criticism, notably from those on the left who stress the importance of preserving the welfare state to avoid populist backlash. 

“While military expenditures no longer know fiscal limits, social benefits and support for parental leave are already on the chopping block,” economists Tom Krebs and Isabella Weber argued in a column for Project Syndicate. “This is bound to further fuel dissatisfaction.” 

The United Kingdom’s Labour government is a straw in the wind. It recently announced £4.8 billion in welfare cuts even as it boosted defense spending by £2.2 billion. 

It’s not all pain. Military spending will give the economy a short-term boost. Defense contractors’ revenues will rise, manufacturing jobs will increase, and workers’ wages will cycle back into the economy. Daniel Kral, lead economist at Oxford Economics, said the scale of the plans is so huge that they could help “break Europe out of stagnation through domestic demand-led growth.” 

But while the production of guns and bombs is counted in GDP figures, there is no long-term productivity boost from landmines that just lie in the ground, or howitzers under wraps in barracks. They may guarantee the system that generates GDP by protecting it from invasion, but their contribution to the final numbers is unquantifiable.

That’s a problem, given that Europe’s rearmament plans are going to be funded largely through debt. Government debt is already high, and adding to it could very well damage the economy in the long run. 

Choices, choices

One way to square the circle is to invest smarter. To keep as much value in Europe as possible, the bloc will need to develop the products itself that it currently buys from the U.S. — and do so without further antagonizing a protectionist White House. More than half of European spending on procurement flows to U.S. firms.

French President Emmanuel Macron has called on governments to replace U.S. Patriot missiles and F-35s with European alternatives like SAMP/T systems and Rafale jets. The Berlaymont is explicitly backing local industry as part of its rearmament efforts.   

But front-line countries like Poland or Finland want to prioritize immediate needs — even if that means buying from the U.S., South Korea or Israel.  

“The Baltics see fire, Central Europe sees smoke, everyone else doesn’t see anything,” said one European diplomat who asked to remain anonymous to speak candidly.

At present, too much of Europe’s defense spending goes to entrenched, slow-moving national champions. By contrast, Ilzetzki’s paper describes how the U.S. Department of Defense promotes competition through dual sourcing — purchasing weapon systems from more than one company at once to encourage competition. Often these tenders are more open-ended: Rather than favoring a certain technology with very fixed specifications that in effect favors established players, it will put out a call for open-ended solutions to a certain military problem. 

Such tenders “reached a broader set of firms that are smaller, younger, and more technology-oriented … [and] also led to more patents and dual-use spillovers,” the Kiel report reads. 

Partly because of that, about 16 percent of U.S. military spending goes to R&D, compared to only 4.5 percent in Europe. That helps U.S. companies keep their technological edge and makes them more likely to invent something useful in civilian life.

As such, to succeed in the long run, any coordinated European rearmament push will require capitals to do more to embrace new entrants — many more nimble and at the technological frontier, said Dan Breznitz, an expert in state-run innovation policy at the University of Toronto.  

“You need to be able to disrupt the system,” he said. “You need to have an understanding that there will be new players. And some of those new players will become the new giants. And that’s what may be something that I’m not sure that the EU is very good at doing, to be honest.”