The rise in defence spending and the euro area economy

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The rise in defence spending

and the euro area economy

Europe’s defence build-up:

macroeconomic, fiscal and

financial stability challenges

EEA/ESEM Annual Meetings

Philip R. Lane

Member of the Executive BoardDublin, 17 August 2026

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Outline

Developments in defence spending and its financing

Macroeconomic effects of the increase in defence spending

2 Financial and funding dimension

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Defence spending across euro area countries

Sources: Eurostat (2026), European Commission Spring 2026 Forecast, North Atlantic Treaty Organization (NATO) (press release 7 July 2026) and European Defence Agency (EDA).

Notes: Countries are ordered by defence spending as a percentage of GDP in 2025 according to European Commission data (based on the Classification of the Functions of

Government (COFOG)). For Ireland, Spain, Italy and the Netherlands, the blue bar shows 2024 data plus the increase in COFOG defence investment from 2 024 to 2025. For Ireland,

Italy, Cyprus, Latvia, Lithuania and Malta, European Commission data are unavailable for 2026 and defence spending is shown as constant at the assumed 2025 value. For the non-

NATO Member States (Ireland, Cyprus, Malta and Austria), 2025 NATO defence spending is approximated by the latest available EDA defence spending data for 2025, shown by the

shaded blue markers. Two euro area aggregates are displayed, EA contains all 21 countries, while EA* contains only the NATO c ountries. For Ireland, figures are expressed as a

percentage of GNI*.

Defence spending – 2025 and 2026 estimates across different sources

(percentages of GDP)

EE LV LT GR SK BG FR CY NL FI EA* DE HR EA BE SI IT LU ES PT AT MT IE

COFOG 2025 COFOG 2026 NATO 2025 NATO 2026

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Total public and defence investment across euro area countries

Source: Eurostat (press release 24 April 2026),

Notes: Countries are ordered by total public investment spending (P.51g in ESA 2010) as a percentage of GDP in 2025. The euro area countries are grouped by countries that

have activated the national escape clause (NEC, on the left) and the non-NEC countries (on the right). The additional flexibility for defence spending under the EU fiscal framework is

equivalent to 1.5% of GDP from 2025 to 2028. This flexibility can be applied if a Member State requests activation on the bas is of their increase in defence spending compared with

the selected base year. For most of the 14 euro area countries using the NEC, 2021 serves as the base year, while Bulgaria, S pain and Greece use 2024. For Ireland, figures are

expressed as a percentage of GNI*.

Public investment and investment in defence:2025

(percentages of GDP)

EE LV HR SI GR SK BG FI LT AT DE BE PT ES LU FR IT NL CY MT IE

countries with an active NEC countries without an active NEC

Investment in defence Total public investment 20% of total investment in defence

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Source: Eurostat (press release 24 April 2026).

Notes: COFOG data. "R&D" defence spending (3% on average) is subtracted from the other components (the biggest share from inv estment, followed by personnel). “Personnel”

denotes the share of compensation of employees plus social benefits (other than social transfers in kind) (here 53% on average, declining share); “intermediate consumption" consists of

government use of goods and services, such as fuel, maintenance and other operational inputs, in the day -to-day provision of defence services (24%, increasing share); “investment”

denotes gross fixed capital formation, such as the purchase of equipment and infrastructure. The latter category includes mil itary weapon systems, such as warships, submarines,

military aircraft, tanks, missile carriers and launchers (19%). “Other” denotes fiscal transfers, including military aid to Ukraine, and other spending (3% on average, increasing after 2021).

Defence spending breakdown (1995-2024)

(share of total spending)

Composition of euro area defence spending over time (21 countries)

10%

20%

30%

40%

50%

60%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60%

2024

1995

Intermediate consumption Investment Personnel Other R&D spending

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Long-term outlook for defence spending and its composition

Sources: Janes databases and ECB staff calculations for the aggregation.

Notes: ROW stands for rest of the world. The ROW aggregate excludes the NATO

countries. The euro area aggregates exclude Malta and Cyprus.

Total defence spending

Sources: Janes databases and ECB staff calculations for the aggregation.

Notes: The euro area aggregate excludes Malta and Cyprus. The NATO aggregate

excludes the non-NATO euro counties Ireland, Cyprus, Malta and Austria. ROW stands for

rest of the world, excluding the NATO countries. R&D stands for research, development,

testing and evaluation, according to Janes database classification.

Spending by functional category

(percentages of GDP) (shares of total spending)

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

3.2

2024 2028 2035

Total defence spending

Euro area NATO ROW

100

2024 2028 2035 2024 2028 2035 2024 2028 2035

Euro area NATO ROW

Other R&D

Operations & Maintainance Personnel

Procurement

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Defence spending and fiscal positions in euro area countries

Sources: ECB, NATO and ECB calculations.

Notes: Only euro area countries that are members of NATO are included. The sovereign

debt-to-GDP ratio refers to the fourth quarter of 2025.

Change in defence expenditure and

sovereign debt-to-GDP ratio

Sources: ECB and Eurostat (government finance statistics), European Commission (draft

budgetary plans), NATO and ECB calculations.

Notes: Low debt means a debt-to-GDP ratio below 60%, medium debt a ratio between 60%

and 100% and high debt a ratio above 100%. The chart shows the average of the actual

general government balance in 2025 and draft budgetary plans for 2026. Spain is missing

from the chart as it has not submitted a draft budgetary plan for 2026. Bulgaria is missing

as it had not yet joined the euro area in 2025 and was therefore not required to submit a

draft budgetary plan for 2026.

Change in defence expenditure and

general government balance

(percentages of GDP and percentage points) (percentages of GDP and percentage points)

HR SK

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0 50 100 150 200

Change in defence expenditure 2022-2026

Sovereign debt-to-GDP ratio

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

-6 -5 -4 -3 -2 -1 0 1 2 3 4

Low debt Medium debt High debt

Change in defence expenditure 2022-2026

Average general government balance in 2025 and 2026

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Developments in defence spending and its financing

Macroeconomic effects of the increase in defence spending

2 Financial and funding dimension

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100

150

200

250

2022 2023 2024 2025 2026

Euro Area Broad Equity Index

Technology

Targeted Defence

German spending

announcement

Russian invasion

of Ukraine

13/08/2026

Sources: Bloomberg, LSEG and ECB calculations.

Notes: The chart shows the one-day changes in key financial market

indicators on 5 March 2025 following the German fiscal announcement.

Box plots are based on daily changes since 1 January 2020 and show

the minimum, the 25th, 50th, and 75th percentiles, and the maximum of

the respective historical distributions. The latest observations are for 13

August 2026. DE stands for Germany, EA stands for euro area, OIS for

overnight index swap, and ILS for inflation-linked swap.

Cross-market reaction to 5 March

German fiscal announcement

Financial market impact of German announcement on defence spending increases

Sources: Bloomberg, LSEG and ECB calculations

Notes: The chart decomposes the one-day change in the respective

nominal euro area overnight index swap (OIS) forward rates on 5 March

2025 into the contributions from the real rate component and inflation

compensation. The real rate component is calculated by subtracting the

inflation-linked swap rate from the nominal OIS rate.

Reaction of euro area OIS rates to

German fiscal announcement

Sources: LSEG and ECB calculations.

Notes: Values are normalised to 100 on 1 January 2025. Vertical lines

mark the days before the “Russian invasion of Ukraine” on 24 February

2022 and the “German spending announcement” on 5 March 2025,

respectively. The latest observations are for 13 August 2026. EA stands

for euro area.

EA equity market performance:

broad index, technology, defence

(basis points) (basis points) (index: 1 January 2025 = 100)

-48

-36

-24

-12

DE 10y EA 10y

OIS

DE 10y

spread

over EA

OIS

EA 1y1y

ILS

EA 5y5y

ILS

Daily changes since January 2020

Change on 5 March 2025

1y1y 1y2y 1y4y 1y9y

Inflation component

Real rate component

Nominal OIS rate – change on 5 March

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-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Q1 22 Q1 23 Q1 24 Q1 25

Debt

Historical average

-1.0

-0.9

-0.8

-0.7

-0.6

-0.5

-0.4

-0.3

Q1 22 Q1 23 Q1 24 Q1 25

Capex

Effects of exposure to defence on corporate financing and investment

Sources: LSEG, NL Analytics and ECB calculations.

Notes: The latest observations are for the third quarter of 2025 for LSEG and fourth quarter

of 2025 for NL Analytics. Exposure of euro area firms to defence and infrastructure

spending is derived from the frequency with which they mention related expressions in

earnings calls. Exposed firms made up 7% of the total number of listed firms in the second

quarter of 2025.

Difference in debt and investment

between firms exposed and not exposed to defence

Sources: ECB (AnaCredit, Centralised Securities Database (CSDB)), NL Analytics and

ECB Calculations

Notes: A firm is defined as exposed to defence if a related keyword has been contained in

at least one of its earnings calls since second quarter of 2022. Historical averages start in

2018 and 2020 respectively for the CSDB and AnaCredit for reasons of data availability for

the exposed firms. Bank loan growth is smoothed using a five- month centred moving

average. The latest observations are for April 2026 for Anacredit and July 2026 for the

CSDB.

Debt by exposure to defence and infrastructure

(percentage points)

(left panel: 12-month trailing sum of net issuance; right panel:

percentages per annum)

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-5

2022 2023 2024 2025 2026

Non-exposed firms Exposed firms

Historical average

Bank loans

-25

100

2022 2023 2024 2025 2026

Debt securities

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Euro area bank exposures to the defence sector

Sources: ECB (AnaCredit), ECB calculations.

Note: Turnover values refer to defence-sector firms that borrow from euro area banks and

therefore the figure does not represent total turnover of the entire defence sector. NFC

stands for non-financial corporations.

Lending to the defence sector and total

turnover in the defence sector

Sources: ECB (AnaCredit), ECB calculations.

Note: The horizontal line indicates the average share of lending to the defence sector in

total lending by euro area banks to NFCs. NFC stands for non- financial corporations. 2024

data.

Share of defence sector lending – lenders

and borrowers

(EUR billions) (percentages in 2024)

4000

4200

4400

4600

4800

5000

5200

5400

5600

5800

6000

2020 2022 2024

Lending to defence sector

Total lending to NFCs (rhs)

300

350

400

450

500

550

600

2020 2022 2024

Defence sector turnover

Q4 24 Q4 24

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

FR IT DE ES

Lender – % of euro area bank lending to defence sector

Borrower – % of euro area bank lending to defence sector

Lender – % of bank lending to NFCs in country (right-hand scale)

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Effects of defence spending on the real interest rate

Sources: ECB staff calculations. Notes: Effect of a 1% of GDP government consumption increase in the euro area lasting 25 years in a version of the EAGLE model (Gomes et al.,

2012). The model is extended to include preferences over safe assets as in Rannenberg (2021) and Rannenberg (2025). This feat ure introduces long-run effects of a fiscal expansion

on the real interest rate by lowering the response of private consumption to higher current and expected future real interest rate increases, and introduces a wealth effect from the

supply of government bonds on consumption. Government consumption enters household utility as a complement as in Clancy et al . (2016). Without this feature, the long run (ten-

year) effect of the fiscal expansion on the real interest rate would be slightly more than half as big. The result for government investment differs because government investment raises

productive capacity while having a smaller effect on private demand. In order to raise private demand correspondingly, the real interest rate has to eventually decline.

Effects of different types of defence expenditure on the real interest rate

-0.4

-0.3

-0.2

-0.1

0.0

0.1

0.2

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40

Government consumption Government investment

(horizontal axis: quarters after the increase in spending, vertical axis: percentage points)

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Funding gap for strategic investment

Sources: European Commission, European Parliamentary Research Service, NATO,

European Investment Bank and ECB staff calculations.

Note: Based on Bouabdallah et al. (2025). Defence, green and digital investment needs in

the EU, expressed as a percentage of 2024 GDP and broken down into private funding

(blue bars), already existing EU funding (yellow bars), and the public funding gap (red

bars).

Estimated annual spending needs in defence and

other strategic investment

Source: Bouabdallah et al. (2025).

Note: Financing of the three transitions at EU and national level.

Multi-pronged approach for public financing of

strategic investment needs

(percentages of GDP)

Green Digital Defence

Public funding gap EU funding Private funding

National and EU

public strategic

financing of three

transitions

Roadmap towards a

more integrated and

productive EU

Additional

reprioritisation of

national budgets

Existing EU and

national financing

mechanisms

A more

cohesive

Europe

Status quo

Put further order in

your house

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Outline

Developments in defence spending and its financing

Macroeconomic effects of the increase in defence spending

2 Financial and funding dimension

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Expansion of activity in different defence sectors in Germany

Sources: Federal Statistical Office and ECB staff calculations.

Notes: Orders refer to domestic orders. “Other transport equipment” includes military

fighting vehicles, alongside ships, aircraft and rail equipment. Chart shows the percentage

change in the average domestic order volume index for 2026 and 2025 compared with

2021. 2026 values are based on January-June data. The latest observations are for June

2026.

German domestic manufacturing orders

Sources: Federal Statistical Office and ECB staff calculations.

Notes: Chart shows the percentage change in the average production index for 2026 and

2025 compared with 2021. 2026 values are based on January-June data. The latest

observations are for June 2026.

German manufacturing production

(percentage changes compared with 2021 levels) (percentage changes compared with 2021 levels)

100

150

200

250

300

350

Explosives Weapons and

ammunition

Other transport

equipment

2025 compared with 2021 2026 compared with 2021

100

120

140

Explosives Weapons and

ammunition

Other transport

equipment

2025 compared with 2021 2026 compared with 2021

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Baseline: Effects of additional defence spending since 2025 Munich Security Conference

Euro area additional defence spending

and composition since February 2025

0.0

0.1

0.2

0.3

0.4

0.5

0.6

2025 2026 2027 2028

Ukraine support

National defence

Total

71%

21%

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

National defence 2025-2028

Compensation of employees

Intermediate consumption

Other spending

Government investment

Sources: Eurosystem staff macroeconomic projections for the euro area, June 2026, and ECB calculations. Forthcoming in Checherita-Westphal, C., Rodríguez-Vives, M., Lalinský, T. and Parker, M.

(2026).

Notes: Fiscal shock in the RHS chart defined in marginal terms, that is, annual change of the levels of additional national defence spending shown in LHS chart (dark blue bars) (defence spending on

Ukraine support is assumed not to have a direct macroeconomic impact on the euro area economy). The macroeconomic effects are aggregated at the euro area level on the basis of country-specific

estimates produced using simulation models of the Eurosystem national central banks. They are expressed as a percentage point deviation from a baseline without the additional defence spending,

keeping monetary policy, exchange rate and financial spreads fixed at their baseline values.

Estimated macroeconomic effects of the

additional national defence spending

(left-hand scale: percentages of GDP; right-hand scale:

percentage of GDP, component shares, percentages)

(fiscal shock: percentage points of GDP; macroeconomic

effects: percentage points)

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

0.18

0.20

202520262027202820252026202720282025202620272028

Fiscal shock Real GDP growth HICP inflation

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Macroeconomic impact of a gradual fiscal expansion – multipliers in projection models

Euro area GDP multiplier Euro area HICP inflation

(change in GDP per unit of change in government defence

spending in percentage points)

(annual average deviation from baseline growth in percentage

points)

Sources: Bokan, N., Jacquinot, P., Lalik, M., Müller, G., Priftis, R. and Rigato, R. (2025), “ Macroeconomic impacts of higher defence spending: a model-based assessment”, Economic Bulletin, Issue 6, ECB.

Notes: The charts report the estimated impact of an increase in defence-related expenditure from 2% of GDP in 2025, gradually building up until the target of 3% is reached at the beginning of 2028, and

then remaining constant over the medium term. The instrument is government consumption purchases. Monetary policy and exchange r ates are active to facilitate model comparison.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

2025 2026 2027 2028

ECB-REBASE ECB-BASE ECB-MC

DREAM HANK Average

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

2025 2026 2027 2028

ECB-REBASE ECB-BASE ECB-MC

DREAM HANK Average

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Macroeconomic impact of defence spending – multipliers in projection models

Euro area GDP multiplier: across models Euro area GDP multiplier: state-

dependencies and different instruments(change in GDP per unit of change in government defence

spending in percentage points) (change in GDP per unit of change in gov. spending in percentage points)

Sources: Checherita-Westphal, C., Huber, C., Rodríguez-Vives and Müller, G. (2025).

Notes: All simulations with ECB-BASE at fixed monetary policy and fixed exchange rates. Government

consumption purchases only: same multiplier as in the left -hand side chart. Defence spending composition

assumes spending to be distributed across public consumption (40%), investment (40%), compensation

(15%) and transfers (5%). “Higher import content” assumes that the import content of all spending is 50%

instead of 16% as in the benchmark calibration. “Tighter labour markets” assumes a steeper slope of the

wage Phillips-curve and a stronger correlation of private sector with public sector wages than in the

benchmark.

Sources: Bokan, N., Jacquinot, P., Lalik, M., Müller, G., Priftis, R. and Rigato, R. (2025),

“Macroeconomic impacts of higher

defence spending: a model-based assessment”,

Economic Bulletin, Issue 6, ECB.

Notes: The spending instrument is government consumption purchases. Monetary policy

and exchange rates are active to facilitate model comparison. The charts report multipliers

from an increase in defence-related expenditure from 2% of GDP in 2025, gradually

building up until the target of 3% is reached at the beginning of 2028, and then remaining

constant over the medium term.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

2025 2026 2027

ECB-REBASE ECB-BASE ECB-MC

DREAM HANK Average

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

2025 2026 2027

Government consumption purchases

Government investment

Government transfers to households

Defence spending

Defence spending with higher import content

Defence spending with tighter labour markets

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Sources: Bokan, N., Jacquinot, P., Lalik, M., Müller, G., Priftis, R. and Rigato, R. (2025), “ Macroeconomic impacts of higher defence spending: a model-

based assessment”, Economic Bulletin, Issue 6, ECB.

Notes: (a) Fiscal expansion via government investment instead of government consumption purchases in ECB -MC. (b) Increase in the elasticity of

substitution of private and public goods in DREAM. (c) Higher demand for low -skilled workers in HANK. (d) Increase in the share of imported goods related

to the provision of the government consumption goods in DREAM. (e) Comparing forward- looking expectation hypothesis in the yield curve with a

backward-looking setting using ECB-(RE)BASE. (f) Assumption that deficit is fully financed by increases in labour taxation in EC B-REBASE.

Modelling the sensitivity of macroeconomic impact of a gradual fiscal expansion

GDP multiplier Household

consumption

Business

investment

a) Higher share of public

investment ↑↑ ↑↑ ↑↑

b) Spending with close

complementarity to private

goods

↑↑ ↑↑ ↑↑

c) Spending targeted at low-

income sectors ↑ ↑↑ ↓↓

d) Higher import content ↓ ↓ ↓

e) Anticipation of future

monetary policy tightening ↓ ↓ ↓↓

f) Anticipation of tax hikes to

finance budget deficits ↓↓ ↓↓ ↓

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Substantial uncertainty surrounding fiscal multipliers of defence spending

Sources: Checherita-Westphal and Særkjær (2025) and updates.

Notes: The dots represent the (main) estimate of the cumulative defence spending multiplier, and the bands indicate one standard deviation when available or readily calculated. When multiple result s

were available, the selection was made based on the original author’s preferred specification to ensure a relevant comparison with the other studies, and for a one and four -year horizon (centre of the

shorter and medium to long-term horizons respectively). Multipliers shown measure an increase in GDP from a one unit (e.g. USD 1 or EUR 1) increase in defence spending. For the studies marked

with (*), the multiplier measures the percentage point increase in the GDP growth rate following a 1 percentage point increas e in the defence-spending-to-lagged GDP ratio. For the studies marked

with (†), the multiplier measures the percentage point increase in GDP relative to trend from a 1% increase in defence spending relative to trend GDP. Other studies have used military spending

(news) as an instrument for more general government spending.

GDP fiscal multipliers of military spending in empirical studies

US STUDIES

Barro and Redlick (2011)(*), Military spending, temporary, 1 year

Permanent, 1 year

Ramey (2011), Military spending news, full sample, 5 years

Post-Second World War, 5 years

Nakamura and Steinsson (2014)(*), Military spending: prime military contracts, 2 years

Ben Zeev and Pappa (2017), Military spending news, 1.5 years

Antolin-Diaz and Surico (2025), Military spending news, 1 year, 4 years

CROSS-COUNTRY STUDIES

Gechert and Rannenberg (2018), Military spending, meta-study, average, 2-year average horizon

Expansion, 2-year average horizon

Recession, 2-year average horizon

Olejnik (2023 WP), Military expenditure, Central and eastern Europe, 1 year, 4 years

o/w Personnel, Central and eastern Europe, 1 year, 4 years

o/w Equipm. & infrastr., Central and eastern Europe, 1 year, 4 years

Garcia et al. (2025)(†), Military spending, EU27, 1 year, 4 years

Military Spending, Limited fiscal space, EU27, 1 year, 4 years

Ample fiscal space, EU27, 1 year, 4 years

Military Spending, High import reliance, EU27, 1 year, 4 years

Low import reliance, EU27, 1 year, 4 years

Furceri et al. (2026) (†), Military Spending, EU27, 1 year, 4 years

-2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

Multiplier value

Shorter-term (0-2 years) Medium-to-long term (3-5 years)

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GDP and price effects: empirical evidence across EU countries over 1999-2025

Notes: Estimates for the sample of the 27 current EU Member States over 1999- 2025 from Checherita-Westphal and Særkjær (2026) us ing the panel local projection (LP) method of Jordà (2005). The charts show

cumulative effects over a five-year horizon after a defence spending increase by 1% of trend GDP (fiscal shock in year 0). The cumulative (real) GDP multiplier shown follows the specifi cation of Ramey and Zubairy

(2018). The "adjusted" capital defence spending is aimed at improving the timing of the fiscal shock by "leading" the capital component of COFOG defence spending data using a country-specific “delivery time delay”

proxy constructed on the basis of the SIPRI Arms Transfer Database (ATDB). The GDP variable is expressed in constant prices and effects are shown in percent deviations from (lagged) trend GDP. The effects for the

HICP inflation and (GDP) Deflator growth are in percentage points. The baseline control variables include four lags of non- defence government expenditure, government revenue, trade openness (imports plus

exports), the real effective exchange rate and gross public debt, as well as four lags of the dependent variable and defence spending variable. Country and year time effects are used throughout. Confidence bands:

grey 68% and light grey 90%. Forthcoming in Checherita-Westphal, Rodríguez-Vives, Lalinský and Parker (2026)..

Cumulative impact of total defence spending

(bold line: with "adjusted" capital spending component to improve timing of the fiscal shock by accounting for delays in delivery of large

equipment; dashed line: not “adjusted" as per COFOG recording of capital spending in national accounts)

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GDP and price effects of different defence spending categories

Notes: Estimates for the sample of EU27 Member States over 1999- 2025 from Checherita-Westphal and Særkjær (2026) using the panel local projection (LP) method of Jordà (2005). The charts show cumulative

effects over a 5-year horizon after a 1% of trend GDP increased defence spending on capital, adjusted (left-hand side chart) and personnel spending (right-hand side chart) (fiscal shock in year 0). T he cumulative GDP

multiplier follows the specification of Ramey and Zubairy (2018). The "adjusted" capital defence spending is aimed at improving the timing of the fiscal shock by "leading" the capital component of COFOG defence

spending data using a country-specific “delivery time delay” proxy constructed on the basis of the SIPRI Arms Transfer Database (ATDB). The variables (apart from prices) are normalised to lagged trend GDP. The

effects are shown as percent of trend GDP for all variables apart from HICP inflation and GDP deflator growth (percentage poi nts). The baseline control variables include four lags of non-defence government

expenditure, government revenue, trade openness (imports plus exports), the real effective exchange rate, and gross public debt, as well as four lags of the dependent variable and defence spending variable. Country

and year time effects are used throughout. Confidence bands: grey 68% and light grey 90%. Forthcoming in Checherita-Westphal, Rodríguez-Vives, Lalinský and Parker (2026).

Cumulative impact of "adjusted" capital spending

Cumulative impact of personnel spending

(percent of trend GDP for all variables, apart from HICP inflation and GDP deflator growth, where the effects are expressed in percentage points)

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Top euro area defence firms’ linkages with suppliers and subsidiaries

Sources: ECB staff calculations based on Bloomberg and Orbis.

Forthcoming in Checherita-Westphal, Rodríguez-Vives, Lalinský and Parker (2026).

Location of suppliers

Sources: ECB staff calculations based on Bloomberg and Orbis.

Forthcoming in Checherita-Westphal, Rodríguez-Vives, Lalinský and Parker (2026).

Location of subsidiaries

(percentages) (percentages)

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Defence sector productivity and employment dynamics

Sources: ECB staff calculations based on Orbis and Eurostat. Forthcoming in Checherita-

Westphal, Rodríguez-Vives, Lalinský and Parker (2026).

Notes: Mean value added per employee in top defence firms and their subsidiaries

operating in the manufacturing sector over mean value added per employee in the

manufacturing sector in NUTS1 regions in 2023. Below (above) mean represents

productivity ratio below (above) mean productivity in the manufacturing sector.

Relative productivity of top defence firms

Sources: ECB staff calculations based on Orbis and Eurostat. Forthcoming in Checherita-

Westphal, Rodríguez-Vives, Lalinský and Parker (2026).

Notes: Net job rate calculated as the difference between the within- region job creation rate

and job destruction rate in firms from the automotive industry in the period between 2018

and 2023. Low and high shares indicate whether employment in top defence firms,

including their suppliers and subsidiaries, accounted for a below-median or above-median

share of total employment in the region in 2023, respectively.

Automotive industry vs defence

(ratio of mean value added per employee of top defence firms to

that of all manufacturing firms)

(net job creation 2018-2023 in automotive sector vs defence

sector share of employment)

Rubric

Source: Eurosystem estimates based on Domínguez-Díaz et al (2025).

Forthcoming in Checherita-Westphal, Rodríguez-

Vives, Lalinský and Parker (2026).

Change in R&D spending

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

1 2 3 4 5 6 7 8 9 10

Public Private Total

Economic impact of matching US levels of public sector defence R&D

Source: Eurosystem estimates based on Domínguez-Díaz et al (2025).

Forthcoming in Checherita-Westphal, Rodríguez-

Vives, Lalinský and Parker (2026).

Note: TFP stands for total factor productivity.

GDP growth and contributions

-0.4

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

1 2 3 4 5 6 7 8 9 10

Labour contribution Capital contribution

TFP contribution GDP growth

Source: Eurosystem estimates based on Domínguez-Díaz et al (2025).

Forthcoming in Checherita-Westphal, Rodríguez-

Vives, Lalinský and Parker (2026).

Cumulative R&D multiplier

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

1 2 3 4 5 6 7 8 9 10

(percentage points of GDP) (percentage point deviations from steady state and

percentage points)

(euro of GDP per euro invested in public R&D)

Rubric

Citations of relevant ECB research

• Bouabdallah, O., Dorrucci E., Nerlich C., Nickel C., Vlad, A. (2025), "Time to be strategic: how public money could power Europe’s green,

digital and defence transitions“, The ECB Blog, ECB, 25 July.

• Böninghausen, B. and Vladu, A.L. (2026), "Sloping up: the repricing of euro area yields in 2025", The ECB Blog, ECB, 16 January.

• Checherita-Westphal, C., Rodríguez-Vives, M., Lalinský, T. and Parker, M. (2026), "Defence spending and its short and longer-term

macroeconomic effects", Economic Bulletin, forthcoming in Issue 6, ECB.

• Checherita-Westphal, C., Huber, C., Rodríguez-Vives, M. and Müller, G. (2025), “Fiscal aspects of European defence spending:

implications for euro area macroeconomic projections and associated risks”, Economic Bulletin, Issue 5, ECB.

• Checherita-Westphal, C. and Særkjær, L. (2025), “Fiscal multipliers of defence spending: a short review of the empirical literature", in

Bokan, N., Jacquinot, P., Lalik, M., Müller, G., Priftis, R. and Rigato, R., “Macroeconomic impacts of higher defence spending: a model-

based assessment”, Economic Bulletin, Issue 6, ECB.

• Clancy, D., Jacquinot, P. and Lozej, M. (2016), "Government expenditure composition and fiscal policy spillovers in small open economies

within a monetary union", Journal of Macroeconomics, Vol. 48, June, pp. 305-326.

• Gomes, S., Jacquinot, P. and Pisani, M. (2012), "The EAGLE. A model for policy analysis of macroeconomic interdependence in the euro

area", Economic Modelling, Vol. 29, issue 5, September, pp. 1686-1714.

• López Vicente, F., Rodríguez-Vives, M. and Rojas, J. (2024), “Public spending on defence, public order and safety in Spain and the

European Union”, Economic Bulletin, 2024/Q3, Banco de España, Article 5.

• Rannenberg, A., (2021), "State-dependent fiscal multipliers with preferences over safe assets", Journal of Monetary Economics, Vol. 117.

January, pp. 1023-1040.

• Rannenberg, A. (2025), "Forward Guidance with Preferences over Safe Assets", IMF Economic Review, Vol. 73(4), pp 1090-1194.