The Impact of Military Rearmament on Economic Growth and Stability

The study investigates the relationship between military expenditure and economic growth across nine European nations from 1961 to 2023. Using two econometric models with relevant variables for our study to examine potential causality. The theories behind which are heavily discussed include the Keynesian stimulus against the Neoclassical growth theories, creative destruction and research and development spillover effects into the private sector. Further theories which are critical are the crowding out effect and Guns vs. Butter theories and classical theories of how debt impacts the economic stability of a state. The main finding is that the relationship is complex and moderated by the country’s fiscal state. The results support a Keynesian stimulus but a “dampened” effect rather than a multiplier where the defense estimate at one year lag is smaller than that of capital formation at the same lag. There is also found to be a crowding-out effect and an opportunity cost problem of defense spending where the capital could be allocated otherwise. The findings also state that the effect changes with the level of government debt and tax revenue. In short if a state has higher debt, defense spending will have a lower effect on GDP, but if a state instead finances the military spendings with tax revenue there is a positive effect.