Europe, Defence, and Economic Policy

Executive Summary

Europe’s security now depends on its economic policy choices. As the continent assumes greater responsibility for defence, its economic governance must adapt. Fragmented national procurement wastes resources and perpetuates dependence on external suppliers — including the United States. Coordinated demand, common funding, and strategic investment are essential to turn higher defence budgets into genuine capability and innovation.

Joint procurement delivers scale and resilience. Defence markets are highly concentrated; uncoordinated national buying raises costs and deepens fragmentation. Shared planning, joint purchasing, and specialisation among allies can lower unit costs, strengthen supply security, and build a competitive European industrial base. A common procurement pipeline would also signal reliability to private suppliers and investors.

Fiscal frameworks must evolve with security realities. The new EU fiscal rules provide limited flexibility for large joint projects. Targeted exemptions or common EU funding for qualified multinational defence investments could safeguard essential spending without undermining credibility. Temporary, transparent carve-outs — modelled on RRF or IPCEI mechanisms — would ensure fiscal discipline while enabling strategic action.

Economic security is broader than China. Europe’s reliance on US technologies and defence inputs creates its own vulnerabilities under shifting geopolitical conditions. Mapping these dependencies and diversifying supply chains — through friend-shoring, onshoring, or EU-level coordination — would enhance resilience and strategic autonomy.

Defence spending can become an innovation engine. When channelled into R&D, dual-use technologies, and public-private partnerships, defence outlays can accelerate industrial modernisation and technological leadership. Europe’s challenge is to transform rearmament into long-term productive capacity rather than a fiscal burden.

Policy Recommendations

1. Pool and specialise procurement. Expand EU-level joint programmes and encourage capability specialisation among member states.

2. Adapt fiscal frameworks for security. Create temporary, targeted exemptions or shared EU funds for qualified joint defence investments.

3. Map and mitigate dependencies. Identify critical vulnerabilities — including those tied to US suppliers — and diversify sourcing.

4. Direct spending toward innovation. Prioritise R&D, dual-use technologies, and innovation-driven procurement to convert defence outlays into lasting economic strength.