Europe’s Economic Hope

Defense Spending May Prove To Be a Mirage

Europe is rearming. Spurred by the war in Ukraine, rising geopolitical tensions, and decades of underinvestment, the continent is entering a new era of state-led defense spending. The rhetoric is bold: industrial revitalization, strategic autonomy, and a new economic stimulus all wrapped into one. Defense is being framed not only as a necessity but as a catalyst for long-term growth.

But this strategy rests on a dangerous illusion—that state-driven investment, particularly in defense, can substitute for the private consumption that underpins true economic vitality. Europe may be choosing the wrong engine to restart its stalled economic model.

The Reindustrialisation Mirage

Since Russia’s full-scale invasion of Ukraine in 2022, European governments have committed to ramping up military budgets. Germany’s €100bn special fund for the Bundeswehr, France’s seven-year €413bn defense spending plan, and Poland’s ambition to reach 4% of GDP in military expenditure signal a profound shift in fiscal priorities.

The European Commission has backed this trend, launching the European Defence Industrial Strategy and proposing joint procurement models to strengthen the defense base. European leaders have spoken of this moment as a “Zeitenwende” — a turning point in Europe’s geopolitical and industrial future.

But the economic expectations being placed on defense are overstated. Military spending does not automatically translate into broad-based, sustainable growth. It can provide a short-term boost to industrial output and employment in selected sectors, but it does not carry consumer demand all on its own.

America’s Lesson

Consider the United States, where defense spending is large but rests atop a fundamentally consumer-led economy. Private consumption represents about 68% of U.S. GDP, compared to 52% in the Eurozone.

U.S. defense investments often spill over into civilian technologies: the internet, GPS, touchscreens, and semiconductors all began as defense-funded research.
But the critical difference lies in the second stage: a vibrant domestic market, vast access to capital, and a culture of commercialization allow these technologies to scale into globally dominant consumer applications.

In Europe, this feedback loop is weaker. Defense innovation remains siloed, procurement is fragmented across national lines, and risk capital for scaling innovation is limited. Even successful firms rarely become global leaders. Of the world’s 25 largest firms by market capitalization, none are European.

A Continent in Consumption Denial

Underlying Europe’s current economic bet is a deeper cultural and philosophical discomfort with consumption. For decades, Europeans have distinguished themselves from what they view as American-style consumer excess. Environmentalism, social equity, and prudence are praised over consumption, even at the cost of stagnation.

But economics does not reward virtue in abstraction. The truth, as Adam Smith wrote in The Wealth of Nations, is that “Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident, that it would be absurd to attempt to prove it. But in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.” .

Without a growing consumer base willing to spend, there is no sustainable demand for goods, no incentive for innovation, and no engine for profits.

Europe’s household consumption growth has been tepid for over a decade. Real wages have stagnated, energy prices remain structurally high, and demographic trends are grim. Countries like Italy and Germany are rapidly aging; by 2050, one in three Germans will be over 65. Such demographics inevitably drag on both growth and consumption.

Fiscal Ceiling

Moreover, Europe’s welfare-heavy fiscal architecture limits how far defense spending can stretch. Public spending in France now exceeds 58% of GDP — the highest among OECD nations.

Adding large, recurring defense budgets risks crowding out essential services or running afoul of fiscal rules, especially with debt levels already elevated after COVID-19 stimulus packages.
Defense-led growth is capital-intensive, centrally allocated, and difficult to scale.

Unless it generates commercially viable civilian technologies — and unless Europe can build the market mechanisms to absorb them — the multiplier effect will remain muted.

The Question

The real question now is not just for policymakers, but for investors. Where does the next cycle of growth and innovation come from?

Do you invest in a continent that sees the state, not the individual, as the primary driver of demand (government's share of GDP is at around 35% in the U.S. and around 50% in Europe)—where regulation remains heavy, tech penetration low, and the largest companies are often legacy industrial firms, low-tech luxury conglomerates or oil majors?
Or do you favor markets like the U.S., where Amazon, Nvidia, Apple, and Microsoft continue to generate staggering returns on the back of global demand and scalable business models rooted in consumption?

Europe may be embarking on a much-needed rearmament. But without a reawakening of consumer demand, it risks mistaking firepower for growth—and military Keynesianism for a genuine revival.

Disclaimer

Please note that Benchmark does not produce investment advice in any form. Our articles are not research reports and are not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

Credits

Photo by Markus Spiske / Unsplash.