ING Economics, the think-tank of international lender ING Bank, has warned that the planned €800 billion spending spree on defence announced by the European Commission on March 4 was poorly timed.
That was, it said, because many countries that wanted to rebuild their depleted armies were struggling to balance their budgets.
While some presented the huge investments in European arms manufacturing as a “watershed moment” and an economic opportunity, the think-tank said it had “doubts” about this.
“At a time when the eurozone economy has fallen back into stagnation, you might think that hundreds of billions of extra fiscal expenditure will be enough to revive Europe’s stagnant economies.
“But we have doubts. While additional spending can make a difference to growth, it’s not going to be immediate and the ultimate boost to GDP will be moderate in the coming years,” ING said.
Increased European defence spending couldn't come at a worse time for countries with stretched budget balances pic.twitter.com/5APN6BANTb
— ING Economics (@ING_Economics) March 7, 2025
Looking closer at the planned investments, ING Economics stressed what it saw as its poor timing, with many eurozone countries still struggling with budget deficits that were too high.
ING noted that countries such as France, Belgium and Italy have entered the so-called Excessive Deficit Procedure and would have trouble reducing deficits to 3 per cent of GDP.
“Increasing defence spending to a higher NATO target will therefore be a challenge, especially as quite a few of the high-deficit countries already struggle to meet the current 2 per cent target”, it said.
It was highlighted that Germany stood out as a special case, with the March 5 proposals to introduce defence spending exceptions to the “debt brake” likely leading to a significant increase in military expenditure.
“Given its already low government deficit, Germany could lead the way in terms of additional spending. The jump in German yields shows that markets are expecting a much higher demand for government borrowing from Berlin,” the think-tank said.
ING said that the EC’s proposal to boost defence spending relied on invoking the Stability and Growth Pact’s escape clause, potentially unlocking €650 billion if countries increase defence budgets by 1.5 per cent of GDP.
That would raise average European Union spending to 3.5 per cent of GDP, which would allow deficits to exceed 3 per cent without triggering the Excessive Deficit Procedure.
A proposed €150 billion fund for defence borrowing could benefit high-interest-rate countries but did not constitute additional spending. While cohesion funds may now be used for defence, the plan stopped short of a shared EU-wide fund, it said.
ING added that, without a binding spending target, it remained uncertain as to whether the €800 billion projected by the EC would materialise.
It further stressed that it mattered where the extra funding would be invested.
“NATO estimates that about two thirds of additional eurozone defence spending last year went to equipment investment. Given Europe’s low defence production capacity, this generally means that a lot of spending will result in higher imports,” ING said.
“The European Commission estimates equipment investments to comprise around 80 per cent of imports, while others like Bruegel think it’ll be lower.
“While we do expect the eurozone to increase its defence production capacity, we think the initial extra investments will result in a sizeable amount of imports which will fade modestly over time as domestic capacity increases.”
According to the think-thank, this meant that, while rearming Europe may seem like a major boost to eurozone fiscal spending and growth, the initial impact was likely to be more moderate.
It expected GDP gains of 0.1 per cent to 0.2 per cent for the eurozone in 2026 and 2027.
Rising defence spending, fiscal rules changes and Germany’s €500 billion infrastructure fund created clear upward pressure on interest rates, ING noted.
The key question was by how much. While inflationary effects may be muted overall, countries with positive output gaps could face faster price pressures, whereas Germany had more room before hitting capacity constraints, it said.
