European defence spending in 2024 and beyond: How to provide security in an economically challenging environment

Europe has to respond to a new and more contested security order. Russia's imperial ambitions threaten stability and peace, while the United States demands from the European NATO countries to contribute more to their own security. To improve defence capabilities, Europe has to increase defence spending immediately and also to create fiscal space for a permanent rise in defence spending. In this report, we show that both public debt and the tax burden are at a high level in most European countries. Therefore, issuing new debt or raising taxes to finance permanent higher defence spending may come with severe economic costs and do not seem a sustainable solution for most countries. We also show that many European countries have collected a considerable peace dividend since the end of the Cold War. In the same period, welfare states have expanded to a degree not backed by the general economic development. We estimate that if governments shifted around one percent of non-defence expenditure towards defence, this would be sufficient to meet the NATO 2%-target. In an economically challenging environment, however, European governments face trade-offs, as they also need to invest in transforming their economies and making them more competitive. In some countries, the public does not even support an increase in defence spending. Europe, hence, finds itself in a dilemma.