Europe's Defence Spending Surge: Economic Boom or Fiscal Bust?
European defence stocks are surging amid increased spending following the Ukraine conflict, boosted by plans to raise NATO's allocation to 5% of GDP. This spending could stimulate growth but faces financing challenges, potentially impacting civilian infrastructure and public services if not managed through increased debt issuance.
Since the onset of the Ukraine conflict in 2022, European defence stocks have seen significant growth, propelled by anticipated increases in defence spending across the continent. The Stoxx Europe TMI Aerospace & Defense index has recorded over 40% annualised returns since early 2022.
Upcoming NATO commitments could see defence spending rise to a striking 5% of GDP, with around $375 billion needed to meet these targets by the mid-2030s. Despite the potential economic benefits, how this spending is financed remains a crucial issue. Currently, only Poland meets the proposed GDP allocation.
The British government plans to lift defence spending to 3% of GDP by 2034, but this may affect civilian infrastructure due to existing fiscal limitations. Increasing debt, as seen with the EU's Readiness 2030 initiative, might provide a more sustainable path, though it risks escalating deficits unless productivity goals are met.
(With inputs from agencies.)
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