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The economics of war is a multifaceted and intricate subject that spans a wide range of factors, from military expenditure to the long-term economic consequences of conflict. As global tensions rise, the strategic importance of defense industries is growing, leading countries to redirect their economic priorities to fund military capabilities. This shift is becoming increasingly evident in Europe, where defense strategies are being overhauled in response to escalating threats. Thierry Breton, the EU’s commissioner for the internal market, notably called for a shift of the European defense industry toward a “war economy,” citing Europe’s current “existential threat” in light of the ongoing geopolitical tensions. As a result, a deeper understanding of the economics of war is critical to grasp how nations fund, sustain, and recover from conflict.
The War Economy: A Transition Toward Militarization
In March 2024, Thierry Breton advocated for a significant shift within Europe’s defense strategy. The European Commission announced a new defense plan, which included a €1.5 billion ($1.6 billion) subsidy to strengthen Europe’s defense capabilities. This move is not isolated. Across Europe, nations are ramping up investments in their military industries, recognizing the strategic importance of maintaining robust defense systems in an uncertain geopolitical climate.
For example, in February 2024, Germany’s Rheinmetall, one of the world’s leading arms manufacturers, inaugurated a factory dedicated to producing artillery ammunition, explosives, and rockets. This factory will not only boost Germany’s defense production but also bolster Europe’s broader military infrastructure. Similarly, in Norway, Kongsberg, a major aerospace and defense company, opened a new facility focused on manufacturing anti-ship and cruise missiles. This surge in military investment reflects a broader trend where defense industries are increasingly seen as essential to national security, and by extension, economic stability.
The Surge in Global Military Spending
The growing prioritization of military spending is reflected in global expenditure trends. According to the Stockholm International Peace Research Institute (SIPRI), global military expenditure hit a peak of $2.4 trillion in 2023, marking the highest year-on-year increase since 2009. This surge in military spending is largely driven by heightened geopolitical tensions, particularly in Europe, the U.S., and parts of Asia. The situation in Ukraine has placed immense pressure on European countries to increase their defense budgets, not only for their own security but also to support Ukraine in its ongoing conflict with Russia.
The economics of war extend beyond just the cost of military equipment and personnel. The arms industry, as seen with companies like Rheinmetall and Kongsberg, plays a pivotal role in driving economic activity. These industries generate employment, fuel technological innovation, and contribute to economic growth. However, while military spending stimulates these sectors, it also comes with significant economic trade-offs. Increased defense budgets often lead to reduced spending in other vital sectors, such as healthcare, education, and infrastructure.
Military-Industrial Complex: A Key Driver of the War Economy
The term “military-industrial complex” refers to the symbiotic relationship between a nation’s armed forces and the industries that supply them with weapons, technology, and resources. This relationship has been a defining feature of wartime economies for centuries. In a modern context, the military-industrial complex has expanded beyond traditional arms manufacturers to include tech companies, research and development sectors, and cybersecurity firms.
The creation and growth of specialized defense industries are essential components of war economies. In times of conflict, these industries are crucial for maintaining the rapid supply of weapons, ammunition, and other military technologies. The immense financial resources needed to sustain such production often require direct state intervention, whether through subsidies, tax breaks, or public-private partnerships. This can be seen in the €1.5 billion subsidy earmarked by the European Commission, which is designed to ensure that the continent’s defense industries remain competitive and capable of meeting the demands of modern warfare.
The Long-Term Economic Impact of War
While military investment can temporarily stimulate an economy by creating jobs and boosting industrial production, the long-term economic effects of war are often more damaging. In the aftermath of conflict, nations face the daunting task of rebuilding infrastructure, addressing war-related health crises, and dealing with the economic consequences of lost productivity.
The rebuilding process, known as post-war reconstruction, typically requires significant financial resources. However, the economic damage from war often far exceeds the initial investment in military infrastructure. For example, the cost of rebuilding war-torn countries like Iraq and Syria has run into the trillions of dollars, not including the long-term costs of displaced populations, loss of human capital, and the erosion of national wealth.
In addition to the direct financial costs, the social consequences of war—such as displacement, psychological trauma, and social unrest—can lead to a reduction in the labor force and a decline in productivity. This long-term decline in economic output is a crucial consideration in any nation’s decision to engage in or sustain a war.
The War Economy’s Relationship with Inflation and Debt
The economics of war also intertwine with broader macroeconomic factors like inflation and national debt. The immediate effects of war, such as rising demand for military goods and services, can put pressure on inflation. When governments finance war spending by borrowing heavily, national debt increases, potentially leading to higher interest rates and a reduced capacity for economic growth in the future.
In Europe, concerns about inflation have already been mounting, exacerbated by the war in Ukraine. The rising cost of essential goods and energy has already placed a strain on European households. Governments are faced with the dual challenge of supporting military expenditure while trying to keep inflation in check and protect their economies from further destabilization.
The Role of War in Shaping Global Trade and Alliances
Beyond the direct economic impacts on individual countries, war has a profound influence on global trade and geopolitical alliances. Nations involved in conflicts often find themselves reshaping their trade relationships to secure resources and military supplies. In Europe, for example, the war in Ukraine has led to closer economic and military ties between NATO countries, as well as increased cooperation between the U.S. and European defense contractors.
On a global scale, the economics of war often leads to shifts in the balance of power. Countries that control key resources, such as oil or rare minerals, can leverage these assets to gain strategic advantage in times of conflict. The result is often a realignment of global trade routes, tariffs, and economic partnerships, which can have lasting implications for the global economy.
