SPENDING THAT MATTERS: THE ECONOMIC CASE FOR INVESTING IN EUROPE’S DEFENCE INDUSTRY
Study commissioned by the European Defence Agency
28 Jul 14. Defence plays a pivotal role in promoting internal and external security, maintaining peace, stability and prosperity, as well as protecting personal freedom and our way of life. However, defence spending also has several macroeconomic benefits. A recent study commissioned by the European Defence Agency (EDA) outlines the advantages of investing in the European defence industry in terms of economic benefits, employment and sustainment of research and development capabilities.
What is the real effect of today’s pressure on national defence budgets?
A recent Agency study sought to answer this precise question. Some of its conclusions are revealing: for example, for each €100m cut in EU defence expenditure, there is a €150m fall in EU gross domestic product (GDP), and a €40m fall in EU tax revenues. However, the consequences of such cuts extend far beyond the pure economical realm. The study, which was conducted by British consultancy firm Europe Economics, also highlighted that a similar €100m cut in defence spending would translate into the loss of about 3,000 jobs, 800 of which would be high-skilled.
In some key dimensions, the overall macroeconomic benefit of investing in the defence sector may exceed that of investing in other domains. For instance, the study confirmed that defence investments have a far greater impact on highly-skilled employment and research and development, therefore potentially leading to a long-term GDP growth rate. The results of the study estimated that the impact is 12 to 20 times greater than that generated by other forms of public spending. Of equal importance is the fact that defence R&D creates a “spillover” of technologies to the civil sector. This often significant “spill-over” means that investing in defence R&D is essential to the emergence of breakthrough technologies which has a knock on benefit in other areas such as the civil aircraft market. More generally, the study demonstrated that the macroeconomic impact of investment in the defence sector is greater at EU level than at the national level, because of the inherent “Europeanised” nature of the defence industry.
The study also reviewed a number of case studies to try and quantify the micro-economic impact of several acquisition programmes in the EU, like fighter aircraft. It confirms, for instance, that programmes such as Eurofighter or Rafale helped EU companies to acquire the competitiveness they enjoy today on the commercial aircraft market. Another example is the Leopard 2 main battle tank programme, which was launched in the last years of the Cold War. It enabled the German Army to equip its cavalry regiments with a highly capable system, at a cost that was 45 per cent lower than the next best alternative. This was the first study which looked at the EU as a whole; previous efforts were focused only at a national level. It demonstrates tangible rationale to support investment in the European defence industry, confirming that there are considerable opportunities to increase the efficiency of European collaborative programmes and at the same time European economic prosperity. (Source: MPI – Hawk Information)