Rabobank: Europe must invest wisely in defense to boost security and economy

Increasing defense spending could improve both Europe’s security and economy, but only if investments are made strategically, according to economists at Rabobank.

Hugo Erken, head of Dutch economics at Rabobank, cautioned that “it is easy to spend billions on defense without it resulting in more equipment, better cyber defense, or stronger critical infrastructure.” He gave the example of increased spending leading merely to higher prices for defense materials or greater profits for defense companies, without tangible benefits to security.

The NATO summit in The Hague will focus heavily on raising defense budgets. For Europe, Rabobank emphasizes the critical need to invest more in research and development (R&D). “Europe is miles behind the U.S. in this area,” Erken told ANP.

Rabobank’s calculations show that every extra euro spent on defense R&D could yield a long-term return of 7 to 8 euros. Historically, defense-driven R&D has sparked innovations like the internet and the microchip.

The economists also stressed the importance of clear performance agreements and guarantees for European defense companies. Frank van Es, Erken's colleague, warned, “If you don’t do this, money risks leaking to non-European producers.”

Financing methods are equally crucial. The report highlights that if increased defense spending is immediately offset by cuts elsewhere or higher taxes, the short-term economic impact will be negative. “Funding through extra government debt is therefore preferable,” Erken explained. However, he added that public finances must ultimately be restored.