European Rearmament Could be the start of the next war in Europe

A Rapid Rise in Defence Spending Is About to Unleash a High-Octane Blast of Military Keynesianism

It has taken three years, but Europe is at last putting its collective economy on an industrial war footing. The sums of money being discussed are truly eye-watering, with figures that would have been politically unthinkable mere weeks ago.

One leaked plan for German rearmament currently circulating in Berlin proposes a staggering €400bn (£330bn) blitz of additional expenditure on national defence, buttressed by another €500bn intended to rebuild Germany’s crumbling infrastructure. Such massive investment would represent a fundamental shift in German fiscal policy and defence posture, marking a dramatic departure from decades of military restraint.

Another leaked plan, revealed by the respected Italian newspaper Corriere della Sera, discusses the possibility of converting Italy’s struggling automotive industry into a revamped ecosystem of weapons production. Under this ambitious proposal, subcontractors across the industrial heartlands of Lombardy and the Veneto would supply German armaments plants much as they currently supply car components for Volkswagen, Mercedes and BMW. This industrial transformation would preserve manufacturing jobs whilst bolstering Europe’s defence capabilities.

“It is becoming obvious to everybody that defence spending is the way to offset job losses in the car industry,” observed Holger Schmieding, the chief economist at Berenberg Bank, highlighting the economic logic behind these sweeping proposals.

What is also becoming increasingly evident is that Donald Trump either actively desires a Russian victory in Ukraine, or is so besotted with the television reality show spectacle of his peace deal that he would willingly smash America’s alliance system out of pique if thwarted. This realisation has sent shockwaves through European capitals, forcing a dramatic reconsideration of strategic autonomy.

Ursula von der Leyen, the president of the European Commission, joined the bidding on Tuesday with an €800bn “Rearm Europe Plan” using emergency powers under Article 122 of the Treaties, the immediate riposte to Trump’s overnight outrage. The speed and scale of the response demonstrates just how seriously European leaders are taking the new geopolitical reality.

Funds are to be rushed into air defence systems, artillery pieces, precision missiles and advanced drones, with a target of raising average EU military budgets by 1.5 percentage points of GDP over the next four years. Whilst the specific mechanisms remain somewhat vague at this early stage, the direction of travel is unmistakably clear: Europe is preparing to defend itself.

The immense figures under discussion in Berlin would have been politically unthinkable a week ago, before the total loss of faith in American friendship. This represents a seismic shift in European strategic thinking, with profound implications for the continent’s economic and defence policies.

If enacted on anything close to this ambitious scale, such a high-octane blast of military Keynesianism will entirely change the economic and geopolitical shape of the world. Indeed, it is the coming boom in Europe that savvy investors should all be betting on, as defence spending has historically proven to be a powerful economic stimulant.

Bavaria’s premier Markus Söder has emerged as the weather-vane of our times, leading the call for a full-blown revival of German military power along with a joint nuclear deterrent in concert with France and the United Kingdom. His dramatic shift in position reflects the new consensus forming across the political spectrum.

“We need a drone force of 100,000 drones, 800 new tanks, 2,000 Patriot missiles and 1,000 Taurus just for Germany as a protective shield like the ‘Iron Dome’. Only the strong will be taken seriously,” Söder declared, articulating a vision of European military capability that would have been unthinkable in German politics just months ago.

Europe finds itself in roughly the same position today as America did in 1939, when the US defence budget amounted to a mere 2 per cent of GDP and the miniscule US army ranked alongside the Belgian army in terms of size and capability. American military spending subsequently rose dramatically, reaching 5.6 per cent of GDP in 1941, 16 per cent in 1942, 35 per cent by 1943 and peaking at an extraordinary 41 per cent in 1945. This historic precedent demonstrates how quickly advanced economies can shift to a war footing when necessity demands.

The American defence surge was led by William Knudsen of General Motors, the corporate titan of the age who took the job at the US war department for a patriotic salary of just $1. Tasks were divided amongst the industrial giants of the era, with each focusing on specific military needs. Ford built the biggest factory the world had ever seen at Willow Run in Michigan, capable of producing a four-engine B-24 Liberator bomber every hour by 1944, an astonishing feat of industrial engineering.

Chrysler rolled out the M3 medium tank through the freezing winter of 1941 in a factory that still lacked walls, showcasing American industrial determination. The subsequently developed Chrysler M4 Sherman, with a motor powered by five six-cylinder engines ingeniously welded together, became the workhorse of allied armour, supplied to the British, Canadians, Poles and Free French forces throughout the conflict.

Whilst technology is undoubtedly more complex today, the fundamental idea remains much the same. “It won’t be car factories suddenly making tanks, but suppliers have skilled labour that can be switched to defence as the auto industry shrinks,” explained Mr Schmieding, highlighting the potential for industrial transformation.

It was the war – not the New Deal – that ultimately lifted America out of the Great Depression. A similar military revival could potentially do much the same for a Europe that has been trapped in economic defeatism and learnt helplessness for nearly two decades. It represents a way of achieving the turbo-charged growth envisioned in the Draghi Plan by other means, through targeted investment in strategic industries.

The supposed trade-off between defence and welfare is widely regarded as one of the great fallacies of modern politics by economic historians. Defence spending, when properly directed, can drive broader economic growth and technological innovation.

Much of the technology underpinning US economic hegemony has its origins in Pentagon research programmes: the internet was initially an offshoot of the Advanced Research Projects Agency, conceived as a computation network within the US defence complex that could survive a nuclear first strike. This military innovation subsequently transformed the global economy.

Silicon Valley, once a pastoral landscape of apricot orchards and a producer of a third of the world’s prunes, began making radars and aerospace components for the US government in the 1940s. It later turned to developing the integrated circuits needed by NASA and the Pentagon during the Cold War. Even Google’s origins can be traced back to grants from US agencies for intelligence surveillance technologies. Defence innovation has repeatedly proven to be a powerful driver of broader economic development.

A comprehensive study of OECD member states published by MIT’s Review of Economics in January found that government spending on defence research consistently drives rapid productivity growth by crowding in higher private investment. The positive spillover effects extend far beyond the defence sector itself.

The moral of this economic story is that Europe can potentially kill two birds with one stone, defeating perma-slump at home and Putin’s predatory imperialism abroad simultaneously. A properly structured defence investment programme could revitalise European industry whilst bolstering security.

Sir Keir Starmer has already proclaimed this new Gospel in the United Kingdom, describing his Defence Industrial Strategy as the spearhead of economic growth and a path to leadership in crucial future technologies including artificial intelligence and quantum computing. This represents a significant evolution in Labour’s economic thinking.

The German plan for military and economic rearmament was meticulously drawn up by four leading institutes from across the political spectrum, specifically designed to hold the Christian Democrats and Social Democrats together in a grand coalition. This broad political consensus increases the likelihood of implementation.

Chancellor-in-waiting Friedrich Merz has jettisoned two of his core political doctrines in a matter of days: a lifelong defender of Atlanticism has all but given up on America; and a champion of ordoliberal fiscal rigour is suddenly searching for ways to amend the German constitutional debt-brake while there is still a chance in the old Bundestag. These dramatic shifts demonstrate the profound impact of recent geopolitical developments on European politics.

The timing is crucial, as once the new Bundestag takes over in late March, Putin-Versteher (Putin-sympathisers) on both the hard Left and the hard Right will likely have sufficient votes to block any significant changes to German defence policy. This narrow window of opportunity adds urgency to the rearmament plans.

Europe will ultimately find the money for weapons because it simply has no choice in the face of growing threats. The necessity of self-defence will overcome traditional fiscal constraints.

The European Union currently has a €90bn line of untapped funding from the Covid recovery plan that can and will be repurposed for defence needs. Additionally, the bloc is sitting on approximately €200bn of frozen Russian assets that are likely to be tapped to pay for weapons sent to Ukraine and to beef up the formidable arms industry already created by the Ukrainians themselves, which must not be allowed to fall into the hands of the Kremlin.

Half the immediate task is to turn Ukraine into “a steel porcupine,” in Von der Leyen’s vivid phrasing, capable of deterring further Russian aggression through defensive capability.

The coalition of the willing will have to rearm mostly outside the formal EU structure given the vetoes of Hungary and the Russophile bloc within the Union. This will require new institutional arrangements to coordinate defence efforts.

Joint debt issuance is undoubtedly needed to shield high-debt states from a potential bond market attack, but this can be accomplished through a new agency akin to development banks, and should sensibly include non-EU allies such as the United Kingdom, Norway and Canada. This would create a broader European security architecture beyond the confines of the European Union.

The technical details of financing are fundamentally trivial when viewed against the scale of the challenge. Non-US NATO members have a combined GDP of approximately $30 trillion (£24 trillion), a staggering 14 times the size of the Russian economy. This economic disparity means that a united Europe possesses the resources to effectively counter Russian aggression.

Europe can bring Putin to the negotiating table by hammering him on two fronts simultaneously: firstly, through an arms race that Russia simply cannot afford to sustain given its smaller economic base; and secondly, through choking Putin’s vital oil revenue by paralysing his mercenary “dark fleet” of tankers in the Baltic, and by equipping Ukraine with missiles capable of reaching Russia’s Black Sea oil terminals. This dual approach would apply maximum pressure on the Russian economy.

The worst of all potential outcomes would be a false peace that neutralises Ukraine, leaving Putin free to rebuild his war machine while his arms factories continue firing on all cylinders. Such a scenario would merely postpone conflict whilst allowing Russia to prepare for future aggression.

A premature ceasefire would potentially allow Putin to concoct a story of abuses against ethnic Russians in the Baltic states as a pretext for further attacks before Europe is sufficiently strong enough to hold the line. History has demonstrated the dangers of appeasing territorial aggression.

The coalition of the willing must now act with lightning speed to deter further aggression. Otherwise, Putin may be tempted to strike while he perceives he has a perishable advantage in military capability. Europe is approaching what military strategists would describe as the point of maximum danger, when deterrence is most likely to fail.

The rearmament of Europe represents not just a military response to Russian aggression, but potentially a transformative economic programme that could revitalise European industry, drive technological innovation, and create sustainable employment. The challenge will be to ensure that this massive investment is directed efficiently towards building genuine capability rather than being dissipated through bureaucratic inefficiency or corruption.

For the United Kingdom, newly outside the European Union but still a crucial European security partner, this presents both challenges and opportunities. Britain’s defence industry could benefit significantly from increased continental spending, but only if cross-Channel cooperation can overcome the political tensions of Brexit.

The coming years will likely see a fundamental restructuring of the European security architecture, with implications extending far beyond the continent itself. A more militarily capable Europe would alter the global balance of power, potentially reducing dependence on the United States whilst creating a more multipolar international system.

The question now is whether European leaders can summon the political will to follow through on these ambitious plans, overcoming decades of underinvestment in defence and the significant fiscal challenges involved. The answer will shape the continent’s future for generations to come.

Comment

There is no doubt in my mind that this will end badly, Germany rearmed will invariably become a threat, but add the autocracy of the EU to the mix and it will only be a matter of time before the treacherous EU will allow the increasing military power to go to their heads, creating a new pan-European threat.