MNI: EC Sees Only 'Moderate' Defence GDP Impact

Increasing EU defence spending to NATO's 5% goal will have only a "moderate" impact on economic growth, according to the European Commission's draft Autumn Semester Package due to be released on Tuesday.

Taking both components of the NATO-mandated increase into account - the 3.5% core defence objectives and 1.5% for broader security aims, the Commission sees EU GDP 0.8% higher by 2035.  

While the rise in spending would probably lead to a higher debt-to-GDP ratio, its impact on GDP is "uncertain" and hinges on how spending is designed and implemented, it will say.

"The relatively modest total GDP effects reflect that the additional spending is partly financed through offsetting measures, the impact of aggregate demand partly “leaks” abroad via imports and is dampened by higher interest rates that crowd out private demand," a Commission document said. (See MNI: EU 'Industrial Group' Countries Take Aim At Green Agenda)

HIGHER BORROWING

The lack of budget cuts elsewhere will initially require higher net borrowing, potentially pressuring rates upwards, until the likely introduction of offsetting spending cuts, the document said

The initial boost to the economy will be driven by frontloaded “core” defence requirements, but over time the impact of this will diminish as tax hikes are implemented to reduce debt, according to the Commission

The additional 1.5% NATO spending component for broader defence and security goals on the other hand will have only a modest impact at first but will accelerate gradually. 

"Over time, this type of spending could "yield longer-term benefits if directed toward productive investment and implemented as additional spending."