The Demand for Military Expenditure in Europe: The Role of Fiscal Space in the Context of a Resurgent Russia

Abstract

A variant of established work on the demand for military expenditure is developed based on a practical concept of fiscal space from the perspective of short-term government choices concerning public expenditures. A new indicator, referred to as fiscal capacity, is defined and used as a candidate explanatory variable in an empirical model of European defence spending over the 2007–2016 period. Fiscal capacity is found to outperform simpler measurements of economic conditions, notably GDP growth forecasts, in explaining changes in defence spending efforts as a share of GDP. Regarding security environment variables, the results suggest that Russia has recently come to be seen as a potential military threat by European nations, leading to defence spending increases, the more so the shorter the distance to stationed or deployed Russian forces, and particularly so by those European nations that have a land border with Russia. A prospective exercise is then carried out in order to assess the capacity of EU member states that are also members of NATO to reach NATO’s 2% goal for defence spending over a mid-term horizon.

Keywords:

• Military expenditure
• demand
• fiscal space
• fiscal capacity
• EU
• NATO
• Russia

JEL Codes:

• H56
• H68
• O52

Notes

1. The locations considered are Baranovichi (Belarus), Donetsk (Ukraine), Sevastopol (Ukraine), Tiraspol (Moldova), Kaliningrad (Russia), Pskov (Russia) and Levashovo (Russia).