Europe’s fiscal rules are backing the wrong kind of defence

In a new VoxEU/CEPR column, The EU fiscal framework undermines innovation and security, LBS Professor of Economics Paolo Surico makes a sharp and unsettling case: Europe’s revised fiscal rules are loosening constraints on the least productive forms of defence spending while continuing to choke off the investments that matter most for long-term growth and security.

Under the updated Stability and Growth Pact, EU member states may exceed deficit limits if borrowing finances defence. Politically, the logic is clear. Economically, Surico argues, it is upside down. Much defence spending goes on personnel and imported equipment, with limited domestic spillovers and significant leakage abroad, particularly to the US. By contrast, defence and civilian R&D - the spending with the highest and most persistent returns - remains tiny by international standards and tightly constrained by fiscal rules.

Drawing on historical evidence from the US, especially the post-1945 innovation model inspired by Vannevar Bush’s Science: The Endless Frontier, Surico shows that sustained public investment in research, universities and mission-driven institutions delivers powerful productivity gains, crowds in private investment, and underpins both economic resilience and strategic autonomy. Crucially, American technological leadership was not built on procurement-heavy defence budgets, nor on DARPA alone, but on broad-based, civilian-centred innovation funding.

Surico proposes a reorientation of Europe’s fiscal framework: exempt innovation-related expenditure, especially R&D, rather than routine procurement. This would preserve fiscal discipline while redirecting borrowing toward investments that expand future productive capacity. He outlines practical mechanisms, including R&D bonds, a significantly expanded European Investment Fund, deeper venture capital markets, and a European equivalent of the US Office of Scientific Research and Development to coordinate mission-driven research.

The message is stark. Europe can continue to use fiscal loopholes to finance short-lived consumption and imported hardware, or it can redesign its rules to put innovation at the core of its economic and security strategy. As Surico makes clear, the choice will shape Europe’s prosperity and autonomy for decades.

Read the full article on VoxEU/CEPR: https://cepr.org/voxeu/columns/eu-fiscal-framework-undermines-innovation-and-security