Professor Surico: defence spending could spur innovation - if Europe gets it right
LBS’s Professor Paolo Surico says Europe’s defence boom will spur growth only if it fuels innovation, not just arms production
“Higher defence spending can boost productivity and long-term growth — but only if the money fuels innovation, not inflation,” says London Business School’s Professor Paolo Surico in Will higher defence spending boost the European economy? (FT, 5 November 2025)
Surico’s research into fiscal policy and industrial productivity finds that an increase in military spending worth 1 per cent of GDP could lift output by up to 2 per cent over time, provided it is channelled into research and development rather than traditional procurement. “US defence investment has long powered technologies like GPS and nuclear energy,” he explains. “Europe’s challenge is to ensure today’s rearmament delivers similar spillovers rather than simply raising prices.”
European governments are dramatically expanding their defence budgets in response to Russia’s invasion of Ukraine and shifting US priorities. Germany plans to spend €650bn between 2025 and 2029, while the UK is preparing a decade-long ramp-up worth £36bn a year, according to the Institute for Fiscal Studies.
The potential upside is clear: regions such as Barrow-in-Furness in northern England and Saarland in western Germany - both scarred by decades of deindustrialisation - are now seeing a revival of shipyards and arms manufacturing. BAE Systems and Rolls-Royce are hiring thousands to meet new submarine contracts, while missile-maker Diehl Defence is expanding in small German towns once reliant on car making.
But the risk, warns Surico, is that Europe’s defence boom could stop at the factory gate. His analysis shows that defence-related R&D across the EU currently stands at just 0.04per cent of GDP, compared with 0.62per cent in the US, where venture capital and start-ups play a far greater role. “If Europe wants growth, it needs to shift more procurement to small, high-tech firms working on dual-use technologies,” he says, rather than relying solely on multinationals such as BAE and Airbus.
The UK government has pledged to raise direct spending with SMEs to £7.5bn by 2028, and new “defence growth deals” worth £250m aim to revive cities including Cardiff, Glasgow and Sheffield. Yet many start-ups complain that slow-moving procurement and complex contracting still favour large incumbents.
Ultimately, Surico argues, the question is not whether defence spending will boost Europe’s GDP, but what kind of growth it will deliver. “If the goal is short-term stimulus, there are faster ways,” he notes. “But if Europe treats defence innovation as a platform for new technologies and skills, it could be transformative.”
As the continent retools its industrial base, his message is simple: “Spend smarter, not just more.”
The Long-Run Effects of Government Spending, published in American Economic Review (Juan Antolin-Diaz and Paolo Surico, London Business School and CEPR, 2024), finds that public expenditure can stimulate economic activities in the medium term whenever its composition is tilted towards R&D, as it is during military conflicts. However, the study also finds that a significant increase in public R&D can have long-lasting effects on output and productivity even when it is not directly associated with war spending.