NEWSROOM – Money alone won’t cut it—it’s time for Europe to spend smart on defense

Money alone won’t cut it—it’s time for Europe to spend smart on defense

Elisabeth Radke

March 11, 2026
European re-armament has made the region the world’s second-largest defense spender after the US, but it commands only a fraction of the military capabilities of other powers. The ongoing war in the gulf demonstrates how low cost, mass produced autonomous systems challenge expensive legacy defense. Europe yet has to adjust its spending to reflect the seismic shifts in the economics of defense. A new analysis by the Kiel Institute for the World Economy pinpoints why Europe gets so little strategic yield for its euro and proposes “five principles to spend smart” with which the area—starting with its biggest spender, Germany—could put its ample resources to better use.The Kiel Policy Brief “Time to spend smart” (https://www.kielinstitut.de/publications/time-to-spend-smart-19558) shows that European military spending of about USD 550 billion in 2025 amounted to a respectable 60 percent of the US’s globe-spanning defense budget of USD 920 billion, about 50 percent more than China’s assumed actual spending and about three times Russia’s outlays—but that the region still faces critical gaps in military capabilities, from space systems to communications and artificial intelligence (AI).

“Europe has to focus on maximizing the military output of its huge financial inputs to stop punching below its weight,” says Kiel Institute President and the report’s co-author Moritz Schularick (https://www.kielinstitut.de/experts/moritz-schularick/). “This weakness stems from enormous inefficiencies in military spending: European defense remains fragmented along national lines—resulting in low production volumes, high unit costs, limited cutting-edge technology, and politically entrenched national champions.”

As a result, Europe fields 14 different main battle tank models to America’s one, 16 submarine types to America’s four, and risks compounding such inefficiency as its military spending grows. By taking a closer look at Germany, Europe’s largest economy with a surging defense budget, the report shows that the region is not focusing on its key advantages—capital and innovation—to spur best use of its new funds.

Germany has not committed major investment to next-generation weapons or harnessed its industrial base to boost production. It has allocated only 3 percent of a first round of additional defense spending of EUR 100 billion, agreed in 2022, to autonomous systems, data centers, and satellites (rather than tanks and aircraft), kept research and development (R&D) outlays at 2 per cent of defense spending (less than a fifth of the US rate), and, with Europe, still does not produce enough ammunition or air defenses.

“Germany and Europe should take a leaf from Ukraine’s book and invest heavily in autonomous unmanned systems,” says Johannes Binder (https://www.kielinstitut.de/experts/johannes-binder/), Kiel Institute Researcher and the report’s co-author. “So far we haven’t invested in anti-drone protection and would be in the same situation as the gulf states today confronted with mass produced low-tech drones with considerable destructive potential.”

Europe can close its military capability gap—but money alone will not get the job done. It needs a defense strategy that effectively mobilizes economic capital and innovation. To foster a defense industry driven by technology and automation, the report sets out five principles for how the region can do better. European countries need to

1. spend more on military R&D—Germany alone should quadruple outlays to 10 percent of defense spending, or EUR 10–15 billion annually—and create autonomous and agile procurement agencies to better buy in innovation;

2. prepare for surges in weapons demand during conflicts by agreeing capacity contracts with industry that finance the build-up and maintenance of production capacities that can also be scaled up rapidly if needed;

3. learn from Ukraine as the region’s most cost-effective and innovative regional security actor by pursuing deeper defense-industry integration alongside increasing military support from 5–6 percent of European defense expenditures;

4. centralize weapons procurement and harmonize production to create a truly European defense market that produces large cost savings through scale and enhances interoperability of national armies and surge-capacity planning;

5. jointly issue Eurobonds to develop highly capital-intensive military assets like satellites, long-range missiles, AI, and other defense capabilities they currently lack.

 

Source: Kiel Institut für Weltwirtschaft