Europe’s Pitch Book: Defence is costly. But Europe can afford it
The desk interprets the recent commentary on Europe's rearmament as a critical turning point for the region, indicating a substantial increase in defense spending, which aligns with shifting geopolitical priorities. Per the full note , Europe is projected to elevate its defense expenditure from below 1.5% of GDP in 2019 to 3.5% by 2035, reflecting heightened security concerns stemming from the ongoing conflict in Ukraine. This spending is expected to reshape economic dynamics, although the immediate macroeconomic boost remains uncertain. With no scheduled high-impact events, traders should remain alert to market reactions as this narrative develops and impacts investor sentiment in EUR-related pairs.
What the desk is arguing
The desk frames this as a significant policy evolution for Europe, emphasizing defense in response to growing geopolitical threats. According to the source, defense spending's jump reflects not only a response to the Ukraine crisis but also a necessary commitment as Europe grapples with a more unpredictable relationship with the U.S.
While some analysts argue that such expenditures do not inherently stimulate economic growth, the desk points out that the reallocation of resources towards defense could favor domestic manufacturers and drive innovation through increased R&D investment—elements crucial for long-term economic resilience.
Where it sits in our coverage
Current consensus for EUR/USD targets reflects a projected range of 1.04 to 1.12, with firms like: - JPMorgan: 1.10 (Mar26) - BoFA: 1.04 (Mar26)
This perspective aligns closely with the upper bounds of the aforementioned targets, suggesting a bullish sentiment from the desk that contrasts with some more conservative forecasts.
How other firms see it
The jpmorgan outlook supports a more bullish stance on the euro amidst rising defense expenditure, while the bofa perspective takes a more cautious approach, citing concerns over inflation and public debt. This divergence reflects underlying anxieties about the broader economic impact of increased defense spending.
Intertwined with this narrative, the trajectory of EUR/USD mirrors overarching fiscal policies and ECB decisions, especially as they relate to inflation control and interest rates.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Europe's defense spending to rise to 3.5% of GDP by 2035.
- 02Increased focus on security impacts trade, technology, and energy policy.
- 03Macro growth benefits of defense spending remain uncertain.
- 04Positioning in EUR may reflect shifting geopolitical sentiment.
Market implications
Watch for signals in EUR pairs as Europe solidifies its defense strategy. A move above 1.10 could signal further bullish momentum in EUR/USD, contingent on external geopolitical developments.
Risks to this view
Potential inflationary pressures and corresponding monetary policy shifts by the ECB could negate the bullish outlook, particularly if defense spending leads to significant increases in public debt or rates.
Opinions Opinion by Marieke Blom Europe’s Pitch Book: Defence is costly. But Europe can afford it Published 09:00 Europe's rearmament is expensive, fragmented and politically difficult. Yet progress has been faster than many expected.
Defence spending is rising fast, production is increasingly European, and the financial burden may turn out to be manageable If you ask Europeans which challenges matter most today, economic growth no longer tops the list. Security, defence and geopolitical instability have moved to the forefront. The reasons are obvious.
Russia's war against Ukraine continues. Europe's relationship with the United States has become less predictable. Security concerns increasingly shape trade, technology and energy policy.
And supporting Ukraine remains both a military and financial commitment. Against this backdrop, Europe has committed to a substantial increase in defence spending, from less than 1.5% of GDP in 2019 to 3.5% by 2035. Unsurprisingly, security and defence are expected to take centre stage at this week’s State of the Union.
Critics point to fragmented industries, procurement inefficiencies, production bottlenecks and concerns about public debt. Yet amid the long list of challenges, an important question often receives less attention: what is actually going right? Quite a lot, as it turns out.
No macro boost, but that’s not the point You might expect me to argue that higher defence spending will boost economic growth. But that is not the argument I want to make. The economic impact of defence spending depends on how and where the money is spent.
Benefits tend to be greater in economies with spare capacity, higher unemployment, stronger domestic production, and higher investment in research and development. At the same time, increased spending can add inflationary pressure and prompt higher interest rates, offsetting some of the stimulus. And over the long run, defence spending must be financed through higher taxes or lower spending elsewhere, making it more likely to change the composition of the economy than to raise its growth rate permanently.
The strongest economic case for defence spending is therefore not faster growth, but greater security. By reducing the risk of future economic disruption, it helps ensure that Europe remains a safe place to live, work and invest. Now back to what is going well.
The surprising speed of progress The jump in spending has been quite remarkable. As recently as 2019, defence spending was roughly 1.4% of GDP, while for 2026 it is estimated to be 2.4% of GDP . The last couple of years saw an increase of almost 0.2 percentage points of GDP per year.
Sources & References
How we cover this story