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The European Union has announced a strategic shift: a turn towards reindustrialisation, with particular emphasis on the defence-industrial complex. The aim is to make this sector a driver of high-tech growth and a pillar of security.
This pivot is rational, especially given that the global economy is no longer operating solely on the basis of comparative advantage but is increasingly shaped by the logic of economic security. Yet the question remains: will Europe once again fall into the trap of past errors, where sound ideas are thwarted by systemic inertia, excessive regulation and pervasive bureaucracy?
In 1918, Oswald Spengler published The Decline of the West (more widely referred to in Central and Eastern Europe as The Decline of Europe). In it, he predicted the impending twilight of the Western world, arguing that by prioritising technology over culture and losing its inherent spirituality, the West would ultimately give way to other civilisations. At the time, the book caused a stir among global intellectuals. More than a century has passed and Europe has not collapsed—but the title has taken on renewed relevance. In recent years, it has become a popular reference point in political and expert circles.
Although Spengler’s prophecy has not materialised, Mario Draghi’s recent report on the EU’s competitiveness paints a sobering picture. His analysis highlights both current and future risks that Europe faces. Chief among them is technological stagnation—ironically, the very opposite of what Spengler lamented in 1918. Draghi identifies a critical technological lag behind the United States and, in some areas, China. He cites Europe’s failure to capitalise on the digital revolution, the declining competitiveness of European industry, excessive bureaucracy, and deteriorating demographics. These are all valid concerns. Draghi deserves recognition for his frank diagnosis and his call to prepare for a shift in the global order and to prioritise investment.
The Defence Engine Under a Cloud of Debt
The concept of anchoring reindustrialisation in the defence sector appears strategically sound. Defence industries stimulate technological development and innovation, generate hundreds of thousands of jobs, boost production in related sectors, strengthen internal markets, and serve an essential security function. However, this ambition faces substantial economic obstacles.
Europe is contending with high energy costs, elevated interest rates, and restricted access to finance—compounded by requirements to meet environmental, social and governance (ESG) standards. Trade is burdened by tariffs and political risks.
These pressures are reflected in weak economic performance. In 2024, real GDP in the EU grew by just 0.8 per cent, with the eurozone expanding by 0.7 per cent. Although growth improved in the first quarter of 2025 (1.4 per cent in the EU and 1.2 per cent in the eurozone), this does not yet signal a robust recovery. The Purchasing Managers’ Index (PMI)—a key measure of business activity—has remained below the 50-point threshold for 33 consecutive months, indicating prolonged stagnation in industry.
Fiscal risks are also intensifying. In 12 EU member states, budget deficits exceed the Maastricht threshold of 3 per cent of GDP. Notably, Romania’s deficit stands at 9.3 per cent, Poland’s at 6.6 per cent, France’s at 5.8 per cent, and Slovakia’s at 5.3 per cent. Public debt in the eurozone stands at 87.4 per cent of GDP. Italy, France and Spain—three of the EU’s four largest economies—are significantly above the 60 per cent Maastricht limit, with debt levels at 135.3 per cent, 113 per cent, and 101.8 per cent respectively.
Externally, new trade tensions loom. The EU may soon face a wave of new US tariffs. In 2024, EU exports to the US exceeded $600 billion. Any loss of access to this market would deliver a significant blow to European industry—especially if Washington increases subsidies to its own defence sector and begins redirecting contracts away from Europe, a scenario that appears increasingly likely.
Can Europe Sustain a Defence-Based Economy?
Against this backdrop, the EU plans to invest €800 billion in defence modernisation, including €150 billion through new borrowing, under the European Commission’s ReArm Europe initiative. This appears to be a high-stakes financial gamble, testing the limits of economic resilience.
NATO Secretary General Mark Rutte in January advocated raising defence spending to 3.7 per cent of GDP for EU and NATO members. Last year, these countries spent an average of 2.02 per cent. Only four EU states exceeded 3 per cent: Poland (4.12 per cent), Estonia (3.43 per cent), Latvia (3.15 per cent), and Greece (3.08 per cent).
Rutte’s call appears justified in light of current threats—but such increases would require hundreds of billions of euros annually. Can national budgets absorb this? Are voters willing to support such a shift? Increased defence spending implies cuts to social, educational and infrastructure programmes. It is a political minefield. While long-term benefits may emerge—through job creation, tax revenues, and consumption—much depends on whether European leaders can convincingly articulate these gains to the public.
Germany appears prepared: the Bundestag has endorsed lifting the so-called “debt brake” (introduced in 2009 to cap new borrowing at 0.35 per cent of GDP), paving the way for increased defence outlays. France faces greater difficulty, with debt at 113 per cent of GDP and a fragmented political landscape. President Macron is reportedly considering dissolving parliament and calling early elections this autumn. Italy and Spain, meanwhile, currently spend less than 1.5 per cent of GDP on defence—well below the target—though Spain has announced plans to allocate an additional €10.5 billion this year.
In 2024, the EU’s total defence spending reached €330 billion. To meet NATO targets, this would need to rise to €598 billion annually. This is not merely a budgetary reallocation; it is a fundamental shift in the EU’s financial model and its broader economic paradigm.
Strategic Gamble or New Epoch?
Positioning the defence sector at the centre of European reindustrialisation may be the correct move—but many uncertainties remain. How can the EU avoid falling into a debt trap? How can internal stability be maintained amid rising expenditure? How can Europe avoid losing ground in the global market, particularly if the US and China introduce new tariffs on EU goods?
Europe stands at a crossroads. It can either seize this historical moment to transform itself—or become mired in complexity, delay, and political hesitation.
This may be the moment for a more profound reassessment. Alongside modernising its defence sector, should the EU not also confront its structural vulnerabilities—from social policy and education to energy and taxation, from bureaucratic inefficiency to the absence of a coherent technological strategy? If the defence sector turns from a ‘locomotive of modernisation’ into a ‘ballast in the boat of debt’, what currently appears to be a sound strategic course could ultimately result in deep strategic disillusionment. And then, Spengler’s warning may finally come to pass. Something, one must admit, Europe would be well advised to avoid.