Defense Spending, Conflict and Economic Growth in Europe

Abstract This study seeks to answer the following research question: How do defense spending and conflict impact economic growth in Europe, and what role does NATO membership play in shaping these dynamics? Using a panel dataset of 40 European countries from 1999 to 2023, the analysis investigates a change in security dynamics in Europe post-2014, determinants of military expenditure, whether NATO’s influence is more pronounced for countries closer to Russia, and how military expenditure and conflict impact economic performance. Employing panel econometric techniques, the analysis reveals that while military expenditure is not directly correlated with GDP per capita growth, conflict exerts a profoundly negative effect, with battle-related deaths significantly reducing economic performance. NATO membership is associated with increased defense spending, where geographical distance to Russia implies weakening of NATO countries’ military budgets. For NATO members, higher US military expenditure correlates with reduced European spending, highlighting reliance on American security provisions. The findings underscore the complex dynamics between defense allocations, alliance structures, and economic conditions, emphasizing the need for balanced policy approaches that address security imperatives without compromising long-term economic growth.