Tendencies and Relations of Defense Spending and Economic Growth in the EU Countries

Abstract

European countries are surrounded by growing conflicts and security threats. For every country it is necessary to ensure internal and external security. Defense should be seen as preventative spending as well as like an insurance policy. In terms of that, many policy makers have to decide how much money should be spent on defense. This paper investigates the tendencies and relationships of defense spending and economic growth in the European Union (EU) countries taking into consideration the level of countries’ economic development over the period of 2004–2013. The authors have done this by considering a number of descriptive statistical indicators and applying Granger testing. Based on the real gross domestic product (GDP) per capita, the European Union countries have been classified into five categories. The association between defense spending and economic growth has been estimated. On the basis of causality testing, the prevailing causality direction is from defense spending to economic growth in the group of countries of a very high level of economic development. However, in the group of countries of lower or mid-level of economic development the causality runs from economic growth to defense spending. For the remaining group of countries, no causal relationship has been detected between these two variables. The paper is concerned with defense spending and economic growth only. The authors have not considered all the other factors. That is the major limitation of this paper. Despite of this, the research highlights the key trends and relationships, which should be of particular interest to policy makers. However, every country is unique, and the economic growth or decline do not imply spontaneous change in defense expenditure. Prospective threats may be the most important factor for the expansion of defense spending.