The economic footprint of Europe’s defence build-up

Summary — “The economic footprint of Europe’s defence build-up” (CEPR VoxEU, Luiz de Mello, Ines Dezcallar & Sean Dougherty, 5 July 2026)

Building a new regional dataset spanning 1,011 regions in 15 European countries, this column shows defence policy’s economic effects are highly local, not just a national security matter. The authors combine plant-level data from Military Balance+ with ORBIS subsidiary structures, identifying 347 defence production plants and 3,888 firms linked to defence-related activity across those countries, then match them to OECD regional GDP, patenting, manufacturing employment and population data. They find regions hosting defence production and supply-chain activity have a higher long-run per-capita GDP than comparable regions without such activity, even after controlling for population, manufacturing employment, patenting and higher-level regional fixed effects — though the authors caution this is a conditional association rather than a causal multiplier, since regional procurement values aren’t observable. Notably, the income premium is larger in more innovative regions, suggesting defence spending amplifies existing industrial and knowledge-spillover advantages (citing clusters like Toulouse and Munich) rather than creating new economic strength from scratch. Using local projections around the 2014 Crimea annexation as a quasi-natural experiment, they find defence-hosting regions saw about a 0.6% higher cumulative GDP growth differential by four years out. The policy upshot: as Europe ramps up defence spending, governments should pay attention to where the money lands — investing in complementary regional assets (skills, R&D, university links) so gains aren’t simply concentrated in already-wealthy defence clusters, deepening regional inequality

Defence policy is usually discussed as a national security issue, but its economic effects are often highly local. This column presents new evidence from 1,011 regions in 15 European countries suggesting that places hosting defence production and supply chain activity have a larger economic footprint than comparable places without such activity: they enjoy higher income…

Source: CEPR / VoxEU · July 4, 2026