Kiel Report

• Economically, Trumpism creates multiple problems. Trump's protectionist agenda is inefficient and in some cases deliberately destructive. His reckless tariff and debt policy is jeopardizing the global role of the US dollar as a reserve currency. The world currently needs the US capital market, while the US can use it to finance a high level of consumption. A withdrawal of global capital flows from the US would therefore not only damage the American economy but also destabilize the international financial system. The first signs of such a loss of confidence can already be seen. • Trump's tariff threats against the EU, but also his 'One Big Beautiful Bill' are just the latest examples of such reckless policy measures. OBBB provides fiscal stimulus at the wrong time with bad distributional effects. The right response from Germany and, above all, Europe to this erraticism and uncertainty is not one of waiting around, but a proactive approach. Under the conditions of a world characterized by great power politics, Europe itself must become a strategic great power—militarily, economically, and culturally. Otherwise, there is a risk of losing political relevance in an increasingly multipolar world. • While the first steps towards strengthening the military have been taken, an ambitious innovation and growth agenda is missing. According to the Kiel Report, Europe is moving in the wrong direction in terms of educational and cultural influence: instead of attempting to attract global talent, isolationist tendencies and provincial thinking dominate—for example in higher education and tax policy. • The analysis paints a worrying picture of the transatlantic future: the USA under Trump's second presidency will further weaken multilateral institutions and no longer see Europe as a partner, but as a rival. Nostalgic transatlanticism is therefore no longer a viable option. • A Europe made up of many Switzerlands is not viable. Only a united, creative Europe will be able to stand up towards the rising authoritarian powers in the world. Europe's political existence is at stake.

This report updates and expands the data-driven work of our initial study from September 2024, which concluded that Europe would only be fit for war in several decades. We show that the situation today is even more concerning if Europe aims to be fit for war by 2030. First, Russia continues to outproduce four European countries across multiple weapon systems. We demonstrate that production must increase by a factor of around five to tilt the balance decisively in Europe’s favour. Procurement needs to accelerate and be frontloaded, as delivery delays of three years or more persist. Second, transatlantic tensions are weakening the strength of the U.S. security guarantee. Europe depends heavily on the U.S. not only for readily deployable troops but also for strategic enablers. While overall U.S. weapon imports are not excessive, reliance on American systems in critical modern capabilities remains a concern. Third, military strategy and technology are evolving rapidly. Military planners must modernize weapons and strategy while simultaneously scaling existing and effective systems—a major challenge for often slow and bureaucratic procurement structures. Investment in European technology is essential for modernisation. European weapons tend to be expensive due to low production volumes in a fragmented market; a focus on cost-effectiveness is vital to ensure the EU’s planned €800 billion defence spending is sufficient and fiscally sustainable.

This paper investigates how an increase in military expenditures affects an economy. It is written in the context of rising geopolitical tensions that have spurred increased military spending in the United States, Europe, and other economic areas. It draws on a large literature in macroeconomics, public finance, defense and peace studies, economic history, and the study of productivity to evaluate the short- and long-run consequences of rearmament.

War is back in Europe and as it becomes long-lasting, the question of armament gains central im-portance. This report finds that Russian military industrial capacities have been rising strongly in the last two years, well beyond the levels of Russian material losses in Ukraine. Meanwhile, the build-up of German capacities is progressing slowly. We document Germany’s military procurement in a new Kiel Military Procurement Tracker and find that Germany did not meaningfully increase pro-curement in the one and a half years after February 2022, and only accelerated it in late 2023. Given Germany’s massive disarmament in the last decades and the current procurement speed, we find that for some key weapon systems, Germany will not attain 2004 levels of armament for about 100 years. When taking into account arms commitments to Ukraine, some German capacities are even falling. The new Tracker provides detailed information on quantities, value of the orders, predicted delivery dates, as well as the companies from which Germany procures. The situation of slow and insufficient procurement can and needs to be remedied. Failing on deterrence would mean a higher likelihood of a costly war. Instead of Germany pursuing a “war economy”, as some have argued, Germany’s defence budget needs to durably and credibly increase. Higher and credible long-term demand will lead to increasing supply capacities. A long-term European armament strategy is needed. Germany and Europe need to focus on speed in procurement, on cost effectiveness through econo-mies of scale in an integrated European market, on innovation, and on technological superiority. Tracking military rearmament is essential to the security of the continent.