The 8 Percent Approach: A Big Bang in Resources and Capacity for Europe’s Economy and Defence

Author presentation: Ismail Abdi is a Research Assistant at ECIPE. Andrea Dugo is an Economist at ECIPE. Fredrik Erixon is the Director of ECIPE. Lauri Tähtinen is the CEO of Mission Grey and a non-resident Senior Associate at CSIS.

Europe has become a region of feeble economic performance and military frailty. Its share of the world economy is rapidly shrinking, and the region is struggling to keep up with economies at the modern technological frontier. Countries in the European Union have for decades talked about the importance of raising Research and Development (R&D) expenditure and allow greater space for an entrepreneurial business sector that is prospering on the back of innovation. However, the results are poor. R&D expenditures as a share of GDP have largely been stagnant, business investment and inward Foreign Direct Investment (FDI) have tanked. Rates of new business formation and growth are paltry, partly as a result of gross overregulation. Productivity growth has continued its decades-long path of deceleration, and the EU is increasingly behind international leaders.

Fortunately, Europe is beginning to wake up from its strategic slumber. Defence expenditures are now growing faster than in previous decades – and some countries, like Poland, are becoming serious powers. Yet, the region’s own military capacity remains poor.  Europe must rebuild core conventional capacities at a time when defence modernisation requires substantial resources and focus. Russia may be bogged down by its war against Ukraine, but it is rebuilding its capacities fast and is increasingly aided by partnerships with other countries that want to break down what remains of a liberal world order. Many European NATO-members are now hitting the 2-percent spending target but must spend vastly more to acquire sufficient capacities to defend themselves and their interests. 

Europe is at a perilous strategic moment and its leaders must now accept and drive change. The EU needs a Big Bang in its allocation of resources for R&D and military capacity. Europe’s total spending on R&D is way below comparative regions and drains the economy of long-term developmental strength. After decades of under-spending on defence, Europe needs to vastly raise military spending to acquire the capacity needed to defend itself and the global order from which it prospers. On both accounts, Europe needs to over-correct and discard its mentality of resource incrementalism, offering too little, too late out of a fear of overcommitting and overspending. Such an outlook is self-defeating. To be able to shape outcomes, Europe needs a Big Bang.

How much should Europe spend on R&D and defence? There is no correct answer to the question; however, it is easier to identify incorrect ones. A basic formula is that R&D expenditures should be at a level and of a nature which can position the region at the global frontier of knowledge and technological change. In addition to adequate public resources, this also calls for a private sector that has the profile to lead in key areas of technological development. In the military realm, governments should spend what is necessary to defend their territories and assist allies as well as prevent such a need from arising: to deter enemies and aggressors from hostile and opportunistic behaviour. Europe is a long way from meeting this challenge: it does not only allocate insufficient resources but even when pursuing the right policies, it remains stuck in a mindset of incremental change. At such a pace, the problems you are attempting to solve will continue to recede into the distance.

Thus, we are calling our Big Bang “the Eight Percent Approach”: Europe’s collective resources for R&D and defence should now be at 8 percent of GDP. A reasonable allocation of resources now should be the equivalent of 4 percent of GDP for R&D and defence, respectively. In nominal terms today for the European Union, this equals 720 billion EUR for R&D and 720 billion EUR for defence. This can be compared with the actual spending today (using data for 2023), which is 405 billion EUR in R&D and 340 billion EUR in defence. To get to the 8 percent Big Bang, EU countries need to increase spending by 695 billion EUR. An extra 315 billion for R&D, and an extra 380 billion for defence. 

Capacity needs to be built for Europe to start controlling regional and contributing to global outcomes. New resources open up avenues for new outcomes, but they also need to be combined with many other initiatives to deliver on their objectives. Such policies include improving the competitiveness of the EU defence industry and discarding the old national champion model that has resulted in an EU defence sector that is fragmented, consisting of small and ineffective companies. Moreover, with battlefield contributions increasingly relying on modern data science and civilian technology, Brussels and other EU capitals need to create an environment for innovation and technology experimentation.

Yet, as the challenge to the liberal order from which Europe has benefited is global, it must resist the temptations of a “Fortress Europe” mentality of allocating resources only to its own defence or, worse, to that of its individual Member States. Building stronger alliances and partnerships with other countries and regions is of fundamental importance. This includes finding a new balance between competition and cooperation with the United States in different arenas. However, managing transatlantic relations in this new era is not enough. A new international strategy must include deepening relations with other parts of the world, foremost amongst them the Indo-Pacific region.