For decades, Europe has enjoyed a “peace dividend”: the ability to spend less on defense thanks to the security umbrella provided by the United States. This allowed governments to direct more resources toward social programs, expanding welfare systems and financial safety nets. Over time, spending on social protection steadily grew as a share of government budgets — rising from 36.6% in 1995 to 41.4% in 2019, according to Eurostat — and helped build a rich and prosperous middle class.

But that era is coming to an end. With Russia’s war in Ukraine reshaping Europe’s security landscape and the U.S. drifting toward a more isolationist stance — especially following Donald Trump’s return to office — European countries are being forced to take greater responsibility for their own defense. Across the continent, governments are now making significant increases to defense budgets. After months (or years) of pressure by Trump to raise defense spending, NATO leaders agreed to raise defense spending as a share of GDP up to a staggering 5%, up from 2%. Sweden, already, has announced plans to raise defense spending to 3.5% of GDP by 2030, explicitly citing regional instability and U.S. unpredictability. Similarly, Germany recently pushed through a constitutional reform to its debt brake, unlocking billions for defense and infrastructure; projections suggest that maintaining defense spending at 3.5% of GDP over the next decade could total €600 billion. Since the middle of the Cold War era, Germany’s military expenditure as a percentage of GDP has dropped dramatically. Peaking at 4.9% in 1963, it fell to an all-time low in 2005 of just 1.1%. The European Commission has also stepped in, proposing sweeping measures that could mobilize €800 billion in defense spending. These include the temporary relaxation of EU fiscal rules to allow more public funding for national defense and the availability of lending from the European Investment Bank. These proposals, although not yet ratified by all EU member states, have already buoyed defense-sector stocks, signaling a significant shift in political and economic priorities.

This shift is prompting a reallocation of public resources: funds that once went to social spending are increasingly being redirected to defense. A Financial Times study suggests that had European countries been spending the NATO target of 2% of GDP on defense all along, it would have required an additional €387 billion annually — funds that previously supported pensions, healthcare, and unemployment benefits. From now on, they will finance tanks, drones, and ammunition instead. The peace dividend is over; security is once again becoming a central pillar of government budgets.

However, there are upsides to this rise in defense spending. A 2025 study titled The Economic Returns on Defense R&D examined defense-related research investment in 19 OECD countries from 1981 to 2021 and found impressive returns — between $8.1 and $9.4 for every dollar invested. This vastly outperforms non-defense R&D, which averages between $1.5 and $1.7 per dollar. These figures suggest that military investment, particularly in advanced technologies, can be a significant economic driver if managed strategically.

A separate analysis by ABN-AMRO echoes this, arguing that higher defense spending can boost economic growth in both the Eurozone and the Netherlands — but only if European industry can successfully pivot toward defense manufacturing. One example of this pivot is Dutch carmaker Nedcar, which has announced a move into defense equipment production instead of making car parts. However, such transformations are far from guaranteed. Many industrial plants and supply chains remain constrained by legacy infrastructure, specialized-labor shortages, and a lack of technical expertise in military manufacturing.

Furthermore, these economic benefits come with considerable trade-offs. As public funds are increasingly allocated to defense, fewer resources remain for social spending. Welfare programs, healthcare systems, education, and pensions — the bedrock of Europe’s post-war social model — may face tightening budgets. For lower-income groups and vulnerable populations, this could mean reduced support at a time when economic uncertainty and demographic pressures are rising. The shift may also deepen social inequality: while certain industries and regions benefit from new defense contracts, cuts to social services disproportionately impact those already struggling.

Politically, the reallocation of funds risks fueling public discontent and polarization, especially if citizens perceive a decline in their quality of life to underwrite military expansion. As one economist, Mark Zandi of Moody’s Analytics, put it: Europe’s long peace allowed “economic resources [to be freed] for private investment and allowed governments to increase support for social welfare.” That chapter may be closing — and the costs of its ending will not be evenly distributed. So although the return to high defense spending may well be necessary in the face of new geopolitical threats, it carries a steep social and political price that European governments will have to manage.

Implications 

1. European countries may come to resemble the US in terms of social structure: As Europe redirects public spending from welfare to defense, the long-standing European model of extensive social safety nets is being undermined. Over time, this could result in weakened public healthcare, pensions, and unemployment benefits—core features of the European welfare state. The shift mirrors the American model, where defense spending historically takes precedence over social spending. This may lead to more pronounced socio-economic inequality, increased reliance on private services, and a greater divide between regions and demographics—hallmarks of America's societal structure. As welfare systems shrink and privatization grows, Europe’s social contract may begin to erode, pushing it closer to the US model in both policy and public sentiment.
2. A return to Cold War-bifurcation of global resources: Increased investment in defense R&D may yield high returns, but it will also likely bring about a bifurcation of the global innovation landscape. Just as in the Cold War era, sensitive research and technologies may become siloed, classified, or restricted to national or alliance-based projects. This fragmentation can slow the pace of global innovation and reduce the efficiency of knowledge and tech transfer across borders. Additionally, the development and procurement of military-grade goods may replace open-market trade in some sectors, curbing overall economic growth and limiting the diversity of goods available globally. As defense industrial bases expand and become more nationally oriented, global supply chains could suffer from a rise in duplication, inefficiencies, and geopolitical frictions. That is something we are already seeing in terms of the splitting of the internet (‘the Splinternet’) and the Battle of Stacks. 
3. The rise of “pacifist populism”: The shift from welfare to warfare spending risks could trigger a populist backlash—not of the usual nationalist or militarist kind, but one rooted in social and economic concerns. Citizens used to generous welfare states may increasingly resist defense-focused budgets, particularly if social services decline in quality or accessibility. This could fuel the rise of what we could call “pacifist populism”: political movements that prioritize domestic welfare over military build-up and argue for diplomacy over deterrence. Governments will face growing political pressure to justify military spending and maintain public trust amid visible trade-offs, and could lead to weaker support for far-away conflicts that European countries should or will not be involved in, such as Ukraine, Gaza or Taiwan.