In its analysis, from the beginning of May 2025, the Fiscal Council has focused on the planned changes in public defense spending. The new geopolitical realities require decisions to increase the financing of European defense capabilities. With today's analysis, Fiscal Council member Atanas Atanasov outlines some prospects for economic growth in the context of the need to increase defense spending in Europe.
This was commented on by Atanas Atanasov, member of the Fiscal Council.
2025 marks a conceptual turning point in the development of the EU's security and defense capabilities. At a historic summit held on 24-25.06.2025 in The Hague, NATO's 32 member states set a new, ultra-ambitious target for increasing defense spending, which envisages reaching 5% of GDP for each member state over a 10-year period. The two-component spending formula includes 3.5% of GDP for core military spending and 1.5% of GDP for spending related to military infrastructure.
The governments' ambition also brings out another important effect of the increase in spending - the revitalization of the continent's industrial sector and new opportunities for economic growth.
What the numbers say:
In 2023, the European defense industry generated a turnover of 158.8 billion euros, which is 16.9% more than in 2022 and an 8.9% increase in employment - to 581,000 people. The EU's total military spending for 2024 is BGN 325 billion, or 1.9% of total GDP, and is expected to increase by another EUR 100 billion by 2027.
Currently, 80% of European defense orders come from suppliers outside Europe. Two questions arise - about the strategic autonomy of European defense and defense investments to generate technological advantages. To achieve the latter, it is necessary to overcome the strong fragmentation of the military industry and its closure within national frameworks. The reality today is limited production capacity, based primarily on domestic demand, the absence of pooled resources and few opportunities for research and development.
The main factor that can push national economies towards growth after the decision to increase military spending is the establishment of a system of coordinated investments and purchases at the EU level. This can be done through joint procurement.
There are several mechanisms for this:
The SAFE (Security Action in Europe) instrument, providing loans of up to EUR 150 billion to help EU Member States achieve a significant increase in defence investment through joint procurement.
The European Defence Industrial Programme (EDIP), providing EUR 1.5 billion in grants until 31.12.2027 to stimulate joint procurement of defence products and strengthen production capacity.
The Strengthening of the Defence Industry through Joint Procurement (EDIRPA) in force since 19.10.2023, worth EUR 300 million EUR, which stimulates joint procurement of defence products.
Additional initiatives within the EU budget are: EUR 8.8 billion under the European Defence Fund for research and development; EUR 1.7 billion for military mobility projects; EUR 300 million to support joint procurement; EUR 500 million to stimulate ammunition production.
According to a number of studies, increasing European defence spending from just under 2% of GDP currently to 3.5% would cost around EUR 300 billion per year, but this amount could generate a similar amount of additional economic activity.
Increased military spending also acts as a fiscal stimulus. Defence investment stimulates economic activity by generating demand for labour and materials from almost the entire spectrum of production. It has transformative potential and the ability to stimulate innovation. Data show that a temporary increase of 1% in military spending relative to GDP increases total factor productivity (TFP) by 0.3%, leaving a lasting legacy of skills and industrial know-how.
Is it possible for increased defense spending to stimulate economic growth in Bulgaria? The answer lies in the fulfillment of certain conditions.
Expenditure on acquiring defense capabilities in certain areas should be tied to participation in the above-mentioned common European defense financing mechanisms, most notably SAFE, which provides low-interest long-term loans with a ten-year grace period and a thirty-year repayment period, in which Bulgaria has already expressed interest in up to EUR 3 billion.
Using the full capacity of the Bulgarian military industry for rearmament and modernization of our Armed Forces - a capacity that is able to generate added value in the implementation of basic orders for the army. This will increase scientific potential, research and development activities and generate financial resources at the next higher level.
A significant contribution to economic growth should be expected with the possibility of 1.5 percent of the five percent increase in defense spending by 2035 being allocated to the construction of dual-purpose military infrastructure - roads, pipelines, bridges, warehouses, airports, command posts, fortifications. Additional participation in the EU Military Mobility Program along intermodal corridors and logistics centers through jointly financed projects (“Danube Bridge-II”) will enable an increase in production and will ensure the future development of a number of sectors of the industry structure of the Bulgarian industry.
In recent years, the Bulgarian defense industry has achieved billion-dollar turnover, with orders for 2024 exceeding BGN 8 billion. This shows an unsuspected capacity and potential for society.
By achieving tangible growth, it can make a transition that will generate new capabilities for production and export in certain high-tech areas. It is required to concentrate scientific, technological, organizational and financial resources, with which the production of defense products in major state and private companies can stimulate other sectors of production and services in the country.
The government is implementing the already stated intentions to address its potential and support. The first step in organizational and functional terms has already been taken - the creation of a Center for Defense Innovations by a decision of the Council of Ministers of 24.06.2025 as a unit in “Sofia Tech Park“ AD.