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Investing.com -- Europe is likely to take incremental steps rather than a transformational approach in adjusting its defence strategy, Barclays (LON:BARC) said amid the mounting geopolitical pressures and inefficiencies in defence spending.
Russian aggression in Ukraine, more assertive U.S. trade and foreign policies, and rising competition from China have intensified the need for a re-evaluation of European security policies. However, it expects changes to be gradual.
Increasing euro area defence spending from about 2% to 3.5% of GDP by 2035 could boost euro area GDP by 1.6 percentage points compared to a no-increase scenario, Barclays said. It estimated this would require approximately €1.63 trillion in additional defence spending, with €680 billion allocated to investment.
The bank noted that national-level decision-making has led to inefficiencies, with spending priorities varying across EU countries. While discussions on joint defence initiatives are underway, Barclays does not expect a large-scale EU-level funding facility similar to the bloc’s post-pandemic recovery fund.
Instead, the European Investment Bank could play a greater role in financing security investments, and some EU and non-EU countries may establish a special purpose vehicle to issue bonds for defence-related industries.
Barclays said any significant increase in defence spending would have fiscal consequences, requiring flexible application of EU fiscal rules, potential reallocation of unused EU funds, and negotiations for the bloc’s 2028-2034 budget framework.
Well-designed pan-European solution that boosts spending, reallocates resources, and promotes research and development would yield better results than national-level increases, Barclays added.