ECB chief economist flags inflation risks as European defence spending surges to €418 billion

Europe is spending on defence like it hasn’t in decades, and the European Central Bank is starting to talk openly about what that means for inflation, debt, and monetary policy. ECB Chief Economist Philip R. Lane joined a panel at the European Economic Association’s annual congress in Dublin on August 17, laying out the macroeconomic consequences of a continent that’s rapidly rearming. The numbers tell a clear story. Defence spending across the 27 EU member states hit €418 billion in 2025, a 20% jump from 2024 and nearly double the €218 billion spent in 2021. That kind of fiscal acceleration doesn’t happen quietly. The GDP boost comes with strings attached Lane’s panel, organized by the European Stability Mechanism and titled “Europe’s Defence Build-Up: Macroeconomic, Fiscal, and Financial Stability Challenges,” zeroed in on a tension that economists love and policymakers dread. More government spending can juice economic output in the short term, with defence spending multipliers estimated at roughly 1. That means every euro spent on defence generates about one euro of GDP. Historical analysis presented at the panel suggests that defence build-up episodes tend to widen fiscal defi...