According to an analysis by the European Central Bank signed by Philip Lane, member of the ECB board, the increase in military spending in Italy risks turning into a real fiscal shock, with effects on growth, inflation, public debt and financial markets.
For a country with a public debt exceeding 130% of GDP, rearmament is also an economic policy choice destined to have consequences on state investments and, indirectly, on the resources available for healthcare, schools, welfare and families.
How much rearmament could cost Italy
According to what was indicated by the Minister of Economy Giancarlo Giorgetti, Italy intends to use part of the budget flexibility granted by Europe to finance defense spending. In fact, EU regulations allow member states to deviate from ordinary deficit and debt constraints, reaching a maximum overall margin of tolerance equal to 1.5% of GDP, but only if these resources are used for specific priorities, such as energy transition and defence).
The Italian government has therefore decided to exploit this window to finance the military sector and the identified share corresponds to approximately 0.9% of GDP, which is equivalent to approximately 20 billion euros per year when fully operational.
However, financing this additional expenditure without cutting other budget items and without introducing new taxes means creating new debt. As a result, the ratio of the state’s deficit to GDP would rise by approximately 0.9 percentage points.
Consequences for healthcare, schools and aid for families
Italy is already under the scrutiny of the European Union, which has opened a procedure for excessive deficit, a mechanism that requires the country to bring the deficit below the threshold of 3% of GDP. Therefore, further increasing the deficit would push the objective further away, slowing down or blocking the exit path from this surveillance phase and risking prolonging the sanctions or warnings from Brussels.
The risk to healthcare, schools and families does not necessarily mean that direct cuts to these items are already planned. However, with public resources already limited and a growing share of the budget allocated to defence, the government has less room to finance other interventions at the same time, unless revenues increase or new debt is used. This is precisely the underlying risk highlighted by the ECB analysis.
Because where guns are purchased matters
Another issue analyzed is that relating to the destination of military spending, that is: where the money is spent. This is because, as explained, if European states use the new resources to purchase mainly weapons systems and technologies produced outside Europe, a substantial part of the fiscal stimulus inevitably ends up abroad. And in this case, while the country bears the cost of the expenditure, a share of the economic benefit is transferred to foreign companies. On the contrary, if investments strengthen European and Italian industrial supply chains, the economic return can be greater.
On the contrary, if investments strengthen European and Italian industrial supply chains, the economic return can be greater. According to the models referred to by the ECB, a gradual increase in defense spending can produce a positive effect on GDP if the resources remain within the EU and if they are then directed by states towards investments, research, technology and industry.
The estimates cited indicate fiscal multipliers ranging, in the medium term, roughly between 0.6 and 1.2. Concretely, the increase in spending can translate into a growth in economic activity, generating new production, employment, investments and, consequently, greater tax revenues.
