Oh, more guns less butter!
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Putin and Trump May Rescue Europe’s Economy
Rearmament could kick off growth, not only for the Keynesian reasons you’re likely hearing about.
By Joseph C. Sternberg, WSJ
March 13, 2025 12:24 pm ET
Just when it seemed no one could rescue Europe’s long-stagnant economies, an unlikely pair of white knights has emerged: Vladimir Putin and Donald Trump. Between the two of them, and entirely by accident, the Russian and the American are on the cusp of triggering the most significant economic realignment on the Continent since the end of the Cold War.
The cause will be Europe’s belated rearmament drive, although the mechanism by which this revives the Continental economy (if it does) won’t be what you and many economists might think.
Conventional wisdom already is coalescing around the idea that European rearmament will constitute a straightforward Keynesian-style economic boost. In response to Mr. Putin’s 2022 invasion of Ukraine and Mr. Trump’s more recent threats to withdraw American security support for Europe, leaders across the Continent are pouring gobsmacking amounts of money into defense. Tens of billions of pounds will come from London, and up to €800 billion from across the European Union. This is only what’s currently planned—the largest EU economy, Germany, isn’t putting an upper limit on its coming defense investments.
Purely as a matter of arithmetic, this money (mostly borrowed, mind you) will boost official measurements of gross domestic product, since government expenditure is one of the inputs into the GDP calculation. But the bigger economic consequence is less about how much Europe will pay and more about how, exactly, Europe will pay it. To wit, cash-strapped European governments will have to shrink their welfare states to fund their defense build-outs. The supply-side benefits for economic growth could be big.
Britain is leading the way. In desperation amid a strained budget and demands for more defense expenditure, Prime Minister Keir Starmer’s Labour Party is laying the groundwork for a significant reform of welfare programs intended to support the long-term ill and disabled.
The rolls of people on the two main programs for this purpose have swelled since the pandemic. Some 1.2 million people in England and Wales have started receiving either or both since 2020, adding to the 2.8 million who received these benefits as of 2019. (Scotland and Northern Ireland operate separate welfare systems.) The current disability roll encompasses 10% of the working-age population and costs the government around £65 billion a year and growing. Britain spent £54 billion on defense in the last fiscal year.
No one knows for sure why Britain’s disability-benefits system has grown so rapidly in recent years—much faster than in comparable countries—but a political consensus is emerging that this is economically destructive and fiscally unsustainable. The system’s eligibility criteria create a bias toward pulling people out of the workforce permanently, rather than nudging them toward new jobs they could do.
Over the past decade, the average amount of time an individual claimant receives benefits has increased. A House of Lords inquiry in January estimated that if reforms such as stricter work requirements for claimants and an emphasis on occupational therapy could pull 400,000 Britons back into paid work, it would benefit the fisc to the tune of £10 billion a year. This budgetary windfall would arise both from lower benefit payments and increased tax revenues as more work boosts the economy. It’s the only unambiguously good economic idea Mr. Starmer has had so far in his term.
Were it not for the prime minister’s rearmament drive, this situation probably would have been allowed to fester. Mr. Starmer never would choose to grasp this nettle otherwise, and as it is he’ll face fierce resistance to any reform from members of his own caucus in Parliament. The story demonstrates how the need to rearm will force politicians across Europe into necessary but uncomfortable debates about other forms of spending—potentially to the benefit of economic growth and prosperity.
There are other examples. Although Berlin may exempt defense from Germany’s constitutional balanced-budget amendment, incoming Chancellor Friedrich Merz still faces stiff political pressure to control other spending as a partial offset. His center-right Christian Democrats and likely coalition partners in the center-left Social Democrats recently released the outline of a coalition agreement that includes—drum roll, please—welfare reform.
Hashing out the details will take weeks and may prove disappointing. But the two parties have agreed in principle to reforms of Germany’s flagship welfare program. These would include a renewed emphasis on pushing benefit claimants into work and paring payments for those who refuse. Such reforms could be transformative for Germany’s economy, in the same way labor reforms under Chancellor Gerhard Schroeder revived what was then the “sick man of Europe” 20 years ago.
An underappreciated consequence of Europe’s turn from guns to butter after 1991 is that the Continent ended up getting less butter in addition to fewer guns as welfare bloat suffocated economic growth. Perhaps Europe is about to find out if the reverse can also be true.
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