A Conversation on Military Finance: How to Finance Europe’s Rearmament?

In the face of growing external threats and the need for credible deterrence, how can Europe finance its defense build-up? Three main options are available: deficit financing, increased taxes, and expenditure cuts. Each of these options presents tough trade-offs and is likely to encounter political resistance.

However, such debates are not new; nearly every military build-up over the past 200 years has sparked intense discussions about financing. Looking back at history, we ask: how were past wars funded, and what were the outcomes of various strategies? We will further complement that evidence with policy insights of recent years. For that purpose, we will highlight the diverging approaches since 2022, with some countries opting for debt financing (e.g. Germany’s “Sondervermögen”) while others opted for higher taxes (e.g. Lithuania, which raised its corporate tax rate and excise duties to finance defense expenditures). In sum, this conversation will draw on lessons from research and policy to distill a set of recommendations on Europe’s military financing for the years to come.