During the 2008 financial crisis, economist Robert Lucas quipped, “I guess everyone is a Keynesian in a foxhole.” Today, Europe is proving that idea once again, but instead of bank bailouts, the focus is now on military spending.
Germany and the EU are making bold moves to ramp up defense investment. Germany, under its likely future chancellor Friedrich Merz, is preparing to relax its strict “debt brake” rule. This would allow Berlin to spend an extra €1 trillion on defense and infrastructure over the next decade. The EU has also approved an €800 billion borrowing plan, letting member states boost military spending by bypassing debt rules. This marks one of the biggest shifts in European economic policy in recent years.
Meanwhile, Britain is sticking to a more traditional approach. Chancellor Rachel Reeves has insisted that her fiscal rules remain “non-negotiable.” Instead of increasing borrowing, Labour’s plan to raise defense spending from 2.3% to 2.5% of GDP by 2027 involves cutting the overseas aid budget. Pushing military spending even higher would require further “difficult decisions,” Reeves warned.
Britain and Germany are starting from different positions. Despite economic troubles, Germany has a history of budget surpluses. Its debt-to-GDP ratio stands at 63%, far lower than Britain’s 100%. Even though German borrowing costs have risen, its 10-year bond yields are about 2.8%, compared to 4.6% in the UK. These figures give Berlin more flexibility in its spending choices.
Reeves faces both economic and political challenges. The Treasury acknowledges that increased defense spending is necessary. However, with Britain’s tight fiscal position, higher borrowing could mean cuts elsewhere. Labour is wary of bond market reactions, especially after recent financial turbulence linked to concerns over Donald Trump’s economic policies.
Some within Labour hope Britain will follow Germany’s lead in embracing military Keynesianism. However, Reeves remains cautious, fearing political backlash. Before the election, she promised not to raise taxes and positioned Labour as fiscally responsible. This was meant to contrast with Liz Truss’s economic policies, which led to market turmoil.
But this stance may not hold much longer. Cutting government spending too aggressively could undermine Labour’s other goals—fixing public services, avoiding austerity, and stimulating economic growth. With Labour’s poll ratings slipping and internal concerns rising, Reeves may soon have to reconsider her fiscal strategy.
For now, Britain is staying cautious while Europe charges ahead with military Keynesianism. But the pressures of war, economic growth, and political realities may soon force a shift in approach.
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