Tuesday 25 / March / 2025
Brussels: There is no official definition of a "war economy" but there are many attributes that add up to one.
A war economy means that a country has mobilised its resources, manufacturing capabilities and workforce to support military preparation and production leading up to or during wartime.
The most obvious economic change is a shift in industrial production away from consumer goods to things like weapons, ammunition or other military equipment.
Besides traditional military hardware, modern weapons require investments in technology and digital services like software, data analytics, satellite systems and reliable internet, says Penny Naas, a public policy expert at the German Marshall Fund of the United States in Washington.
To manage all this, there is an increase in centralized government control of necessary industries and resource allocation. This control lets governments prioritise and redirect raw materials to war-related industries and goods. Other things like fuel or food may be rationed to give priority to the military.
Who benefits from a war economy?
"In a true war economy, all elements of society are reoriented toward defending the homeland," said Naas.
This reorientation is expensive and there is usually a big increase in government spending to pay for it all. This can lead to more borrowing, inflation, higher taxes and less welfare spending.
Armin Steinbach, a fellow at Bruegel, a Brussel-based think tank, and a professor at HEC Paris business school. argues that companies specializing in military goods, digital technologies, information and intelligence, pharmaceutical and medical technology are big winners.
"Turning to war economies can be catalysts for scientific and technological advancements," Steinbach told DW. "New communication systems, jet engines, radar, intelligence benefit — and these technologies influence other industries."
Transitioning to a war economy
The move from a civilian economy to a war economy can happen slowly or quickly depending on the situation.
During World War Two, Germany had the advantage of knowing it was going to attack so it could get a head start. The US, the UK and other allies had less warning and had to respond frantically.
Today, Russia and Ukraine are in similar situations.
Russia has significantly increased military spending, beefed up the production of military goods and implemented capital controls to slow money leaving the country. Inflation is up and the government has increased public spending to keep the civilian economy going.
Poorer Ukraine is in a much more desperate situation. Since Ukraine is the one being attacked, it is fighting for survival and has had to invest much more into the war effort. Today, Ukraine is spending 58% of its budget on military expenditure, Steinbach noted.
Like Russia, Ukraine has mobilized manpower to support military efforts, which has taken many experienced workers out of the traditional workforce. At the government's request, many factories have been retooled to make weapons and ammunition.
What other countries are in war economy mode?
There are a number of other countries that are almost in war-economy mode because of ongoing military conflicts, including Myanmar, Sudan and Yemen.
The ongoing conflicts in Israel and the occupied Palestinian territories, Syria, Ethiopia and Eritrea have also led to economic disruption as governments there focus on military efforts.
Israel has increased its defense spending and is manufacturing more military goods. Many workers have been recruited to fight taking them out of the civilian job market. To pay for this the government has upped value-added tax (VAT), utility prices and property taxes.
The European Union is ready to rearm
The EU has recently been jolted into action because of waning US support for Ukraine, NATO and Europe in general. This about-face after decades of US support and US President Donald Trump's overtures to Russian President Vladimir Putin are especially troubling for transatlantic security guarantees.
NATO members — 23 of which are part of the European Union — had already been struggling to spend 2% of GDP on defence. Now even this number is not seen as enough.
On March 4, European Commission President Ursula von der Leyen announced a €800 billion ($867 billion) defense plan. Called "ReArm Europe" it is meant to beef up the EU's military capabilitiesand includes a total of €150 billion in loans to EU members. Additionally, the loosening of strict budget deficit regulations will allow countries to spend more and could add up to another €650 billion in military spending in the next few years.
Germany ready to step up military investments
For its part, Germany entered new territory by approving updated budget rules on March 21. Going forward, the government will be more free to armor up since most defense-related spending will no longer be hemmed in by fiscal deficit rules.
The move is so monumental that it could shake up the continent's security policy, and will require an adjustment to the country's constitution.
For Germany and Europe as a whole, prioritizing financial resources will be an important first step.
Penny Naas believes better access to energy plus more coordination to get around a patchwork of national capabilities are also needed at the European level. Joint procurement and shared research and development should reduce costs.
"At a political level, there is a lot of talk about increasing Europe's military capabilities, but it is at very early stages," said Naas. "Europe starts from a strong position, with strong fiscal resources and manufacturing capabilities."
