Contents:The economics of defense spendingMoney for protectionDefense budget models: what they reveal about a countryThe EU’s bottlenecks and Ukraine’s advantagesThe economics of defense spendingIn 2024, global defense expenditures reached $2.44 trillion, a 6.8% real increase over the previous year. The primary drivers of this growth were NATO, China, India, and East Asian countries.Israel spends over 8% of its GDP on defense. Germany and Japan are significantly increasing their defense budgets and revising longstanding post-WWII restrictions.By 2025, NATO members agreed to raise base defense spending to 3.5% of GDP, with an additional 1.5% for infrastructure, cyber defense, and industrial resilience. If implemented, this would mean an annual increase of more than $800 billion in Alliance spending by 2035, compared to prewar levels.Ultimately, this money will go toward weapons and armed forces. But once the resources become abundant, how they are spent becomes more important than how much.Part of the spending is predictably allocated toward job creation and other immediate economic benefits to build public support for sustained defense budgets. Russia’s regime has turned this effect into a central strategy, creating new social classes of war beneficiaries loyal to the Kremlin. North Korea, Iran’s proxy networks, and to some extent Iran itself follow a similar approach.Leading global powers, including the G7 and China, while also mindful of employment impacts, primarily use defense budgets as tools for technological competition and long-term economic development.By analyzing spending structures, one can distinguish between countries preparing for immediate conflict and those investing in long-term technological and economic superiority.The war in Ukraine has shown how some past investments—such as heavy armored vehicles—can quickly lose relevance. This has spurred rapid innovation, focused on producing large quantities of cost-effective yet operationally viable weaponry.At the same time, strategic development goals require investment in expensive, high-tech military systems that may offer peacetime advantages, but prove ineffective in future combat scenarios. This was hard to predict—just five years ago, few imagined drones would make tanks nearly obsolete in a major war.As defense budgets grow in economic weight, weapon choices go beyond tactical performance or unit cost. They become strategic economic decisions.Another critical point: until recently, defense and security had limited weight in EU accession talks. But as defense spending becomes a lever of economic policy, that could change.Money for protectionIn 2024, global defense spending stood at $2.44 trillion—up 6.8% in real terms from the previous year. In purchasing power parity (PPP), this equals $3.2 trillion. Military spending now makes up more than 2.3% of global GDP—the highest share since the Cold War.The United States remains the leading spender, with a defense budget nearing $900 billion, over 3% of its GDP and accounting for more than 38% of global military expenditure in dollar terms. A large share of this supports the U.S. high-tech defense sector, which also benefits from arms imports by other countries.By 2025, 23 out of 32 NATO members surpassed the 2% GDP benchmark, originally set long before Russia’s 2014 annexation of Crimea. Still, progress accelerated following Russia’s full-scale invasion of Ukraine in 2022. At the 2025 NATO summit, allies agreed to raise defense spending to 3.5% of GDP, plus 1.5% for infrastructure, cyber, and industry over the next decade. If implemented, this would push annual NATO spending $800 billion higher by 2035.In 2024, EU and UK defense budgets combined reached about $457 billion, a 12% increase from 2023—the highest since the early 1990s. In PPP, this is slightly less than Russia’s military outlay. However, PPP doesn’t fully reflect defense potential, just as exchange rates fail to capture military purchasing power—since items like drones or tanks aren’t in typical consumer price baskets.Nevertheless, in nominal terms, EU and UK defense spending is twice Russia’s and imposes far less economic strain. Though Russia’s growth rate is faster, Europe’s defense spending has risen nearly 50% since 2014. Raising it to 3% of GDP would add $250 billion annually; 5% would add $800 billion.U.S. and European defense spending models differ sharply. The Pentagon prioritizes high-tech procurement, with R&D accounting for $100 billion annually (12% of the budget)—an order of magnitude above the EU’s $10 billion (~2.5%).Defense budget models: what they reveal about a countryDifferent types of defense spending generate different economic effects.Spending on personnel, logistics, and low-tech arms supports readiness but does little for long-term innovation.Capital investment—infrastructure and advanced weapons systems—has stronger economic returns.The greatest long-term value comes from R&D funding, which fosters innovation and strengthens industrial ecosystems.Although defense spending boosts employment, defense manufacturing is less labor-intensive than civilian industries. Precision engineering and digitalization mean that procurement doesn’t automatically translate into jobs without broader industrial policy tools.The European Commission estimates that defense investments could create up to 500,000 jobs in the EU by 2035. Still, this is less than 2% of total manufacturing employment. So additional defense spending alone is unlikely to justify itself politically without effective communication about rising security threats.For voters, the benefits of defense R&D may be invisible—but for governments, they are clear. A 1% increase in defense R&D share can raise defense productivity by 8%, with spillover into civilian sectors like AI, energy systems, materials, and electronics.If 20% of the defense budget is dedicated to R&D, the EU’s GDP could grow by 0.3–0.5% beyond baseline projections by 2028, with further growth expected.In this sense, a country that emphasizes R&D and capital investment signals long-term strategic thinking. A country focused on personnel and basic supplies is likely preparing for imminent war.The U.S. model is innovation-driven: 12% of its defense budget goes to R&D, 50% to capital investment, and only 35–40% to maintenance and personnel. This structure makes the Pentagon a key driver of innovation in aerospace, AI, and electronics.In contrast, most European countries allocate over 60% to personnel and less than 2.5% to R&D. Capital investments hover around 25–30%, with France, Germany, and Italy leading. Despite tools like the European Defence Fund, SAFE, and EDIRPA, institutional fragmentation and inter-state competition limit scale and efficiency.Russia’s model reflects mobilization logic: 50% for personnel, only 1% for R&D, and about 30–35% for capital spending—focused on mass production of artillery, drones, and glide bombs. It aims for numerical advantage over technological edge. This approach strains industrial capacity over time and yields short-term social loyalty, but not sustainable development.Meanwhile, China’s defense budget supports long-term modernization. Around 6–7% is spent on R&D (especially dual-use tech like drones, AI, satellites, semiconductors, and hypersonics), 35–40% on capital investment, and relatively little on personnel. China’s defense-industrial strategy is integrated into its broader Made in China 2025 agenda, making defense a key tool for economic and technological competitiveness.EU bottlenecks and Ukraine’s advantages"Cost-effectiveness" remains a key criterion for weapon selection, driven by immediate battlefield needs. However, as global military spending continues to rise—without yet reaching its peak—those needs are increasingly influenced not only by frontline demands, but also by economic logic and long-term strategic development. Countries increasing their defense budgets include not only those under direct threat, but also those that view defense spending as a strategic investment in national development.Yet using defense budgets as engines of technological advancement and economic growth creates a strategic trap. When war erupts, it tends to devalue previous investments in technology and demands rapid creation of entirely new systems. The ability to channel investment into defense does not answer the question of what the battlefield will look like even in the near future. That’s why the core demand from armed forces toward a modern industrial defense base may be the ability to ensure technological flexibility—adaptable to the unpredictability of war and resilient to its destructive effects.One of the main barriers to technological returns on defense spending in Europe is fragmentation. EU countries collectively operate more than 170 different models of key weapons systems, while the United States operates fewer than thirty. Between 2016 and 2022, fewer than 20% of defense procurements in the EU were conducted through cooperative programs. While the EU has introduced integration mechanisms, these have yet to significantly change the landscape. The share of joint projects remains low and largely concentrated in Western Europe, while Central and Eastern European countries tend to seek external investors and partners in defense manufacturing. Existing collective financing mechanisms are often hampered by administrative complexity and lack of co-financing from national governments.Compared to EU countries, Ukraine has clear advantages in arms production: 30–60% lower production costs and greater flexibility in meeting frontline needs. Ukrainian weapons systems are also more thoroughly battlefield-testedthan many European alternatives. As a result, European countries are increasingly deepening cooperation with Ukraine’s defense industry.Logistics is another critical factor. The European defense ecosystem remains vulnerable to chokepoints in critical supply chains—from explosives and propellants to chips and optics. Even within the EU, wait times for key components can reach 24–36 months. This has triggered efforts to establish industrial corridors with pre-authorized logistics routes and backup production capacities. Given its modular manufacturing base and experience with rapid prototyping, Ukraine has the potential to become a natural partner in such corridors. Providing decentralized manufacturing and testing capabilities helps reduce risk and enhance the resilience of overstretched European supply chains.However, the EU’s orientation toward strategic development over immediate wartime needs carries the risk of pigeonholing Ukraine as a subcontractor or military testing ground, rather than as a strategic partner. That’s why now is the time to institutionalize defense-industrial relations between Ukraine and the EU. Due to the EU’s chronically fragmented defense industry, Ukraine may need to take the initiative, potentially focusing on bilateral partnerships as a foundation.To achieve long-term integration into the European defense-industrial space, Ukraine must undergo regulatory convergence:Align its producers with NATO and EU standardsImplement robust intellectual property protectionsHarmonize export controls with EU regimesAmend Ukrainian defense procurement law to enable access to collective European defense financing instrumentsDefense spending is becoming a benchmark for the quality of governance. The greatest returns will go not to those who spend the most, but to those who channel investments into high-yield sectors, successfully combine security with development, and place innovation at the heart of industrial strategy. In this new paradigm, Ukraine is better positioned than before the war—and could gain even more, provided the right institutional frameworks are built.This material was prepared in collaboration with the Consortium for Defense Information (CDI), a project uniting Ukrainian analytical and research organizations to strengthen information support and analytical capacity in the fields of national security, defense, and geopolitics.