Professors Jens J. Krüger and Michael Neugart from the Departments of Empirical Economics and Public Economics and Economic Policy have analysed in a study how the share of military expenditures in the GDP of NATO countries would have developed if Russia had not annexed the Ukrainian peninsula of Crimea in 2014. This is also interesting in light of the announcement by the CDU/CSU and SPD to significantly increase Germany's defense expenditures in future and thus soften the debt brake.

The proposal for reforming the debt brake agreed in the exploratory talks between the CDU/CSU and SPD stipulates that defense expenditures in excess of one percent of gross domestic product (GDP) should be exempt from the debt brake. This would be a fundamental change in policy and a break with previous spending behaviour. Even after the annexation of Crimea, Germany has hardly increased its military expenditures in relation to GDP – in stark contrast to NATO countries with a land border with Ukraine or Russia, as Krüger and Neugart show in a recently published study.

Do land borders influence military expenditures?

The authors asked themselves how the share of military expenditures in the GDP of NATO countries would have developed if Russia had not annexed Crimea in 2014. To answer the question, they divide the NATO countries into two groups: those countries that have a land border with Russia or Ukraine, and countries that do not have a land border with Russia or Ukraine, meaning that they may have felt less threatened after 2014 than Poland or the Baltic states. Have NATO countries with a land border with Russia or Ukraine now increased their military expenditures more than the rest of the NATO countries?

To determine this, Krüger and Neugart use the method of so-called synthetic control groups. In this method, a synthetic comparison country is formed with the countries from the group of less threatened states, which does not exist in this form, but which had similar economic data and military expenditures over a longer period of time before the annexation of Crimea. These synthetic reference countries can now be used to estimate how high military expenditures would have been in the countries with a border to Russia or Ukraine if the annexation of Crimea had not occurred.

The result is that, on average, the military expenditures of NATO countries facing a greater threat from Russia was one percentage point higher relative to GDP in 2022. Germany therefore spent less relative to NATO countries with a land border with Russia or Ukraine.

However, it has not reduced its military spending either, while the NATO countries that are under greater threat have increased their contributions.This is shown by a comparison with a group of countries that belong to the Organisation for Economic Co-operation and Development (OECD) but are not in NATO and also have no land border with Russia or Ukraine.

So if the debt brake in Germany were to be reformed in order to increase military expenditures, this alone would not be a turning point – but it would bring Germany's contributions to NATO up to the level of countries such as Poland or the Baltic states.

To the study

Jens J. Krüger & Michael Neugart (published online 18 Dec 2024): Contributing to the global public good: the case of NATO, Applied Economics Letters