Europe’s rising defence expenditure is reshaping industrial policy, with increased military budgets supporting demand for manufacturing, technology and specialised engineering capabilities. The shift could create opportunities for Serbia and Southeast Europe through defence-related supply chains, although participation will depend on industrial readiness and compliance requirements.
MAT described the current environment as a form of “military Keynesianism”, where defence spending is increasingly viewed not only as a security expense but also as a driver of industrial development, technology investment and economic activity. EU military spending reached approximately €381 billion in 2025, equal to around 2.1% of EU GDP, representing a 63% increase compared with 2020. NATO members have also committed to increasing defence and security spending toward 5% of GDP by 2035, compared with the previous 2% benchmark.
Defence Spending Targets Industrial Sectors
Higher defence expenditure supports production, employment and investment in sectors linked to military demand. MAT cited evidence that the economic multiplier of military spending is close to 1, meaning a military spending increase equivalent to 1% of GDP can generate a similar rise in overall economic activity.
The effects are concentrated in industries including aerospace, electronics, machinery, vehicles, communications, sensors, metal products and specialised engineering.
Serbia’s Potential Role in Defence Supply Chains
Serbia and Southeast Europe are not positioned to immediately compete with Europe’s largest defence manufacturers, but they could participate in selected industrial segments. Potential areas include metal fabrication, machined components, electronics assembly, cable systems, protective materials, vehicle parts, maintenance, repair, testing, software support and dual-use industrial services.
Serbia’s existing automotive, machinery, metal and electrical-equipment sectors provide a foundation for participation. Defence-related supply chains require certification, traceability, quality-management systems, cybersecurity compliance and adherence to export-control requirements.
Poland’s Experience Shows Domestic Capacity Challenge
Poland’s defence expansion illustrates both the industrial opportunity and the risk of relying on foreign suppliers. MAT noted that Poland increased defence spending from 2.2% of GDP in 2021 to 4.5% of GDP in 2025.
During the same period, equipment spending increased from 0.7% of GDP to 2.4% of GDP. However, around 80% of Poland’s capital expenditure was carried out through imports, mainly from the United States and South Korea, due to limited domestic production capacity. The example shows that defence spending can generate a stronger domestic economic impact when local companies are integrated into procurement and manufacturing chains.
Financing Conditions Affect Defence Investment Impact
MAT warned that defence-spending increases are often initially driven by borrowing and can raise budget pressures. Defence investment booms typically increase fiscal deficits by around 1.1 percentage points of GDP in the first year.
Higher public borrowing can increase financing costs and reduce credit availability for private-sector investment. For Serbia and Southeast Europe, defence-industrial development therefore depends on private-sector participation, export opportunities and technology transfer rather than relying only on public spending. The European defence expansion cycle favours companies capable of meeting regulated procurement requirements, maintaining consistent quality standards and integrating into international security and dual-use industrial supply networks.
