While European leaders' pledges to dramatically hike military spending rarely stem from growth ambitions, and historical evidence shows defense expenditure seldom translates to economic expansion, the continent's unprecedented €100 billion annual defense outlays starting in 2025 might prevent chronically sluggish economies from plunging into deep recession. The "MEGA" (Make Europe Great Again) acronym, first coined last year amid debates on European competitiveness, resurfaced this spring as investor enthusiasm for European markets surged alongside equity inflows. MEGA-branded hats mimicking MAGA merchandise now sell online, while European stocks recently delivered their biggest outperformance against U.S. markets in two decades following Trump's tariff announcements—propelled largely by defense investment momentum.

Compared to richly valued U.S. equities, Europe offers superior conditions for profit recovery from historic lows and substantial valuation expansion. Fiscal and military spending shifts now position Europe more favorably than America for growth and corporate earnings. After the U.S. signaled reduced NATO funding, European members are projected to boost defense budgets by over €200 billion yearly for five years. Ipek Ozkardeskaya, senior analyst at Swissquote Bank, notes: "Approval of hundreds of billions in military spending remains the prime driver of Europe's equity outperformance this year, with massive capital flooding defense stocks." She adds: "Trump's tariff uncertainty recently rattled sentiment, but infrastructure and military upgrades could significantly lift regional growth without proportionally fueling inflation—giving the ECB policy flexibility."

The protracted Russia-Ukraine conflict exposed critical gaps in Europe's defense systems, while drone-dominated warfare highlights the strategic value of deep-strike capabilities. Consequently, EU members increasingly prioritize next-generation "unmanned warfare systems" centered on drones, satellite communications, anti-jamming networks, and autonomous vehicles.

Though colossal defense spending may avert economic collapse—with NATO targeting 5% of GDP by 2035, up from 2%—its growth impact remains limited. Governments could still optimize returns by adjusting investment approaches. Military spending proves a weak growth engine: Kiel Institute research reveals fiscal multipliers historically below 1, meaning each 1% GDP increase in defense spending yields under 1% short-term GDP growth. Goldman Sachs estimates Europe's multiplier at just 0.5—€100 in defense spending generates merely €50 in GDP.

Constraints include crowding out private investment, spurring higher household and corporate savings. Commitments by German Chancellor Friedrich Merz, UK PM Keir Starmer, and French President Emmanuel Macron to gradually raise spending may further dilute stimulus effects. The Hague agreement's 5% target (€660 billion extra annually by 2035, excluding Germany's €500 billion budget) implies just 0.3% annual GDP growth even under optimistic multiplier assumptions—insufficient to match U.S. growth trajectories.

Accounting nuances further dim prospects: only 3.5% represents core NATO-defined spending; the remaining 1.5% covers loosely "related" items like cybersecurity—much already budgeted—to meet Trump's 5% demand.

Not all euros deliver equal value. Ethan Ilzetzki, LSE professor and Kiel report coauthor, stresses funding methods: debt financing outperforms tax hikes for growth. Europe must also scrutinize allocations. Personnel expansion (40% of budgets) generates limited economic ripple effects through wages, while equipment spending (20%) more significantly benefits private sectors.

Boosting R&D—just 4.5% of EU military budgets versus America's 16%, per former ECB chief Mario Draghi—could yield higher productivity and civilian spillovers, particularly in AI-driven weapons. Modern warfare's evolution toward space, cyber, and unmanned systems amplifies this potential.

Finally, Europe must favor domestic industry: over 80% of procurement relies on imports, 75% from the U.S.—effectively subsidizing American growth. Kiel data confirms European spending on U.S. equipment stimulates the U.S. economy.

Such constraints create uneven benefits across Europe. Germany's abandonment of fiscal restraint—targeting 3.5% core defense spending by 2029, six years ahead of NATO—could end its recession if debt-funded and personnel costs are contained. Conversely, France and the UK (debt >100% GDP) face tighter constraints, requiring slower, austerity-funded expansions with minimal growth returns.

Divergent outcomes highlight the counterproductivity of rigid GDP targets. Ilzetzki warns this distorts incentives into "spending compulsions," ignoring equipment needs, costs, and private-sector benefits. Blindly purchasing overpriced, unnecessary American weapons might quickly hit spending goals but yields little strategic value.

As defense stocks dominate European and global equity gains this year amid the spending surge, governments should instead focus on desired policy outcomes: defining optimal force sizes, equipment requirements, and R&D levels that boost wages, stimulate private sectors, and ignite consumer spending via technological spillovers. Grandiose GDP metrics serve political declarations poorly—they rarely reshape economic realities.