Do not be lulled by the appearance of a resilient economy

Against this backdrop, the phrase ‘war economy’ is now widely used. But is it appropriate and what does it actually mean? Take France, a country with a long history of warfare, recent decades aside. Some perspective is needed. During the First World War, when the entire economy was organised and managed with victory in mind, military spending rose from an estimated 4–5% of GDP just before hostilities began to 40–50% at the conflict’s most intense moments. In the decade before the Second World War, the effort mounted crescendo as international tensions rose: from 2–3% of GDP to 5–8% in 1938–39, again on an estimated basis. Skipping over the 1940s, three further observations stand out: defence spending was 6–7% of GDP during the wars of decolonisation, around 4% during the cold war and just under 2% in the era of the ‘peace dividend’. The target is now 3.5%, or even 5% for security spending as a whole. Clearly, the word ‘war’ covers an extraordinarily wide range of military budgets: from 4% to 50% of GDP. The concept of a war economy therefore needs sharpening. To be sure, the term belongs partly to the language of political communication. As international tensions rise, defence efforts must increase. That is how Emmanuel Macron’s choice of words in June 2022, a few months after Russia invaded Ukraine, should be understood. After three decades of peace dividends, France, Europe and perhaps the world are entering a new era. The task is therefore to define the action this era requires.

For that purpose, let us draw on the approach proposed by Maxime Cordet, research director at the French Institute for International and Strategic Affairs (What Does “Wartime Economy” Stand For?, October 2025), though we will not follow it in every respect. We should begin by distinguishing between peacetime and wartime economies, defining the former as one that requires a military effort intended to prevent war. That effort is calibrated to the perceived level of threat, which is assumed to be relatively low and stable. The long era of the peace dividend is a good example. A war economy, by contrast, has two dimensions, plus an optional third:

• an economy preparing for war, in response to mounting threats;
• an economy at war, whose purpose is to wage and win it;
• the optional role of supporting an ally in a conflict in which the country itself is not a belligerent.

It is difficult not to acknowledge that, hic et nunc, Europe, including France, is veering towards an economy geared to preparing for war, while also providing sustained support to its Ukrainian ally? But how does such an economy work?

Let us begin with the hardest issue: reconciling different time horizons. Rising tensions demand an immediate response: ensuring that the existing military model is fully operational, with serviceable equipment, replenished stocks of consumables such as ammunition, and personnel who are both fully staffed and properly trained. It is also essential to anticipate the nature of tomorrow’s armed conflicts. That outlook shapes decisions on force structure, the design and procurement of new equipment, personnel training and even the alliances to be formed and the degree of co-operation within them. The ability to bridge the short and medium term is central to the response, whether on demand, supply or financing.

On the demand side, the state is the customer. Once that obvious point is made, two questions arise. First, is the transaction between a government and a domestic manufacturer, or does it involve a foreign supplier? The case of a domestic company selling abroad must also be considered. Second, on what terms are orders placed: partnership, development and/or production, volume, the split between firm and optional commitments, price and payment conditions? For many countries, finding the right answer is far from straightforward. Public finances are often already strained; favouring domestic suppliers is not always feasible, especially when time is short and the geopolitical environment is seen as dangerous; and the visibility suppliers need (to ensure delivery and the proper conclusion of the contract) runs up against both constraints.

The supply side may be more complicated still. Capacity had fallen especially low during the ‘happy years’ of the peace dividend. Investment must now be stepped up in both R&D and production – and as quickly as possible. This applies both to rebuilding inventories and to developing and manufacturing the next generation of weapons. Unfortunately, the process runs into four obstacles: supply chains weakened by geopolitical and geoeconomic tensions; a regulatory and standards framework that creates complexity and often slows projects below the desired pace; a workforce with the right skills, which is as essential as it is scarce; and, as on the demand side, the difficulty of giving firms throughout the sector sufficient visibility and confidence that financing will follow, without pushing the associated risks to unreasonable levels.

Then there is financing, a question with several dimensions. First, we must ask whether the solutions used in the past can be repeated: allow public deficits to rise, then gradually make trade-offs through higher taxes and/or a shift in the balance between civilian and military spending in favour of the latter. This time, what was once supplementary may become central. That will inevitably raise questions of political and social acceptability, as well as economic competitiveness.