Are We Back to the 1930s?

 

With European economies promising to up their defence expenditure to 5% of gross domestic product (GDP), are we repeating the 1930s? The inter-war years were dominated by Western (including Japan) powers, with the rest of the world under colonial yoke. 

The First World War between the European powers did not settle old scores, with Germany bitter about war reparations, which caused hyperinflation that devastated German society. After the Roaring 1920s, which ended with the Great Crash of 1929, the 1930s were years of global slowdown. By 1934, President Franklin Roosevelt was elected on the promise of his New Deal to revive the American economy. 

Source: https://en.wikipedia.org

In Japan and Germany, right-wing factions rose on the back of militarism. In 1934, Adolf Hitler came to power with Nazi nationalism to revive and revenge German humiliation in the First World War and loss of territory. German military spending went from 1% to 2% of GDP in 1933 to 13% by 1936 and nearly 100% of GDP by 1945. Japan went from 3% to 4% of GDP to 9% to 10% by 1937 to 1938, when the Sino-Japanese War broke out. 

The United States was slow to react, with an average spending of 1% to 2% of GDP between 1930 and 1938 but rapidly ramped up to as much as 40% of GDP by 1945. The United States has always taken care of European security after World War Two, mostly through the creation of the North Atlantic Treaty Organisation, but the Trump Administration has decided that Europe should bear the burden of its own security, particularly to raise defence expenditure to 5% of GDP. Europe must also take care of the Ukraine mess, whilst America concentrates on its rising rival, China. 

After the humiliating 2025 Munich Security Conference, in which the Trump Administration basically told the Europeans that they are on their own, new German Chancellor Merz announced a doubling of military expenditure. This was a signal that Europe is now beginning to re-arm. 

The Stockholm International Peace Research Institute estimated global military expenditure rose by 6.8% in 2023, to surpass US$2.4 trillion, equivalent to 2.3% of world GDP.

On average, military spending was 6.9% of fiscal budgets, which increased across all five geographical regions, with the most in Africa (by 22% in 2023), while it was lowest in the Americas (2.2%). 

Nevertheless, the United States remains the largest military spender in the world, with US$916bil larger than the combined spending of the nine other top spending countries, and 3.1 times as large as China, the number two spender. 

Thirty-nine of the 43 countries in Europe increased military spending with an average of 16% surge, of which Ukraine spending increased 51%, whilst Russia increased 24%. How will European re-armament impact on growth? 

The peace-loving layman’s view is that military expenditure is a waste of money. But the influential German think-tank, Kiel Institute for the World Economy report on “Guns and Growth: The Economic Consequences of Defence Buildups” argues that Europe-wide GDP may grow by 0.9% to 1.5% if defence spending increases from 2% to 3.5% of GDP. It further argued that the long-run productivity gains from military spending may be substantial, with examples of public research and development for military applications giving spillovers to the private sector, such as the symbiotic relationship between Silicon Valley tech companies and US defence spending. A Goldman Sachs report estimates that additional spending on European defence will have an escalating multiplier of 0.5 over two years. That means every €100 spent on defence would boost GDP by around €50. 

What are the trade-offs between a war economy (which would ultimately lead to wanton human and natural destruction) and an economy dedicated towards peace and co-development? 

This week, the United Nations (UN) issued a report called “The Security We Need: Rebalancing Military Spending for a Sustainable and Peaceful Future”, which highlighted that global military spending has surged to an all-time high of US$2.7 trillion in 2024. Meanwhile, less than 20% of the UN Sustainable Development Goals are on track to be achieved by 2030, with the annual financing gap at US$4 trillion. The UN argues that heightened military expenditure does not necessarily lead to greater peace or stability, but instead exacerbates geopolitical tensions, fuels arms races and increases risks of conflict, particularly when coupled with weak governance, rising inequality and systemic mistrust. 

It just increases our propensity to violence. Look at America, with more than 300 million guns there is more violence there than those that have strict controls on arms purchases. It is somewhat the same for nations – especially for those with dictators (or would be dictators) to start a war. The only people who love wars are the arms manufacturers and those in the reconstruction industry. We as a specie have not learned how to dialogue and settle disputes peacefully. We prefer to repeat history and cause Ukraine, Gaza, Syria and all the rest of it! 

Reference:

Back to 1930s war economy, Tan Sri Andrew Sheng, The Star, 20 Sept 2025