There is no official definition of "war economy", but there are many indicators, he writes Deutsche Welle (DW).
A war economy means that the state mobilized its resources, production capacity and labor to support military preparation and production before or during war. The most obvious economic change is the shift in industrial production from consumer goods to weapons, ammunition and other military equipment.
In addition to traditional military hardware, modern weapons require investments in technology and digital services such as software, data analysis, satellite systems and reliable internet, says Penny Nass, a public policy expert at the US-based German Marshall Fund.
To manage all this, centralized state control of necessary industries and resource redistribution is increasing. This control allows governments to prioritize and divert raw materials to war-related industries and goods. Other things like fuel or food can be rationed to prioritize the military.
Who benefits from the war economy?
"In a true war economy, all elements of society are reoriented to the defense of the homeland," Nas says. This reorientation is expensive and there is usually a large increase in government spending to pay for it all. This can lead to more borrowing, inflation, higher taxes and less money for social spending.
Armin Steinbach, an associate of the Bruegel Economic Analysis Center in Brussels and a professor at the HEC business school in Paris, claims that the big winners are companies focused on military products, digital technologies, information and intelligence, pharmaceutical and medical technology. "Turning to war economies can be a catalyst for scientific and technological progress," Steinbach told DW. "New communications systems, jet engines, radars, intelligence advances bring benefits — and these technologies affect other industries."
Transition to a war economy
The transition from a civilian to a war economy can happen slowly or quickly depending on the situation, he writes DW.
During World War II, Germany had an advantage because it knew it was going to attack and was working on preparations. The US, Great Britain and other allies were late with the answer, so they had to frantically search for it.
Today, Russia and Ukraine are in similar situations. Russia has significantly increased military spending, ramped up production of military goods, and introduced capital controls to slow the outflow of money from the country. Inflation rose, and the government increased public spending to maintain a civilian economy.
Poorer Ukraine is in a much worse situation. Since Ukraine is the one under attack, it is fighting for survival and investing much more in the war effort. Today, Ukraine spends 58 percent of its budget on military expenditures, Steinbach noted.
Like Russia, Ukraine has mobilized its workforce, forcing many experienced workers out of traditional manufacturing. At the request of the government, many factories were converted to produce weapons and ammunition.
Other countries in the war economy regime
There are a number of other countries that are in a war economy mode to some extent due to ongoing military conflicts. Among them are Myanmar, Sudan and Yemen, where civil wars are raging. Conflicts in Israel, Syria, Ethiopia and Eritrea have also led to economic disruption as governments there focus on military efforts.
Israel has increased its defense spending. Many workers were recruited to fight and thus were thrown out of the civilian labor market. To pay for it, the government increased value-added tax (VAT), utility rates and property taxes.
The EU is ready to arm itself.
The EU has recently moved due to the weakening of US support for Ukraine, NATO and Europe in general. After decades of American support for Europe, the US administration under Donald Trump is getting closer to Russian President Vladimir Putin. This particularly worried the European states that relied on transatlantic security guarantees.
NATO members — 23 of which are part of the European Union — barely managed to set aside two percent of GDP for defense. Now even this percentage is not considered sufficient.
The President of the European Commission, Ursula von der Leyen, announced on March 4 the defense plan "Rearming Europe" (ReArm Europe). The €800 billion plan aims to strengthen the EU's military capabilities. It includes a total of 150 billion euros in loans to EU members. In addition, the loosening of strict budget deficit regulations will allow countries to spend more, which could lead to another €650 billion in military spending over the next few years.
Germany ready to increase military investment
For its part, Germany stepped into that field by approving new budget rules in the Bundestag on March 21. In the future, the government will be freer to invest in defense since most defense spending will no longer be limited by fiscal deficit rules. This step was so big that it required a change in the country's constitution and could mean a real shake-up for the continent's security policy.
Penny Nass believes that better access to energy and more coordination is needed at the European level to avoid misalignment of a range of national defense capabilities. Joint procurement and joint research and development should reduce costs. "On a political level, there is a lot of talk about increasing Europe's military capabilities, but it is at a very early stage," Nas explains. "Europe started from a strong position, with strong fiscal resources and production capacities".
