Security vs. Austerity: An Instrumental Variable Analysis of the Effect of Fiscal Rules and Sanctions on Defense Spending

Abstract

Both theorists and practitioners continue to show interest in transatlantic burden sharing. International security and political economy scholarship offers plausible explanations for transatlantic imbalances in military expenditures. However, NATO Allies and EU Member States have pledged to one another to allocate resources in particular ways within defense budgets, a behavior that extant scholarship does not fully address. I argue that fiscal rules and attendant sanctions dampen the kind of defense spending NATO and EU strategists seek: governments respond to fiscal strain buy reducing defense expenditures, and by shifting existing defense resources to personnel, and away from equipment or other expenditures. I find evidence in support of this argument by using age dependency ratios, education levels, and banking shocks in the states in question as instruments for fiscal rules and fiscal sanctions. This phenomenon puts important transatlantic strategic initiatives, namely NATO’s Wales pledge on defense investment, at risk.