Modern geopolitical realities compel a rethinking of the connection between security and the economy. For Ukraine, which is in a state of full-scale war, financial stability and a robust national security system have become particularly urgent priorities. In the context of post-war reconstruction, the synergy of security policy and debt strategy can be a key factor in sustainable economic growth. This article examines how European countries have combined measures in defense and public debt management, and what lessons Ukraine can learn from their experience.
- From Post-War Recovery to Contemporary Threats: A Historical Overview
1.1. Europe After World War II
Europe’s post-war history demonstrates that investments in defense and collective security systems have had a direct impact on economic development. Following World War II, thanks to the Marshall Plan and systematic reforms, Western European countries were able to quickly restore their destroyed infrastructure and economies. This was made possible by large-scale external borrowing (loans and grants from the United States), coupled with strategic planning in the security sector (the creation of NATO, modernization of armies, intelligence coordination, etc.).
1.2. The Cold War and the Shift in Financial Priorities
During the Cold War, defense spending continued to play a significant role in the state budgets of major European countries. At the same time, governments sought to maintain social standards and invest in rebuilding post-war infrastructure. In these circumstances, public debt and its optimal structure became a particularly pressing issue. A high level of military expenditures often correlated with growing debt burdens, prompting Western countries to reconfigure their economic policies to maintain a balance among social, defense, and economic goals.
1.3. New Challenges of the 21st Century
After the collapse of the Soviet Union, European countries reduced defense spending but faced other challenges—terrorism, migration crises, and local conflicts. In the early 2000s, new threats required stronger coordination among EU member states, the use of collective security mechanisms, and corresponding adjustments to debt policy to cover additional costs for military operations and border security.
- Security Policy as a Component of Economic Strategy
2.1. The Impact of Defense Spending on Macroeconomic Indicators
Defense spending is often perceived as “non-productive” or “indirect” investment since it does not always generate immediate added value. However, it would be a mistake to underestimate its multiplier effect. First, the development of the defense-industrial complex (DIC) stimulates research, innovation, and job creation. Second, a reliable security system encourages foreign investment, as businesses tend to favor stable jurisdictions.
2.2. Sectoral Priorities and Budget Allocation
High defense expenditures require a review of the structure of the state budget. In some European countries (for instance, France and the United Kingdom), defense and security account for some of the largest segments of government spending. At the same time, governments strive to ensure funding for education, healthcare, and infrastructure, which are critical for sustainable development. The key task is to find an optimal balance in budget priorities, where security spending is justified in tandem with investments in development.
2.3. Balancing National and Collective Security
The history of NATO and the EU’s Common Security and Defense Policy shows that collective defense can alleviate the burden on individual states in the face of large-scale threats. Sharing military expenses among member countries, joint armament programs, and coordinated geopolitical strategies all help optimize resource use. As a result, each state can direct some of its resources to domestic development projects without compromising the overall level of security.
- Debt Policy and Security: Points of Intersection
3.1. Financing Defense Through External and Internal Borrowing
Public debt can provide a source of quick liquidity needed for developing the defense sector or covering emergency expenditures during military conflicts. However, excessive reliance on borrowing – particularly on external markets -heightens a country’s vulnerability to fluctuations in global financial conditions. Moreover, growing debt entails increased servicing costs, which can limit long-term investment in the security sector.
3.2. Debt Structure: Short-Term Risks vs. Long-Term Investments
Optimizing the debt portfolio is crucial for sustaining both economic and defense stability. EU countries have aimed to reduce the share of short-term obligations in their public debt structures, replacing them with longer-term, fixed-rate instruments. In a security context, this approach makes it possible to plan defense expenditures more predictably and avoid financial shocks that can occur if interest rates suddenly rise or if the national currency depreciates.
3.3. Risks of “Military Inflation”
In the midst of conflicts or when defense costs increase significantly, governments may resort to monetary issuance to cover budget deficits. This can lead to accelerated inflation, which in turn can erode economic growth and real household incomes. European countries have sought to keep inflation in check through independent central banks committed to strict monetary policy. This experience is critically important for Ukraine, since a prolonged war amplifies the temptation to engage in excessive money printing.
- European Case Studies on the Synergy of Security and Debt
4.1. The United Kingdom: A Flexible Model of Defense Financing
The UK generally maintains a high level of defense spending while strategically using debt instruments. After World War II, the government successfully restructured its debt, including by converting short-term obligations into long-term securities at moderate interest rates. This policy ensured stable financing of the military sector, which later became a foundation for London’s active foreign policy.
4.2. Germany: The “Black Zero” Rule and Transatlantic Security
For a long time, Germany adhered to the “schwarze Null” rule, aiming for a balanced budget. Following World War II, thanks to the Marshall Plan and relatively low defense expenditures (as security was largely ensured within NATO), Germany was able to focus on economic development and debt repayment. More recently, as security threats in Europe have increased, Berlin has revisited its defense doctrine and boosted military investment. It has combined these efforts with flexible approaches to debt financing, including tapping into low-interest lending on international markets.
4.3. The Baltic States: Minimal Debt, Maximum Collective Security
After joining NATO and the EU, Lithuania, Latvia, and Estonia strove to keep public debt relatively low while relying on allied support in the event of an external threat. Modern challenges have forced the Baltic governments to increase defense budgets, though they continue to depend heavily on collective security measures within NATO. This helps them avoid a sharp rise in debt by sharing defense costs with other Alliance members.
- Lessons for Ukraine: Building a Post-War Strategy
5.1. Post-War Reconstruction Priorities
After achieving victory, Ukraine will need to allocate substantial resources to rebuild infrastructure, housing, and industry. At the same time, security challenges will remain, given that the risk of renewed aggression could remain high. Therefore, the synergy between debt policy and security strategy should be the foundation of balanced development.
5.2. Optimizing the Debt Portfolio
Ukraine already has experience restructuring its public debt (for example, in 2015). This experience should be analyzed and enhanced with a view to long-term defense needs. Securing long-term loans at reasonable interest rates and minimizing excessive short-term obligations will help avert future liquidity crises. Concurrently, Ukraine can expand its use of innovative financial instruments (e.g., “war bonds,” dedicated reconstruction funds, etc.).
5.3. Controlling Inflation and Using Resources Effectively
Monetary policy must aim to keep inflation in check. In the post-war period, large inflows of foreign aid and government spending could fuel inflationary pressures in the domestic market. Consequently, the National Bank of Ukraine will need to strike a balance between supporting economic recovery and mitigating inflationary risks. Moreover, transparency in allocating and spending resources will be critical to maintaining the trust of international donors and creditors.
5.4. Collective Security and International Alliances
European experience shows that involvement in collective security structures allows for optimized costs and risk-sharing. Ukraine is seeking membership in NATO and the EU, which would open up additional financial and military-technical opportunities. Despite the challenges, integration into European and Euro-Atlantic institutions could serve as the best insurance policy against new threats and an additional factor in safeguarding public finances.
While Ukraine continues to fight for its independence, the strategic integration of security policy and public debt management takes center stage. The experience of European countries proves that a stable defense system and a balanced debt policy are not mutually exclusive but rather can complement each other. On one hand, investments in defense improve a country’s attractiveness to foreign investors by providing a stable environment for business. On the other, effective debt management creates financial space for modernizing the armed forces and implementing long-term development projects.
Ukraine’s post-war reconstruction must be based on a comprehensive approach, in which security policy entails not only the procurement of weapons but also the strengthening of institutions, the development of military technology, and the reform of the defense sector, and in which debt strategy entails prudent investment, transparent mechanisms for resource allocation, and long-term spending plans. Only by adopting such an approach can the nation lay a solid foundation for economic growth, social well-being, and national security, which together will pave the way for successful future European integration.
In essence, the synergy of security and debt is not merely a technical condition for reconstruction but rather a strategic prerequisite for creating a new, strong, and independent Ukraine -one capable of securing its rightful place in the European community of nations and delivering a worthy quality of life for its citizens.
The publication was prepared by Olena Kravchenko, PhD in Economics, Associate Professor of the Department of Accounting and Taxation. The information is a part of the project “EU experience in public debt management: conclusions for Ukraine in the war and post-war period” (101127602-EUEPDM-ERASMUS-JMO-2023-HEI-TCH-RSCH), which is implemented with the support of the Jean Monnet Erasmus+ program.
Funded by the European Union. Views and opinions expressed are however those of the author(s) only and do not necessarily reflect those of the European Union or the European Education and Culture Executive Agency (EACEA). Neither the European Union nor EACEA can be held responsible for them.