By Glenn Agung Hole, PhD
Europe has rediscovered the economics of security. The harder lesson is that money is only the beginning.
For much of the post-Cold War period, the European defence debate revolved around a familiar problem: too little spending, too much dependence on the United States, and too little political willingness to prepare for high-intensity conflict. Russia’s full-scale invasion of Ukraine shattered much of that complacency. European defence budgets have risen sharply. EU member states spent €418 billion on defence in 2025, according to the European Defence Agency (EDA), and the figure is projected to reach €454 billion in 2026. At NATO’s 2025 Hague Summit, Allies went much further, committing to invest 5 per cent of GDP annually by 2035, with at least 3.5 per cent devoted to core defence requirements and up to 1.5 per cent to defence- and security-related investment such as infrastructure, resilience, innovation and the defence industrial base (European Defence Agency 2026; NATO 2025a).
These are historic commitments. They are also only inputs.
The central strategic question for Europe is no longer simply whether it can mobilise more money. It is whether European states can convert that money into military capability that can be produced, moved, maintained, replenished and adapted under pressure. That is a different problem. It is an institutional problem.
A missile battery is a capability only if trained personnel can operate it, spare parts can reach it, software can be updated, energy and communications remain available, and replacement interceptors can be produced at scale. A brigade is a capability only if it can move across borders, cross bridges, use ports and railways, receive fuel and ammunition, and operate within a functioning command and logistics system. A defence factory is a strategic asset only if it has access to skilled labour, explosives, metals, components, finance, permits, testing capacity and sufficiently predictable demand to justify long-term investment.
This is why I describe Europe’s present difficulty as a strategic reproduction crisis. Europe is becoming better at financing security, but it is still rebuilding the institutional systems that reproduce strategic power over time.
From spending to conversion capacity
Institutional economics offers a useful way of seeing the problem. Douglass North’s central insight was that institutions structure incentives and reduce uncertainty; later institutional scholarship showed how durable performance depends not only on formal rules but on organisations, routines, complementarities and credible expectations (North 1990; Hall and Soskice 2001; Thelen 2004). Those ideas are normally applied to economic development, firms, labour markets or political order. They are equally relevant to defence.
States do not convert financial resources into strategic outcomes automatically. They do so through institutions.
Procurement rules determine whether demand is fragmented or aggregated. Education systems determine whether engineers, technicians and cyber specialists are available ten years from now. Permitting systems determine whether a new explosives plant takes months or years to approve. Transport policy determines whether civilian infrastructure can also carry military loads. Energy policy determines whether production and logistics can withstand coercion or disruption. Public administration determines whether political decisions become executable programmes rather than announcements.
The distinction is therefore between resource capacity and conversion capacity. Resource capacity is the ability to mobilise money and assets. Conversion capacity is the institutional ability to turn those resources into effects at the speed, scale and reliability that strategy requires. This is not a semantic distinction. It is the difference between announcing resources and possessing usable power.
Europe’s post-2022 record illustrates the difference. The EDA reports that collaborative procurement represented only 24 per cent of equipment spending in 2025. That matters because Europe’s defence-industrial weakness is not merely a shortage of factories. It is also the cumulative result of fragmented demand, nationally distinct requirements and stop-start procurement cycles that discourage firms from investing ahead of orders (European Defence Agency 2026). The European Defence Industrial Strategy already recognised this logic when it called for at least 40 per cent of defence equipment to be procured collaboratively by 2030 and for a much larger share of procurement to be sourced within Europe (European Commission 2024b).
The policy direction is correct. The Commission’s White Paper for European Defence – Readiness 2030 similarly treats industrial capacity, military mobility and long-term readiness as parts of the same security problem rather than as separate policy files (European Commission and High Representative 2025). The institutional task, however, is harder. Europe has to move from twenty-seven partially separated demand signals toward a system in which industry can see credible, multi-year requirements.
NATO’s updated Defence Production Action Plan makes precisely this point by emphasising demand aggregation, long-term orders, supply-chain security and interoperability (NATO 2025d). By July 2026, NATO’s new Strategy for Industry-NATO Cooperation was pushing the logic further: the challenge is no longer to announce larger investment, but to build the relationship, standards and industrial mechanisms that allow it to deliver capability on time (NATO 2026). Industry does not build strategic depth in response to speeches. It builds when institutions make future demand credible.
The anatomy of a reproduction crisis
Ammunition production offers the clearest example. The EU’s Act in Support of Ammunition Production was designed not simply to subsidise output but to identify and relieve bottlenecks in explosives, powder, shells, missiles, testing and certification. The programme explicitly recognised that upstream inputs, rather than final assembly alone, determine how quickly production can expand. The Commission expected the supported investments to enable annual European shell-production capacity to reach two million by the end of 2025 (European Commission 2024a).
The important point is not the headline number. It is the architecture beneath it. High-intensity warfare consumes stocks faster than peacetime procurement systems were designed to replace them. Restocking therefore requires a chain of capabilities: chemical inputs, energetics, machine tools, specialised workers, secure transport, testing facilities, environmental approvals and long-term contracts. If one link fails, additional money can raise prices without raising output. Strategic capacity is constrained by the weakest institutional bottleneck.
Military mobility exposes the same problem from another direction. NATO describes logistics as the backbone of military power because combat formations are useful only if they can be reinforced and sustained (NATO 2025b). Yet the European Court of Auditors concluded in 2025 that the EU’s military-mobility effort was weakened by fragmented governance, unclear prioritisation and insufficiently predictable funding. Projects had sometimes been selected before the most urgent strategic priorities were fully established (European Court of Auditors 2025).
This is not a peripheral administrative issue. It goes to the credibility of deterrence. Europe can buy more armour and artillery, but if bridges cannot carry them, rail gauges and loading profiles are incompatible, border procedures delay movement, or ports and corridors become bottlenecks, then procurement growth does not translate proportionately into deployable power. The capacity to move is part of the weapon system.
The same logic applies to energy and raw materials. Before 2022, Europe allowed a major strategic dependency on Russian gas to coexist with a deteriorating security relationship with Moscow. That was economically understandable within a narrow efficiency framework, but strategically costly. The IEA estimated that Russian gas accounted for around 45 per cent of EU gas imports in 2021. Europe subsequently diversified rapidly, but the episode demonstrated how commercial dependence can become geopolitical exposure (International Energy Agency 2022).
Critical raw materials present a related challenge. The European Commission notes that 97 per cent of the EU’s magnesium supply comes from China and that all rare earths used for permanent magnets are refined there (European Commission n.d.). These are not abstract trade statistics. Advanced defence systems, energy technologies, electronics, transport and digital infrastructure depend on material chains that often sit outside Europe’s direct control. Strategic autonomy is therefore not autarky, which would be neither realistic nor desirable. It is the capacity to prevent concentrated dependencies from becoming instruments of coercion.
The labour problem may be even more difficult because it cannot be solved by emergency procurement. Eurostat reports that 22 per cent of the EU population was aged 65 or over at the beginning of 2025, with a median age of 44.9 years (Eurostat 2026). At the same time, a Commission-commissioned study of the European defence industry found a striking gap between general attractiveness and actual career intention: 58 per cent of respondents regarded a defence career as attractive, but only 6 per cent of job-seekers planned actively to pursue one (European Commission 2026).
Factories can be expanded faster than engineering cultures can be rebuilt. Europe therefore has a time problem as well as a money problem. Skills, organisational memory and supplier relationships are cumulative assets. When they disappear, they do not return on command.
The Western Balkans are part of Europe’s strategic system
Seen from Tirana, Skopje, Pristina or Sofia, the European defence debate can still sound as if it is centred elsewhere: the Baltic region, Poland, Germany, France or the Nordic countries. That would be a strategic misreading. South-Eastern Europe is not peripheral to Europe’s strategic reproduction. It is part of the connective tissue.
Corridor VIII is a useful illustration. The European Commission describes it as a strategic Trans-European Transport Network linking southern Italian ports through Albania and North Macedonia to Bulgaria and the Black Sea. It combines ports, roads, railways and airports across an east-west axis that has economic value in peacetime and obvious resilience value in crisis (European Commission, Directorate-General for International Partnerships n.d.).
This is exactly the kind of infrastructure that exposes the false division between “civilian” investment and “defence” investment. A railway is commercial infrastructure until a crisis requires it to move forces, fuel, medical supplies or humanitarian assistance. A port is an economic asset until it becomes a reinforcement hub. A digital network supports business until it must also preserve command, government and emergency communication. NATO’s 5 per cent framework now formally acknowledges this interdependence by allowing up to 1.5 per cent of GDP for defence- and security-related investment in critical infrastructure, civil preparedness, networks, innovation and the defence industrial base (NATO 2025a).
For the Western Balkans, this creates an opportunity that is larger than defence policy. EU integration has traditionally been discussed through legal approximation, market access, governance reform and political conditionality. Those remain essential. But the emerging European security architecture adds another dimension: institutional connectivity. Candidate countries that strengthen transport corridors, energy resilience, cyber capacity, border coordination, emergency preparedness and industrial linkages are not merely preparing for accession. They are increasing Europe’s collective strategic depth.
The EU’s Preparedness Union Strategy is especially important in this respect. It calls for a whole-of-government and whole-of-society approach, dual-use planning and investment, regular exercises, and stronger resilience partnerships with candidate countries (European Commission 2025a). That is a significant shift in how enlargement and security can be connected. It implies that institutional convergence should not be measured only by legislation adopted, but also by the practical capacity to function together under stress.
For Albania and its neighbours, the policy implication is straightforward. Strategic relevance will increasingly be determined by the ability to provide reliable infrastructure, secure energy, capable institutions, interoperable systems, skilled labour and credible public administration. Geography creates opportunity; institutional capacity determines whether that opportunity becomes strategic value.
Strategic institutional capital
The deeper problem is that Europe still counts what is easiest to count. Spending metrics are visible, comparable and politically convenient. They tell us something important about effort. They tell us much less about whether institutions can convert that effort into capability.
What Europe needs alongside spending metrics is a clearer understanding of strategic institutional capital: the accumulated stock of institutions, competencies, infrastructures, routines and relationships that enable a state or alliance to generate and regenerate strategic capability over time. In practical terms, this is the institutional conversion capacity that sits between resources and results.
The term capital is deliberate. Like physical or human capital, institutional capacity can accumulate, generate returns and depreciate. A trusted procurement system lowers transaction costs and gives industry confidence to invest. A strong vocational system reproduces technical competence. Interoperable standards reduce friction. Efficient public administration shortens the distance between political decision and operational effect. Resilient infrastructure provides options under pressure. Networks between government, universities, firms and the armed forces speed learning and adaptation.
But institutional capital also depreciates when neglected. Supplier ecosystems disappear. Skilled workers retire. Stockpiles are run down. Exercises become ritualistic. Maintenance is deferred. Infrastructure is designed for peacetime efficiency without redundancy. Procurement knowledge atrophies. The decline can remain invisible for years because the formal institutions still exist. The real weakness becomes apparent only when the system is asked to surge.
This is why strategic reproduction is a more useful lens than rearmament alone. Rearmament suggests acquisition. Reproduction asks whether capability can be sustained after the first procurement cycle, the first mobilisation and the first shock.
Thelen’s work on institutional change is helpful here because institutions rarely transform through one grand reform. They evolve through layering, conversion, drift and recombination (Thelen 2004). Europe’s defence institutions will be no different. There will be no single act that creates a European strategic capacity. It will emerge from the cumulative alignment of procurement, industry, transport, energy, skills, finance, technology and public administration.
Recent EU scholarship on geoeconomics points in the same direction. Haroche (2024) shows how geopolitical competition has pushed the Union toward greater use of economic instruments for power purposes, while Hoeffler (2023) and Hoeffler, Hofmann, and Mérand (2024) document how security crises have altered the boundaries of EU defence activity. The implication is that the old separation between economic policy and security policy is eroding. The institutions that generate prosperity are increasingly also the institutions that generate resilience and strategic leverage.
Money is necessary; it is not self-executing
The obvious objection is that this argument risks understating the importance of money. It does not. Europe’s previous level of defence effort was too low for the strategic environment it now faces, and institutional reform cannot substitute for ammunition, air defence, ships, personnel or stockpiles. Without sustained financing, there is nothing for institutions to convert.
The point is more demanding: spending and institutional capacity are complements, not substitutes. More money flowing through weak conversion systems can produce inflation in defence markets, bidding wars for scarce labour, duplication of national programmes and politically impressive contracts that arrive too late. Conversely, efficient institutions without adequate budgets merely administer scarcity. Strategic effectiveness requires both. The policy error is to treat the budget ratio as if it were itself an output measure.
There is also a danger in turning “European preference” into an excuse for protectionism. Strategic resilience does not require Europe to produce every component domestically, nor should common procurement become a mechanism for preserving inefficient incumbents. Open competition among trusted suppliers, transatlantic industrial integration and partnerships with reliable third countries remain sources of strength. The relevant question is not whether a supply chain crosses a border, but whether dependencies are diversified, substitutable and politically sustainable under stress.
This is where an institutional perspective disciplines the language of strategic autonomy. Autonomy should be measured by options, not isolation. A resilient Europe is one that can switch suppliers, expand capacity, coordinate standards, protect critical nodes and continue operating when normal commercial assumptions break down. Resilience is therefore not the opposite of interdependence. It is the institutional ability to manage interdependence without becoming strategically captive.
What Europe should measure—and reform
A serious institutional approach would change what governments choose to measure when they speak about defence readiness.
The first shift is from annual expenditure to conversion performance. Governments should ask not only how much they spend, but how quickly appropriated resources become deployable capability. That means measuring procurement lead times, ammunition replenishment rates, maintenance availability, infrastructure readiness, permitting times, workforce pipelines and the resilience of critical suppliers. The European Commission’s 2025 defence-readiness omnibus, which proposed a 60-day permitting regime for defence projects, is important precisely because it treats administrative speed as a strategic variable (European Commission 2025b).
The second shift is from national optimisation to system-level resilience. Fragmentation may preserve national discretion, but it can also reduce scale and interoperability. Collaborative procurement is not automatically superior in every case; defence markets involve legitimate national-security constraints, industrial interests and sovereignty concerns. But where requirements are common, persistent duplication imposes a strategic cost. Europe should judge cooperation by whether it produces larger production runs, more predictable demand, common standards and faster replenishment—not by the number of committees created.
The third shift is from innovation policy to deployment policy. Europe does not lack scientific capability. Its recurring weakness is converting invention into scaled application. In defence, the gap is particularly costly because technologies become relevant only when procurement, testing, doctrine and users are linked. A successful innovation ecosystem therefore requires more than research grants. It requires experimental environments, rapid procurement pathways, tolerable risk, access to growth capital and military organisations capable of adopting new tools. NATO’s Rapid Adoption Action Plan moves in this direction by seeking to shorten the path from technological product to operational use (NATO 2025c).
The fourth shift is to treat skills as strategic infrastructure. Engineers, machinists, logisticians, software developers, cyber specialists and public-sector procurement professionals are not support functions around hard power; they are part of hard power. Governments can place orders in a week. They cannot produce an experienced explosives engineer or systems integrator in a week. Education, vocational training, immigration policy, labour mobility and defence-industry attractiveness therefore belong in the security debate.
Finally, Europe must institutionalise civil preparedness. NATO’s resilience framework is built around continuity of government, continuity of essential services and civil support to military operations, while the EU’s Preparedness Union Strategy adopts a comparable whole-of-society logic (NATO 2024; European Commission 2025a). That is not bureaucratic expansion. It is a recognition of how modern societies actually fight and endure. Militaries depend on civilian energy grids, commercial transport, hospitals, data networks, food systems, ports and private suppliers. Deterrence is credible only when these systems can continue operating under pressure.
The politics of endurance
There is one further dimension that is easily overlooked: political time.
Defence-industrial investments have long lead times. Infrastructure projects can span multiple governments. Skills policies produce results over decades. Stockpiles and maintenance budgets are politically less visible than new platforms. The central problem of strategic reproduction is therefore not only coordination across sectors, but continuity across electoral cycles.
Institutional capital depends on credible commitment. Firms invest when they believe demand will persist. Workers enter a sector when they believe careers will exist. Local authorities accept disruptive infrastructure when national priorities are clear. Allies plan around one another when commitments survive changes of government.
This does not mean insulating defence policy from democracy. It means creating political frameworks in which democratic competition occurs inside a sufficiently stable strategic direction. The most resilient states are not those without disagreement. They are those capable of sustaining essential functions despite disagreement.
Europe’s security debate has understandably been dominated by urgency. Urgency is necessary when threats are immediate. But urgency without institutional continuity can produce a cycle of emergency spending followed by fragmentation, delay and disappointment. The real test of the present defence turn is not whether Europe can announce extraordinary sums. It is whether it can build institutions capable of turning extraordinary effort into ordinary, repeatable competence.
There is an economic dividend to getting this right. Security expenditure is often discussed as a subtraction from prosperity: money diverted from consumption, welfare or civilian investment. Some of it inevitably carries an opportunity cost. But the institutional quality of the spending changes the economic outcome. Investment in dual-use transport, secure energy, advanced manufacturing, cyber capacity, technical education and research can strengthen both deterrence and productive capability when projects are selected for real strategic value rather than relabelled to satisfy accounting targets. Poorly designed spending can crowd out growth; well-designed strategic investment can expand the capabilities on which growth and security jointly depend.
That distinction matters for smaller European states and candidate countries. They cannot compete with the largest powers by replicating every military-industrial function. They can, however, become indispensable nodes in wider systems: specialised manufacturing, energy transit, logistics, cyber expertise, repair capacity, training, ports or transport corridors. In institutional terms, strategic depth is not only a function of size. It is also a function of reliability.
Conclusion
Europe is spending more on defence, and it should. The strategic environment leaves little alternative. But budgets do not defend territory. Institutions convert budgets into the capabilities that do.
The decisive question is therefore not whether Europe can afford security. It is whether Europe can reproduce security: industrially, logistically, technologically, administratively and socially.
That requires a broader conception of power. Defence factories matter, but so do vocational schools. Missiles matter, but so do rail corridors and ports. Military headquarters matter, but so do procurement offices, energy networks, hospitals and telecommunications systems. Innovation matters, but only when institutions can move it from laboratory to field. Geography matters, but only when states possess the institutional capacity to turn location into strategic value.
For the Western Balkans, this is not a secondary debate. The region sits inside the infrastructure, energy, mobility and political geography of European security. Its integration into European institutions should therefore be understood not merely as a question of enlargement, but as part of Europe’s capacity to reproduce resilience across its wider strategic space.
The policy vocabulary of the coming decade should therefore move beyond how much Europe spends and ask a harder question: how effectively does Europe convert resources into enduring capability?
That conversion rate is where strategy becomes real. It is also where Europe’s institutional future will be decided.
Security, like prosperity, must be reproduced.
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About the author
Glenn Agung Hole, PhD, is an institutional economist and Associate Professor at the University of South-Eastern Norway (USN). He is also affiliated with Strategers Institute in North Macedonia and holds academic affiliations and visiting professorships with institutions in the Western Balkans, Africa and Central Asia. He combines academic research with nearly three decades of executive and strategic leadership experience from Nordic business and industry. His work focuses on institutional economics, geo-economics, state and institutional capacity, entrepreneurship, strategic governance and European security, with particular emphasis on how societies convert economic resources, political ambition and technological capability into durable institutional and strategic capacity. He is the founder of the Institutional Capital Project.
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