In discussions about war, economists are also prone to causing confusion with their results. The World Bank recently made a blunder, by noting that per capita income in both Russia and Ukraine has increased despite the ongoing conflict. In defiance of Western sanctions, the Russian economy remains strong. Even after the invasion began two and a half years ago, when Ukraine's economy initially collapsed, the World Bank suggests that the economy of the attacked country has somewhat recovered.

For statisticians, this may be seen as a dry statistical fact, but for the broader population affected by the war, it sounds like mockery. Exaggeratedly, one might misinterpret the World Bank’s findings to suggest that war is economically beneficial as it increases prosperity. This unintended message could provide ammunition for populists, autocrats, and despots to justify aggressive, expansionist foreign policies.

In macroeconomic terms, it’s mathematically logical for state military spending to drive up GDP during a conventional war. The increased state activities in this area can offset the reduced production of consumer goods.

So what exactly constitutes a wartime economy? In economics, there is no unified definition, as war is rightly considered an exceptional case. Traditional macroeconomic theories apply to peacetime. War is not part of the curriculum at universities, and it is also given only limited attention in research.

In political science, a common indicator for countries directly or indirectly involved in war is the proportion of military spending relative to GDP, although it would be useful to also consider the state budget as a measure. A threshold of 15% to 20% of GDP is generally considered the mark for a wartime economy. The economist Andreas Forner defines the threshold for a peaceful economy transitioning to a wartime economy as a range between 15% and 30%. For comparison: During World War II, military spending reached up to half of GDP in Germany, the US, and the Soviet Union.

A wartime economy is a state of emergency where the production of war goods is prioritised over consumer goods. This includes all production factors such as labour and capital, and monetary policy. Central banks become financiers for the state’s war efforts, and financial policy dominates over monetary policy. Central banks are often reduced to mere money printers, leading to growing state debt. Inflation is controlled through wage and price regulations.

Applying the GDP-based definition today, the term „wartime economy“ only accurately describes Ukraine in the international context. Last year, military spending accounted for 37% of Ukraine’s GDP, with a fifth of its territory occupied by Russia. This puts Ukraine close to the upper limit. Kyiv has nearly maximized the country's war potential. Nato weapon deliveries have enabled Ukraine to withstand the much larger aggressor so far. In contrast, Russia, despite increasing its military production, is not yet in a wartime economy based on publicly available data. According to Statista, Russia’s military spending was around 6% of GDP in 2023, with experts estimating it to be between 8% and 9% at the moment.

The Kremlin might be moving towards a state of emergency as the war continues. This illustrates that major powers, due to their already high military expenditures, have the capacity to engage in prolonged wars without shifting to a wartime economy. For instance, during the Vietnam War (1964-1973) and the Gulf War (1990-1991), the US military spending share of GDP peaked at around 10%. Currently, this share is between 3% and 4%.

In response to the threat in Eastern Europe, Nato is broadly increasing defence spending. Stocks of defence companies are in high demand. However, Western Europe is far from a wartime economy. The nuclear powers France and the UK, with military spending slightly above the US-mandated minimum of 2%, are still far from this status.

Despite Chancellor Olaf Scholz’s rhetoric of a „turning point“ in the Bundestag, shortly after Russia’s invasion of Ukraine in February 2022, Germany remains well below this threshold. Last year, military spending was at 1.5%, excluding the 100 billion euros in special Bundeswehr funding announced by Scholz.

Based on the draft federal budget for 2025, which allocates 53 billion euros for defence, this percentage is projected to drop to 1.3%. This demonstrates that Germany is still far from a wartime economy. The reason is simple: Nato is not a party to the conflict. Claims that Germany, the largest EU economy, is moving towards a wartime economy due to threats from Moscow are misplaced. A calculation as an example: if Berlin were to spend 15% of its GDP on the military, based on a 2023 GDP of 4.1 trillion euros, this would amount to a gigantic sum of over 600 billion euros – an unrealistic figure. It would be more than two-thirds of the US defence budget, the largest military budget in the world by a wide margin.