Eliciting Substance from ‘Hot Air’: Financial Market Responses to EU Summit Decisions on European Defense

The results of deliberations in multilateral fora are often considered ineffective. Decision making in the European Union (EU) and in particular its key intergovernmental body, the European Council, poses no exception. Especially in the domain of EU foreign and security affairs, the unanimity requirement governing this institution allegedly allows nationalist governments to torpedo any attempt to build up a credible European defense force and a unified foreign policy stance. In this article, we take issue with the claim that multilateral summits merely result in “hot air” by looking at whether and how decisions made during EU summit meetings affect the European defense industry. We argue that investors react positively to a successful strengthening of Europe's military component—a vital part of the intensified cooperation within the European Security and Defense Policy (ESDP)—since such decisions increase the demand for military products and raise the expected profits in the European defense industry. Our findings lend empirical support to the view that financial markets indeed evaluate the substance of European Council meetings and react positively to those summit decisions that consolidate EU military capabilities and the ESDP. Each of the substantial council decisions studied increased the value of the European defense sector by about 4 billion euros on average. This shows that multilateral decisions can have considerable economic and financial repercussions.