On Wednesday, NATO members finalized an agreement to raise defense spending to 5% of GDP, in part to placate President Donald Trump (for more considerations behind the decision please see this). But, as Bloomberg notes, for some European NATO countries this ambitious pledge conflicts with fiscal and political realities. Key nations have already signaled to the European Union their reluctance to increase deficits, and the limited scope of the bloc’s flagship rearmament program suggests that, for some, the new goal will be largely symbolic.
- Under the EU’s ReArm plan, key nations — France, Italy, and Spain — chose not to use the fiscal leeway offered by the European Commission to expand deficit-financed military spending. They are more worried about bond markets than EU rules.
- By leaving defense decisions at the national level, the EU plan is more a coordination effort than a bloc-wide initiative, and risks failing to achieve its goal.
- Defense spending in Europe is set to rise — potentially exceeding 3% of GDP in the coming years — but will likely fall far short of the levels implied by the new NATO goal. In addition, it will remain fragmented across member states, with Germany well ahead of the rest.
- At the EU level, Bloomberg estimates that the economic impact from more defense spending will remain limited in the years ahead.
NATO allies have agreed on a new defense spending target of 5% of GDP by 2035, including a core allocation of 3.5% for hard defense and 1.5% for infrastructure and related areas such as cybersecurity and intelligence. This marks a substantial increase for most European allies, except Poland and some Baltic states, which because of geopolitical pressure already exceed the previous NATO 2% threshold.
