NATO defence push already strains Europe's budgets

Mark John, Reuters

NATO Secretary General Mark Rutte will insist at this week's alliance summit that member states are keeping their promise to boost defence spending. Yet progress has been uneven and the push is already stretching some national budgets.

Under pressure from US President Donald Trump, members of the 32-country military pact agreed at last year's summit to boost defence spending to 5% of GDP by 2035 — just over double the overall level for European states and ⁠Canada in 2025. But since then, two camps have emerged: one is led by Germany and the mostly Nordic and eastern European nations which have found the fiscal space to raise spending; in the other are several big players struggling to do the same.

"The UK isn't managing, for example. France isn't and Italy isn't either," Guntram Wolff, senior fellow at the Bruegel economics think tank, said of the three largest economies in Europe behind Germany. NATO says its European members plus Canada spent an extra $90 billion on defence in real terms last year compared to 2024 as they seek to raise core military spending to 3.5% of GDP by 2035 with a further 1.5% GDP on security-related items. Before the summit, Rutte has stressed that last year's new spend amounts to a bigger $139 billion tally in nominal ⁠terms and that there is a "strong commitment" to hit the combined 5% target on time.

Germany will use a rule change exempting defence items from strict borrowing limits to double its spending to over €200 billion ($228.38 billion) between now and 2030, according to a budget draft seen by Reuters ahead of a cabinet review on Monday. Poland, Lithuania and Estonia — countries where the perception of the threat posed by Russia is at its sharpest - are already well on their way to making the new targets, with Warsaw notably having devoted 4.3% of GDP to defence last year.

PARTLY UNFUNDED: Elsewhere the push faces political and fiscal roadblocks. Britain last week announced plans for an extra £15 billion ($20.01 billion) of defence spending, partly funded by cuts elsewhere. But it emerged that one-third was still unfunded, creating an early budget challenge for the likely new prime minister Andy Burnham. More fundamentally, the plan was criticised by opposition politicians and former military chiefs for failing to set out when defence spending would reach 3% of GDP, on the way to meeting Britain's NATO commitment to spend 3.5% of GDP by 2035.

"Defence spending will likely remain one of the biggest fiscal pressures facing the UK in the medium term," said Max Warner, senior research economist at the Institute for Fiscal Studies, a think tank. Italian Prime Minister Giorgia Meloni is due to tell the summit that Rome, despite one of Europe's ⁠largest debt burdens, will lift core and non-core defence spending to 2.8% of GDP in 2026, roughly 0.71 percentage point higher than last year. But with higher military spending unpopular with many voters ahead of next year's national elections, most of the increase will come from domestic security spending such as police duties.

Plans detailed by France in April would lift its defence spending to 2.5% of GDP by the end of the decade from about 2% now, even as it attempts to bring its overall deficit into line with euro area rules — a tough budget goal as it heads towards next year's presidential elections. Spain's Socialist government meanwhile is not seen budging from its refusal to spend more than 2.1% of GDP on defence, with new resources set to be heavily skewed towards technologies with civil applications.

CONCERNS OVER INDUSTRY CAPACITY: Elsewhere, NATO officials have queried the assertion of three countries — Czech Republic, Slovenia and Albania — that they had met the old alliance target of 2% of GDP and asked them to review and re-submit their spending figures. "For us, the challenge is to ensure that Allies remain on the credible path towards that 3.5% commitment, if you keep on bumping along at 2%, then you're ⁠not on the credible path," a senior NATO official said.

Bruegel's Wolff noted that, unlike at last year's summit in the Hague, European leaders can look Trump in the eye and argue they have stepped up to shoulder the burden of a Ukrainian war effort that has shown it is able to resist Russian advances. Still, even if European publics may be starting to accept that more money should go on the military, some observers argue that arms suppliers will need to be ⁠convinced that government defence spending will remain high before they make the investment needed to increase their capacity. "There has been a before Trump, and there will be an after Trump, so this 5% target can change any time," said Ana Boata, head of economic research at Allianz Trade.

"So I think there is a bit of scepticism from European defence companies to actually ramp up investments in order to ramp up production," she said.