At the 2025 NATO Summit, a new defense spending target was adopted, requiring defense and security spending to be increased to 5% of GDP by 2035. Due to differences in geopolitical security environments and fiscal capacity, countries will take different paths to achieve this goal: countries like Germany and France are expected to reach the target ahead of schedule, while countries such as Spain will face greater challenges. Overall, increased defense spending by NATO members within the EU may moderately boost the EU’s economic growth rate but could also lead to higher fiscal deficits, a narrowing surplus, and an upward shift in government bond yields and the euro’s central value.
On June 24–25, the NATO Summit approved the new defense spending goal, with all member states pledging to raise defense and security-related spending to 5% of GDP by 2035, including 3.5% for defense spending and 1.5% for security and infrastructure. Member states agreed to submit annual plans providing credible and gradual pathways to achieve the 5% target, with a mid-term review scheduled for 2029. In addition, NATO reaffirmed its support for Ukraine, stating that support for Ukraine’s defense will be included in the calculation of defense expenditures.
During his first term, Trump consistently called on NATO countries to increase the proportion of defense spending, and this NATO Summit may be viewed as a victory for Trump.
In 2024, NATO’s defense spending stands at $1.47 trillion, equivalent to 2.7% of GDP. If it reaches 3.5% by 2035, the defense spending share of GDP would need to rise by an average of 0.07 percentage points per year. Security and infrastructure spending is not traditionally classified as military spending by NATO; it mainly includes expenditures for improving roads and bridges, strengthening emergency medical services, enhancing cybersecurity, and increasing citizens’ resilience. There is still uncertainty about which expenditures will be recognized as security and infrastructure spending, making it difficult to accurately estimate the scale of future spending increases.
The spending pressure faced by NATO countries to achieve the 3.5% defense spending target varies greatly, with the additional defense spending expected mainly to come from European countries and Canada.
Due to geopolitical security environments and fiscal capacity, the proportion of defense spending as a share of GDP varies significantly among countries. In Europe, Central and Eastern European countries are generally closer to Russia and therefore have higher defense spending ratios, while countries like Spain are further from Russia and have relatively lower defense spending. Countries face differing levels of spending pressure to reach the 3.5% target, with increased defense spending mainly concentrated in Europe. In 2024, Poland’s defense spending already accounts for 4.12% of GDP, exceeding NATO’s target; the United States and Estonia are at 3.4%, so reaching the target poses less difficulty. Among major countries, Spain, Italy, and Canada have shares below 1.5%. To reach the 3.5% target, they would need to increase defense spending by an average of 0.2 percentage points of GDP each year over the next decade, which will be challenging. Before the NATO Summit, Spain stated it only planned to raise defense spending to 2.1% of GDP, and Slovakia and Belgium also hinted that they might not be able to meet NATO’s new target. Trump stated, “They want a free ride, but they will pay the price in trade,” and said that the U.S. is negotiating a trade agreement with Spain that would make Spain “pay double the price.”
Alaric believes that major countries are all willing to increase defense spending, and it is highly likely that NATO will achieve the goal of defense spending reaching 3.5% of GDP by 2035. In recent years, as global geopolitical conflicts have intensified, the willingness of countries to increase defense spending has risen. The EU has long relied on the U.S. and NATO for security, resulting in insufficient defense investment. As of 2024, the total number of German troops is only 185,000, far fewer than Russia’s. According to Bruegel’s calculations, Europe has a total of 1.47 million troops; to fully replace the U.S., more than 300,000 troops would need to be added, an increase of over 20%. In March, the EU and Germany both proposed plans to increase fiscal spending to boost defense investment. Judging by the major countries’ announced defense spending plans, Germany and France are both expected to reach the 3.5% target ahead of schedule, and the UK will also reach the target by 2035. According to Germany’s announced budget, Germany plans to raise defense spending to €162 billion by 2029, a 71% increase over 2025, with a compound annual growth rate of 14%, raising its GDP share to 3.5%, six years ahead of NATO’s target. French President Macron has called for France’s defense spending ratio to rise from the current 2% to 3%–3.5% by 2030. Recently, the UK announced a new defense spending goal to increase its defense spending ratio from the current 2.3% to 2.6% by 2027, reaching 3.5% by 2035.
Increased defense spending by European countries is expected to moderately boost the EU’s economic growth rate. In 2024, NATO EU member states’ defense spending totals about $360 billion, equivalent to 2.1% of EU GDP. If this reaches 3.5% by 2035, the defense spending share of GDP would increase by 0.13 percentage points per year; considering that Germany and France will reach the target earlier than 2035, the increase in defense spending may be front-loaded. If the pace matches that of France, reaching 3%–3.5% by 2030, the share of GDP would increase by 0.2 percentage points annually. Studies have shown that the fiscal multiplier for defense spending is between 0.7 and 1.2, suggesting that increased defense spending could boost EU economic growth by 0.1–0.2 percentage points. From 2025–2029, Germany’s defense spending share of GDP will rise by 0.3 percentage points per year, boosting Germany’s economic growth by 0.3 percentage points.
In addition, increased defense spending will narrow the EU’s surplus and push up European government bond yields and the euro’s central value. In 2024, the EU’s trade surplus reached €791 billion, equivalent to 4.4% of GDP, near a historical high. As the EU gradually increases defense spending, this is expected to help narrow the surplus. Furthermore, if cuts are not made in other government spending areas, the EU’s deficit ratio could rise by more than 1 percentage point from 2030–2035 compared to current levels, which will also raise the central level of European government bond yields. Literature generally finds that a 1 percentage point rise in the deficit ratio pushes up interest rates by 38 basis points. Finally, the improvement in Europe’s economic growth and the rebound in European bond yields will also boost the euro’s central value. Notably, since Trump’s inauguration, the U.S. dollar’s reserve currency status has declined, and increased EU military spending will help strengthen confidence in the euro and support its reserve currency status.