Analysis: NATO has promised a spending blitz. Can its European members afford it?

CNN

2 days ago

The North Atlantic Treaty Organization, the defense alliance of 32 countries, is on a spending spree, with plans to funnel billions into their militaries and security systems over the coming decade.
But it's a splurge that some European members of NATO, grappling with huge and ballooning debt burdens, can ill-afford.
'It's something unprecedented in peacetime to have such a massive increase in spending on any item – in particular, on defense,' Marcel Fratzscher, president of the German Institute for Economic Research or DIW, told CNN.
Last month, NATO members agreed to boost their respective defense spending targets to 5% of gross domestic product by 2035 – more than double the current 2% target and the sort of major increase that US President Donald Trump has been demanding for many years.
The pledge came as Europe's NATO members have to contend with an aggressive Russia and an America that has backed away from its long-standing role as the guarantor of the region's security.
Governments have three options to meet the new spending target – cut other expenses, raise taxes or borrow more – but analysts told CNN that each is either politically unpalatable or unviable in the long term for heavily indebted European NATO countries.
'Many (European Union) countries face hard fiscal constraints,' analysts at Bruegel, a Brussels-based think tank, wrote earlier this month. 'It is unrealistic to expect countries that have struggled for decades to reach a 2% defense spending target to embrace credibly an ill-justified, much higher target.'
Many NATO countries have failed to meet the previous, 2% target, set in 2014. Most have increased spending in recent years in response to Russia's full-scale invasion of Ukraine in 2022 – so much so that the European Union's executive arm expects its 23 member states belonging to NATO to meet that target this year, based on their combined GDP.
But they now need to go further.
The new, 5% target includes a commitment by NATO member states to spend the equivalent of 3.5% of their annual GDP on so-called 'core' defense requirements, such as weapons, with the remaining 1.5% allocated to areas supporting defense like port infrastructure. For some nations, that will mean finding tens of billions of extra dollars a year.
Frank Gill, a senior sovereign credit ratings analyst for Europe, the Middle East and Africa at S&P Global Ratings, thinks that meeting the 3.5% target alone will require European countries, including the United Kingdom, to borrow huge sums of money. Some nations may also cut or reallocate government spending to reduce the amount they need to borrow, he said, but that could prove difficult.
'A lot of (European governments) are facing other fiscal pressures… not least aging populations, which are essentially leading to even higher pension spending,' Gill told CNN. 'Politically, (that) is very challenging to cut.'
Fratzscher at DIW in Germany agrees.
For most NATO countries, he argued, cutting spending is 'utterly impossible.' 'Europe is aging quickly,' he said. 'It's completely illusionary to believe that… governments in Europe could save on public pensions, on healthcare, on care more generally.'
The only sustainable way to finance the 'kind of magnitude of extra (defense) spending' now pledged by NATO is to hike taxes, he argued. Yet there exists neither the political will nor the public support to spend 'in such a dramatic way in this direction… and actually accept the consequences.'
Simply borrowing more is a similarly tricky option in Europe where a number of governments are already saddled with debts close to, or larger than, the size of their country's entire economy.
All else remaining equal, meeting just the 3.5% 'core' defense spending target could add roughly $2 trillion to the collective government debt of NATO's European members, including the UK, by 2035, according to a recent analysis by S&P Global Ratings. That compares with combined GDP of $23.1 trillion for the EU – a proxy for European NATO members – and Britain, based on World Bank data for 2024.
The extra debt would be particularly hard to swallow for countries such as Italy, France and Belgium. These NATO members had some of the highest public debt-to-GDP ratios at the end of 2024, at 135%, 113% and 105% respectively, according to the EU's statistics office.
Those are already heavy burdens. On Tuesday, French Prime Minister François Bayrou said the EU's second-largest economy risks a 'crushing by debt.' He warned that, should nothing change, just the interest France pays on its debt will swell to €100 billion ($117 billion) in 2029, becoming the government's largest single expense. He still supports splashing the cash on defense, while reining in other government spending.
The EU is trying to make it easier for member states to invest in their security. Brussels has exempted defense expenditure from its strict rules on government spending and pledged to create a €150 billion fund from which countries can borrow, at favorable interest rates, to invest in their defense.
However, there is another option for EU NATO members, according to Guntram Wolff, a senior fellow at Bruegel.
'Just not doing it. Not spending more,' he told CNN.
Already, Spain has said it will not meet the 5% target, arguing that doing so would compromise its spending on welfare. Last year, the southern European nation spent only 1.28% of its GDP on defense, based on NATO estimates.
Wolff said the 'best predictor for the increase in defense spending is (a country's) distance to Moscow – much more than any pledges at the NATO summit.'