As NATO Countries Reach Spending Milestone, Is 2 Percent Enough?

It has taken longer than many NATO militaries had hoped, but it seems that the alliance has finally turned the corner on so-called burden sharing. This year, for the first time, most members are expected to meet their decade-old defense spending pledges. But with the slogging Russia-Ukraine war on the borders of the North Atlantic Treaty Organization, and uncertainties about future U.S. commitments to European security, even reaching this goal could be insufficient. 

Sharing More of the Burden

Following Russia’s 2014 annexation of Crimea, NATO countries committed to the goal of spending 2 percent of gross domestic product (GDP) on defense. A decade later, renewed Russian aggression culminating in the 2022 full-scale invasion of Ukraine brought this commitment, particularly many European member countries’ failure to meet it in recent years, into the spotlight.

In 2023, only the United States and a handful of European countries in Russia’s vicinity met or exceeded the spending benchmark. Many of Europe’s largest economies—Germany, France, Italy, and Spain—fell short. This year, the seventy-fifth anniversary of the alliance, which will be marked with a summit in Washington in July, will look different. NATO Secretary-General Jens Stoltenberg announced that in 2024 non-U.S. NATO allies will meet the 2 percent target on average for the first time, and twenty-three out of the thirty-two total member countries will meet or exceed the 2 percent target, including France and Germany.

However, with the continued threat of Russian aggression from the east, the United States and some European countries have suggested that NATO’s benchmark should be raised to 2.5 or even 3 percent. This proposal feels particularly urgent ahead of the U.S. presidential election in November. Former President Donald Trump, the Republican party candidate, has frequently singled out NATO member states as free-riders and said he would even invite aggression against members that don’t meet their financial commitments.

The State of European Defense

During the Cold War, most NATO countries spent around 3 percent of GDP on defense. However, militaries and their defense industrial bases across Europe were significantly reduced in size after the fall of the Soviet Union, as most European NATO countries no longer perceived Russia as a threat. European countries decreased their defense spending and benefited from a “peace dividend” with savings that totaled around 1.8 trillion euros.

Russia’s full-scale invasion of Ukraine in February 2022 naturally prompted most European countries to reevaluate their defenses, including NATO’s major non-U.S. powers. German Chancellor Olaf Scholz declared a Zeitenwende, or epochal shift, and created a special defense budget of 100 billion euros until 2027 to bring Germany up to the 2 percent benchmark. French President Emmanuel Macron and British Prime Minister Rishi Sunak also promised to significantly increase their countries’ defense spending through 2030. However, many European countries still lack sustainable plans to increase spending on defense.

The Spending Conundrum

The defense spending challenge varies from country to country, however, some of the major factors are the same.

Public Opinion. NATO countries across Europe have varying public support for increasing defense spending. At least half of the citizens in Albania, Bulgaria, France, Germany, Norway, and Sweden think their country should spend more on defense. Meanwhile in Croatia, the Czech Republic, Iceland, Italy, Luxembourg, Slovakia, and Slovenia, only 30 percent of citizens or less think their country should raise defense spending.

Even within the countries that have stronger support for more defense spending, the public has still expressed discontent over the trade-offs they would have to make to reach 2 percent or beyond. In most countries, reaching that threshold will entail paying higher taxes, cutting social programs, or taking on more national debt.

Taxes and Spending. Taxation in Europe is already comparatively high—average tax revenue for European NATO allies in 2021 was 38 percent of GDP—7 percent higher than for Organization for Economic Cooperation and Development (OECD) countries in Asia, and 15 percent higher than OECD peers in the Americas. Governments looking to increase defense budgets without raising taxes or running deficits would have to cut spending elsewhere. This would come at a time when European governments are also under pressure to modernize their economies and address climate change, both of which are also costly endeavors.

Between 1991 and 2023, Europe’s social spending more than doubled and now makes up more than half of Europe’s overall spending. Cuts in entitlement programs, like health care and pensions, would be politically difficult for Europe’s democracies, many of which have aging demographics. Recent farmers’ protests in Germany and extreme fallout from pension reform in France last year serve as a warning of the likely backlash. 

National Borrowing. Using debt to fund defense spending is challenging for the many NATO members that are also European Union (EU) countries, as the EU expects member states to keep their deficits under 3 percent of GDP and debt under 60 percent. Some countries follow these guidelines more strictly than others, but recent revisions to the rules could provide more flexibility for governments to take on debt to address outside shocks.

In low-debt countries such as Germany and the Netherlands, borrowing for defense could be more feasible. However, Germany has a constitutional “debt brake,” which tightly limits the government’s deficit spending, and Dutch government coalition negotiations—which formed a far-right-led government earlier this month—have struggled to reconcile spending differences. Meanwhile, many countries in southern Europe already have high debt loads, so borrowing would just worsen the fiscal strain. Seven of the twenty-five European NATO countries—including Spain and Italy—spend more on interest payments on their existing debt than on defense, as does the United States. High interest rates will continue to aggravate this problem.

A Borrowing Alternative

Europe’s wealthier, low-debt countries, most notably Germany, have generally been reluctant to take on joint EU borrowing, especially after the bloc’s cascading debt crisis that began in 2009. However, in 2020, Europe experimented with joint debt through the Next Generation EU program aimed at the economic recovery to the COVID-19 pandemic. The program issued 750 billion euros in debt, providing the money to EU members through grants and loans.

A similar program could be used for European defense spending, as will possibly be highlighted in a forthcoming white paper by former Italian Prime Minister Mario Draghi. This would allow for an influx of funds [PDF] without individual countries taking on more national debt and running the risk of breaching EU regulations. The funding could be tied to strengthening Europe’s defense industry over the long term.

With Russia reconstituting its military strength and forging closer defense ties with China, Iran, and North Korea, it is imperative that Europe reinvigorate and expand its defense capabilities. Regardless of the outcome of November’s U.S. presidential elections, the United States will begin to focus more on the Indo-Pacific. Europe needs to be ready to secure itself. Issuing joint EU debt for defense spending increases could offer both a short-term solution and a sustainable long-term project for defense in Europe. By investing more in their own defense, Europe’s democracies can help ensure their collective security, strengthen their deterrence power, and respond effectively to any future threats.

This article is part of the Diamonstein-Spielvogel Project on the Future of Democracy.