Breakingviews - Europe's holstered defence billions are a problem

Reuters

9 hours ago

BERLIN, June 24 (Reuters Breakingviews) - The 32 members of NATO will congratulate themselves this week on agreeing to increase their defence budgets from the current 2% to 3.5% of their GDP by 2032. They will add some 1.5% of related spending – such as infrastructure, civil defence or cybersecurity – to come up with the headline 5% demanded by U.S. President Donald Trump as a condition to keep his country engaged in Europe. They may even find a fudge to accommodate Spain's reluctance to spend so much on its defence. The real problem, however, is the wait-and-see attitude European governments have adopted with regard to actual military outlays.
Even a solemn and common pledge at NATO's Brussels gathering will not change the reality of the situation of the last two years, which has seen governments either promise money they don't have or are loath to spend. Furthermore, as outlined by a report, opens new tab from the Kiel Institute for the World Economy last week, the abstract debate on spending numbers has obscured the lack of real procurement and large equipment orders. At the current pace it would take several decades for Europe to be fit for war, the authors note.
The organisation's defence ministers in 2006 agreed on a commitment to hike their national defence budgets to 2% of GDP, and it took them 19 years, opens new tab to get there. It may not take as much time to meet the new target: Europeans are now facing a serious Russian threat on their Eastern flank and must prepare for the credible scenario of an American withdrawal from their continent. But for now, budgets have only increased incrementally, and big defence contractors are still waiting for orders before they can commit to long-term investments, as Europe looks impervious to the emergency created by a new Russian offensive in Ukraine.
The European members of NATO (minus Turkey) spent, opens new tab more than 450 billion euros on their defence in 2024. That was a significant 21% jump over what they allocated in 2023, when their military spending had already increased by 18% over 2022, the year Russia invaded Ukraine. Yet even if all seem to agree that the target of 3.5% is the right one considering the new geopolitical context, governments across the region seem seized by a general fatigue. In the UK and France, the region's two biggest military powers, public debt at more than 100% of GDP is forcing a reality check: if defence is a priority, taxes will have to be raised or other public spending will have to be cut.
UK Prime Minister Keir Starmer has so far refused to commit, opens new tab to the 3.5% target, and his Chancellor Rachel Reeves has warned that military spending would be capped at 2.6% of GDP until the end of the current parliament in 2029. French President Emmanuel Macron has accepted the target, opens new tab, but without a timeline. Raising spending to that level would force him to find more than 40 billion euros a year in France's stretched public finances – or to raise taxes in a country already shouldering the OECD's second-highest tax burden, opens new tab. German Chancellor Friedrich Merz is at least preparing a 2026 budget where defence spending could jump from 80 billion euros to 110 billion euros, according to a Deutsche Bank forecast. But that would still only amount to around 2.4% of output – up from 2.1% in 2024.
Merz at least looks determined to make the German Bundeswehr the strongest, opens new tab conventional army in Europe. So far no other European Union leader has emulated him in asking the European Commission for an exemption – using the so-called escape clause – from its deficit and debt rules. Yet that is an option open to all after Brussels' ReArm Europe Plan, opens new tab, which also created a 150 billion euro investment fund financed by joint borrowing.
Meanwhile defence contractors are still waiting for the real orders that would show governments are serious about defence. Micael Johansson, the CEO of $27 billion Swedish defence group Saab (SAABb.ST), opens new tab and head of Europe's defence industry lobby, has warned, opens new tab that companies are now waiting for long-term commitments from governments. Only then will they be able to proceed with the massive investments needed to keep factories ready to ramp up production in a hurry. Governments are the only customers of the defence industry, which does not rely on massive inventories.
While public spending is lagging in spite of promises, private capital is warming to a defence industry that was long shunned by major investors, whether investment funds or venture capital players. The military sector was long deemed to fail basic environmental, social and governance criteria. This is changing fast. Public sector entities such as the European Investment Bank have now loosened their rules. Policymakers in Norway are also thinking about easing the investment criteria of the country's $1.8 trillion sovereign wealth fund. And active European defence startups no longer seem to struggle to find funding – as witnessed in recent weeks by Germany's Helsing, opens new tab and Quantum Systems, opens new tab, which raised a combined 760 million euros based on hefty valuations.
Some European members of NATO like Hungary and Slovakia are now closer to Russia and may not join others in raising the organisation's spending target. But together these two countries only account for less than 2% of Europe's defence budgets. A larger problem comes from Italy and Spain, who respectively only allocated 1.5% and 1.3% of their GDP last year to their defence budgets, which together amount to 12% of Europe's spending. Rome and Madrid's perception of threat is affected by their distance from the Russian front line, and the two governments seem to find it convenient to free-ride on the others' military buildup. Some pressure may have to be applied and it would be more efficient if it came not only from Trump but from other European capitals.
A real pledge by Europe's NATO members to hike defence budgets with a firmer deadline would be the ideal outcome. But no government is obliged to wait for an international deal to beef up its defence and security. For now European governments sound like a soldiers' choir bellowing 'let's march' on an opera stage, opens new tab without going anywhere. They should stop the singing and start the marching.
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