A Historic Pledge and a Monumental Challenge

With the threat of war looming over Europe and rising global instability, NATO has set an unprecedented target: by 2035, all member states are expected to spend 5% of their GDP on defense and security. This ambitious pledge, agreed upon in principle ahead of this week’s NATO summit in the Netherlands, is the most significant rethinking of defense priorities in decades. The drive comes as the U.S. administration, under President Donald Trump, increases pressure on European allies to “pull their weight,” signaling a shift from reliance on the American military umbrella to a model of shared, self-funded deterrence. But data and political realities reveal just how daunting – and perhaps unattainable – this goal might be for much of the alliance.

Quantitative Overview – Where Do NATO Countries Stand Today?

The most recent NATO chart on 2024 defense spending exposes the gap: only a handful of countries—led by Poland, Estonia, and the United States—are even approaching 3% of GDP in defense expenditures. The majority of NATO’s 32 members still hover around 2% or less, with many trailing far behind. According to NATO’s own figures, 23 members have only recently managed to meet the previous benchmark of 2% (set in 2014). A small group of Eastern European nations, now on the front line of the Ukraine conflict, have exceeded that threshold, but most major economies—Germany, France, Italy, Spain, and Canada—continue to lag, with defense spending between 1% and 1.5% of GDP.

NATO’s average collective defense expenditure stands at approximately 2.5% of GDP—far short of the new target. Notably, even the UK and Germany, which publicly back the increase, acknowledge they are likely to struggle to reach 5% given domestic economic and budgetary pressures.

The Target’s Structure: Beyond Classic Military Spending

The 5% figure is not strictly for “pure defense.” NATO envisions 3.5% of GDP dedicated to traditional military outlays—personnel, hardware, and operational forces—while an additional 1.5% will go toward security-related infrastructure such as cyber capabilities, intelligence, logistics, and advanced technology. This new structure reflects the evolving nature of 21st-century security, where cyber threats, technological warfare, and rapid intelligence sharing are as vital as tanks or jets.

Why 5% Is So Difficult: Economic and Political Obstacles

Pushing defense spending to 5% of GDP represents a staggering fiscal burden, particularly for large, developed economies. For example, in Spain, Prime Minister Pedro Sánchez declared that such an increase was “neither reasonable nor efficient,” insisting that a 2.1% investment is sufficient to meet NATO’s core requirements. In Italy, Defense Minister Guido Crosetto has publicly questioned the alliance’s relevance, doubting whether NATO, as it is, even still has a raison d’être.

For countries like Germany, France, and the UK, increasing the budget beyond 2.5% would demand sweeping cuts to public services, social programs, and civilian infrastructure—raising concerns about public backlash and the sustainability of such policies. Even Canada, which has yet to meet the original 2% goal, now claims it will do so by 2026, a significant delay compared to the new expectations.

Political Dynamics: U.S. Pressure and Intra-European Friction

The 5% goal is largely driven by the U.S., which currently spends just over 3% of GDP on defense and has long urged allies to boost their commitments. President Trump’s insistence that Europe shoulder a much larger share of NATO’s burden has shaped alliance politics since his first term, with persistent warnings that U.S. support is conditional on equitable effort.

Despite sharp increases in defense budgets since the onset of the Ukraine war, major discrepancies remain. Eastern European states like Poland and Estonia, bordering Russia, have ramped up defense investment, but larger Western economies remain hesitant, wary of the social and economic cost. The risk is a widening gulf between alliance members, leading to division rather than unity.

Historical Context: Is This Unprecedented?

Even during the height of the Cold War, few NATO members spent 5% of GDP on defense. Today, the threats are more complex—ranging from cyberattacks to hybrid warfare and economic pressure—but the political, economic, and social constraints on defense spending are more acute than ever. The call for a fivefold increase for some countries is not just ambitious, but arguably unrealistic given the competing needs of modern welfare states.

Economic Analysis: What Would 5% Mean for Europe’s Markets and Beyond?

A shift to 5% defense spending would have sweeping macroeconomic consequences. Countries would need to increase taxes, reallocate funds from civilian sectors, or take on additional debt—each option carrying its own risks for financial markets and public stability. On the positive side, expanded defense budgets could spur growth in domestic defense industries, technology, and cyber sectors, creating jobs and strengthening local economies.

The uneven geographic distribution of new spending would likely exacerbate internal alliance tensions, while global investors might see both opportunities in the defense sector and risks in government bonds, credit costs, and the euro or pound. The economic rebalancing required could trigger broader debates about European integration and the role of the state.

Geopolitical Implications: A Stronger NATO or a Fractured Alliance?

Should the 5% target become reality, NATO would become a military and economic superpower, unrivaled in spending and capability. But the risk is that member states unable—or unwilling—to meet the target might push back, reduce participation in costly operations, or reconsider their commitment to the alliance. Calls in countries like Spain and Italy for a more nuanced, flexible approach may become more common, particularly as the social cost of higher defense budgets becomes clearer.

Looking Ahead: Boon for Defense Industry, Stress for Governments

The European defense and technology sectors are poised for massive inflows if spending rises as projected. Companies such as Rheinmetall, Dassault, Leonardo, and Thales could see surging investment, expanded hiring, and new research initiatives. However, the risk of inefficiency, “budget bubbles,” or spending on low-value projects remains high if the push is not strategically managed.

Spillover effects will also touch education, innovation, and civilian infrastructure, with governments forced to make tough choices about priorities in a more dangerous world. Public debate over defense vs. welfare could intensify, challenging political leadership across Europe.

Conclusion: Lofty Ambitions, Steep Road Ahead

NATO’s 5% GDP target reflects political will and a renewed commitment to deterrence, but it sets a nearly unprecedented economic and social challenge for member states. Meeting it would require deep reform, broad public buy-in, and careful economic management to balance security with social needs. The alliance’s future strength will depend not just on spending, but on its ability to adapt, innovate, and maintain cohesion amid uncertainty.