Europe struggles to increase defense budget as requested by NATO

Many NATO members in Europe face high budget deficits, making it difficult to meet the defense budget target of at least 2% of GDP.

NATO's European members need to increase their contributions by more than $60 billion a year to meet the alliance's defense budget needs.

The US has repeatedly called on NATO members to increase their defense spending, especially under former President Donald Trump, who often complained that the US was bearing a greater financial burden than other member countries. Trump said on February 10 that he had said the US would not defend NATO members that did not contribute enough to the alliance.

The push by NATO members to increase their defense budgets to counter the threat from Russia after the Ukraine conflict broke out is adding to budgetary pressure in Europe, at a time when many countries are having to implement austerity policies. Economists say this will cause the gap between European countries to widen.

Bulgarian troops during a joint NATO exercise at the Novo Selo military base in September 2023. Photo: AFP — Bulgarian troops during a joint NATO exercise at the Novo Selo military base in September 2023. Photo: *AFP*

Research by Germany's Ifo Institute shows that countries with the lowest defense budget-to-GDP ratio compared to the 2% GDP target agreed by NATO are also those with the highest debt and budget deficits in Europe.

Germany has the biggest shortfall, spending $15 billion less than required. Spain, Italy and Belgium follow with shortfalls of nearly $12 billion, $11.7 billion and nearly $5 billion, respectively.

Spain, Italy and Belgium are among the six European Union (EU) countries with debt levels above 100% of GDP last year. Italy also has one of the highest budget deficits in the bloc at 7.2% and this is unlikely to improve this year.

"Countries with high debt levels and high interest costs seem to have no choice but to cut spending in other areas. This is not easy. Germany has sought to reduce diesel subsidies for the agricultural sector, but faced a backlash from farmers," said Marcel Schlepper, economist at Ifo.

Matthew Miller, a spokesman for the US State Department, acknowledged that the EU has been working to push NATO members to meet the target of 2% of GDP for defense budgets. Washington has long wanted Europe to increase defense spending and become more self-sufficient in security. Former President Trump's threats have made many alliance members worried about the future if he is re-elected in November.

NATO's total defence budget last year was 1.2 trillion euros, with the US contributing more than double the 361 billion euros paid by EU members, Britain and Norway combined.

New EU fiscal rules for next year are expected to push countries to cut spending further to comply with a 3% annual budget deficit cap and a debt-to-GDP threshold of 60%. More than 10 countries in the bloc could exceed the annual deficit cap, which could lead to sanctions from the European Commission.

However, in negotiations late last year, Poland, Italy and the Baltic states successfully lobbied to avoid the risk of being penalized under new rules that would see the European Commission consider defense spending as a mitigating factor when assessing whether to penalize countries that exceed annual deficit limits.

Poland is expected to spend more than 4% of its GDP on defense in 2024, making it the biggest spender in NATO, meaning Warsaw could be eligible for sanctions relief if it breaches the EU cap.

NATO Secretary General Jens Stoltenberg said last week that two-thirds of alliance members expect to meet the 2% GDP target for defense budgets this year, up from three in 2014, when Russia annexed Crimea.

Eurozone countries are on track to increase their defense budgets from nearly $163 billion in 2021 to more than $347 billion in 2026, according to Pantheon Macroeconomics. This week, Norway became the latest NATO member to announce it would meet its goal of spending 2% of GDP on defense by 2024, a year ahead of schedule.

Lorenzo Codogno, a former Italian finance ministry official and now an economic adviser, said the target would be “difficult” for Italy, whose debt was above 140% of GDP last year, without regulatory exemptions or support from the EU.

“The threat from Russia is not seen as great enough to justify the decision to cut social welfare and invest in weapons,” he said.

A NATO survey found low public support for the idea of increasing defense spending in low-paying countries. Only 28% of Italians said their country should increase military spending, while 62% wanted to maintain or cut the current 1.47%.

Despite being home to NATO headquarters, Belgium spent just 1.2% of its GDP on defense last year, one of the lowest contributors to the alliance, according to figures released last week. Spain was slightly higher at 1.24%.

Excluding seven European countries that have committed to meeting the 2% target this year, including newly admitted Sweden, Ifo pointed out that Europe has a $38 billion shortfall in its defense budget compared to the plan.

“We are moving in the right direction, but too slowly and too late,” Polish Foreign Minister Radosław Sikorski said last weekend, pointing out that Russia’s defense budget is expected to reach 7% of GDP this year. “Russia is moving towards a wartime economy. European economies must at least go into crisis mode.”

Thanh Tam (According to FT, AFP, Reuters )

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