European countries are pouring record amounts of money into their militaries. EU member states spent 343 billion euros on defense in 2024, a 19 percent jump from the previous year. Germany alone crossed the $100 billion mark. NATO allies have pledged to spend 5 percent of GDP on defense by 2035, more than doubling the previous 2 percent target.
But more money is not automatically producing more security. The core problem is fragmentation: 27 EU countries running 27 separate defense budgets, buying 27 different sets of equipment, maintaining 27 different supply chains. Where the United States operates around 30 types of major weapons systems, European countries field roughly 178, including 17 different types of main battle tanks and 20 different fighter aircraft.
This fragmentation costs real money. When a country orders 50 tanks instead of pooling demand for several hundred, the per-unit cost soars. Spare parts cannot be shared. Armies that are supposed to fight together cannot always communicate with each other’s equipment. Between February 2022 and mid-2023, 75 percent of new EU defense orders went to non-European suppliers, with over 60 percent going to American firms, partly because Europe’s own industrial base cannot deliver fast enough.
The GDP Target Trap
NATO’s spending targets measure inputs, not outputs. Spending 2 percent or 5 percent of GDP tells you how much money went through the door, not whether it bought anything useful. As researchers at the Stockholm International Peace Research Institute (SIPRI) put it, the GDP metric “must not be mistaken for a direct indicator of military capabilities” and “does not speak to whether funds are being used efficiently.”
Some countries have figured out how to hit the numbers without meaningfully strengthening their forces. Italy reported a defense budget of roughly 45 billion euros to NATO in 2025, even though actual defense spending was closer to 31 billion euros. The difference came from reclassifying expenditures from other ministries. The result is what Foreign Policy called “the appearance of a stronger ally without a corresponding increase in real military effectiveness.”
Where the Money Actually Goes
Much of the new spending is going toward fixing decades of neglect rather than building new strength. Three decades of underinvestment hollowed out European defense industry competencies, leaving firms with outdated production lines and limited surge capacity. Europe’s defense industry, with an annual turnover of 183 billion euros and around 600,000 jobs, remains substantially smaller than its American counterpart.
Defense cost inflation compounds the problem. Military equipment gets more expensive with each generation, and defense-sector inflation often outpaces general inflation, meaning even significant spending increases can yield modest real capability gains. Limited competition and the absence of economies of scale push production costs higher still.
The EU has recognized the problem. Its Readiness 2030 plan and the 150 billion euro SAFE loan facility are designed to encourage joint procurement and reduce fragmentation. But so far, collaborative defense procurement among EU member states sits at just 18 percent, well below the 35 percent benchmark that has never been met since tracking began.
What Would Actually Help
The countries closest to the threat are showing one possible path. The Baltic and Nordic states, facing Russia directly, have pioneered pragmatic joint procurement programs. Finland’s CAVS program, which pools demand for armored vehicles across five nations, and the FAMOUS next-generation tracked vehicle initiative involving 35 companies from nine EU countries, demonstrate that collaborative procurementA defense purchasing arrangement in which multiple countries pool demand to jointly acquire military equipment, reducing per-unit costs. works when the threat is immediate and the political will exists.
The question is whether Europe can scale this approach before the money runs out or the threat materializes. As one SIPRI researcher summarized: “Boosting spending alone will not necessarily translate into significantly greater military capability or independence from the USA. Those are far more complex tasks.”
European defense spending has entered uncharted territory. Global military expenditure hit $2.718 trillion in 2024, a 9.4 percent real-terms increase that SIPRI called “the steepest year-on-year rise since at least the end of the cold war.” Europe was the primary driver: military spending across the continent surged 17 percent to $693 billion. According to the IISS Military Balance 2026, Europe now accounts for over 21 percent of global defense spending, up from 17 percent in 2022.
The numbers at the national level are equally striking. Germany’s military expenditure surged 28 percent to $88.5 billion in 2024, making it the fourth-largest spender worldwide. By 2025, German defense spending crossed the $107 billion threshold. Poland’s spending grew 31 percent to $38 billion, reaching 4.2 percent of GDP. EU member states collectively spent 343 billion euros on defense in 2024 and are projected to reach 381 billion euros in 2025. The combined European and Canadian share of NATO spending has climbed from 28 percent in 2015 to an estimated 38 percent in 2025.
Yet the central paradox of European rearmament is this: more money is flowing into defense than at any point since the Cold War, and Europe’s actual military capability has not kept pace. Many analysts assess that equipment stocks in several European NATO countries have not recovered to pre-Ukraine-war levels, reflecting donations to Kyiv, the retirement of legacy systems, and delivery timelines that stretch years into the future.
The 5 Percent Target: Political Signal or Spending Plan?
At the 2025 NATO Summit in The Hague, allies endorsed a new benchmark of 5 percent of GDP for defense and security spending by 2035, split between 3.5 percent for core defense and 1.5 percent for defense-related expenditures including critical infrastructure, civil preparedness, and the defense industrial base. SIPRI researchers described this as “above all, a political statement” aimed at demonstrating resolve and, critically, at mollifying Washington.
The fiscal implications are staggering. SIPRI estimates that reaching 3.5 percent alone would require an additional $1.4 trillion in annual military spending beyond 2024 levels, putting total NATO spending at $2.9 trillion. The full 5 percent would demand roughly $4.2 trillion annually. For context, Germany would need to spend approximately $329 billion per year, France $221 billion, and Italy $158 billion. In 2024, only nine countries worldwide had a military burden of 5 percent or more, most of them either at war or petro-states unburdened by parliamentary consent.
The ECB’s June 2025 Economic Bulletin quantified the near-term fiscal impact: new defense spending measures amount to 0.6 percent of GDP cumulatively over 2025-2027, with the bulk coming from Germany. The ECB projects a real GDP growth impact of roughly 0.1 percentage points per year over 2026-2027, with limited inflation effects. But the bank acknowledged “considerable uncertainty” around fiscal multipliers for defense spending, noting that empirical evidence on growth effects is mixed.
Meanwhile, half of NATO’s membership barely exceeds the old 2 percent threshold, with 16 allies estimated at between 2.0 and 2.1 percent of GDP in 2025. Only three allies (Latvia, Lithuania, Poland) currently meet the new 3.5 percent core target.
The Measurement Problem: When GDP Targets Become Goodhart’s Law
The fixation on GDP-based metrics has created perverse incentivesAn incentive that produces unintended consequences opposite to its intended goal, causing a policy to worsen the problem it was designed to solve. that undermine the stated goal of stronger collective defense. SIPRI’s analysis is blunt: spending as a share of GDP “does not speak to whether funds are being used efficiently, whether the spending addresses real capability gaps, or how resources are balanced” across personnel, equipment, and operations.
Italy provides the most instructive case study. Rome reported a defense budget of roughly 45 billion euros to NATO in 2025, while actual defense spending was closer to 31 billion euros. The 14 billion euro gap came from reclassifying expenditures in other ministries. As academics at Sapienza University and the French Institute for Strategic Research documented in Foreign Policy, Italy has pursued “formal compliance with NATO spending benchmarks over a substantive increase in defense resources.”
The deeper problem extends beyond creative accounting. Italy directed its spending increases toward politically acceptable areas: domestic policing missions and large capital investment programs with industrial returns. It has not meaningfully increased spending on training, operations, maintenance, or readiness. It lacks a genuine operational reserve. Its armed forces remain among the oldest in Europe. Nearly 23 billion euros has gone to armored vehicle programs that promise employment and industrial growth but have done nothing to address the structural weaknesses that determine actual combat capability.
Italy is an extreme case, but the pattern is not unique. Pressuring governments to spend more does not, by itself, produce stronger militaries, and in countries where the civil-military gap is wide and the perceived threat is distant, the political path of least resistance is to spend in ways that satisfy the metric while avoiding the domestic friction that genuine military reform requires.
The Fragmentation Tax
The structural inefficiency at the heart of European defense is well documented but stubbornly persistent. EU member states operate roughly 178 types of major weapons systems compared to around 30 in the United States, including 17 types of main battle tanks versus one American type, 29 classes of destroyers and frigates versus four, and 20 fighter aircraft versus six. Each additional system type carries its own logistics chain, spare parts inventory, training pipeline, and upgrade cycle.
The European Commission’s own research, published through CEPR, is frank about the consequences: “The current situation of fragmented demand and supply along national borders create inefficiencies. National defence budgets often duplicate efforts, limiting defence R&D potential, while top industries fail to fully exploit the EU defence market hindering interoperabilityThe ability of military forces or equipment from different nations to function together seamlessly in joint operations. and limiting strategic autonomyA state's or alliance's capacity to make and execute its own defense and foreign policy decisions without depending on external powers for capabilities or protection..”
This fragmentation has deepened even as spending has risen. The Carnegie Endowment for International Peace found in December 2025 that Europe’s rearmament surge is reinforcing fragmentation rather than reducing it. “Governments with large national defense industries are channeling the bulk of new funds toward domestic producers, prioritizing national champions and sovereign control over cross-border integration,” the report noted. More pointedly: “As defense budgets rise, collaboration declines: The political and industrial incentives to pool demand weaken once countries have the fiscal space to go it alone.”
The EDA’s collaborative procurementA defense purchasing arrangement in which multiple countries pool demand to jointly acquire military equipment, reducing per-unit costs. benchmark tells the same story. EU member states currently procure just 18 percent of defense equipment collaboratively, far below the 35 percent target that has never been achieved since tracking began. The urgency of post-2022 rearmament has made this worse, not better: the rush to fill capability gaps after donating equipment to Ukraine drove 75 percent of new EU defense orders to non-European suppliers, with over 60 percent going to American firms. Speed and availability trumped integration and interoperability.
The Industrial Base Problem
Three decades of post-Cold War underinvestment hollowed out European defense industrial competencies. Firms inherited outdated production lines, high per-unit costs, and limited surge capacity. Europe’s defense industry, with a 2024 turnover of 183 billion euros and approximately 600,000 jobs, is structurally smaller and less efficient than its American counterpart.
The capacity problem is compounded by defense cost inflation that outpaces general inflation. New generations of equipment are more technologically advanced and correspondingly more expensive. Limited competition within national markets and the absence of economies of scale (a direct consequence of fragmented procurement) push unit costs higher. SIPRI warns that in this environment, “the marginal returns on investment may decline rapidly, and wasteful spending could proliferate.”
The European Commission acknowledges that labor market constraints further limit the industrial base’s ability to absorb rapid spending increases. Unlike the United States during World War II, when low female participation rates provided a labor reserve, Europe’s current labor market operates near record employment levels. Defense manufacturing hiring has increased roughly 20 percent since 2021, but skills shortages in engineering, medicine, and cyber expertise persist.
The Governance Vacuum
For decades, the United States provided not just capabilities but strategic direction for European defense planning. That role is receding. Carnegie’s analysis describes a widening leadership vacuum: NATO allies “currently find themselves incapable of discussing either Russia or Ukraine inside the alliance,” and the gap between NATO expectations of U.S. contributions and Washington’s actual willingness to provide them complicates long-term planning.
The specific capability targets set under NATO’s Defence Planning Process remain classified. SIPRI notes that this means “the defence budgets meant to address these targets are developed and approved without the possibility of public scrutiny or democratic oversight,” making it impossible for parliaments, auditors, or civil society to assess whether spending aligns with actual defense needs.
Bright Spots: The Baltic Model
Not all of Europe is failing at defense integration. The Baltic Sea region offers a contrasting model. Facing an immediate Russian threat, the Nordic and Baltic states, the UK, Germany, and Poland have made procurement decisions based on “delivery speed, performance, cost, and the strategic risks of dependency” rather than industrial politics. Carnegie describes this as “regional pragmatism”: cooperation becomes easier when defense-industrial choices are anchored in credible near-term contingencies.
Finland’s Common Armoured Vehicle System (CAVS) program, which pools demand across five nations, and the FAMOUS next-generation tracked vehicle initiative, involving 35 companies from nine EU member states, demonstrate that collaborative procurement is achievable. The EDA’s joint 155mm artillery ammunition procurement, driven by the urgency of replenishing stocks donated to Ukraine, provides another example of threat-driven cooperation.
The EU’s institutional response has also evolved. The Readiness 2030 initiative activated the Stability and Growth Pact’s national escape clause to give member states fiscal room for defense spending through 2028. The 150 billion euro SAFE loan facility conditions funding on collaborative procurement involving at least two member states. These are steps in the right direction, though their impact remains to be seen against the gravitational pull of national procurement habits.
The Strategic Equation
Europe faces a timing problem. The threat from Russia is assessed as immediate by countries on NATO’s eastern flank. Rebuilding an integrated, interoperable European defense requires structural reforms that take years. The expedient option, buying off-the-shelf from the United States, fills capability gaps fast but deepens the dependency that European leaders publicly want to reduce.
The 5 percent target, whatever its political utility, risks making this worse by incentivizing quantity over quality, national accounting tricks over genuine capability building, and fast procurement from existing suppliers over the slower work of building a coherent European defense industrial base. As the European Commission itself acknowledges, “Coordinating spending between countries may increase innovation and R&D spillovers across member states, reducing the risk of wasteful fragmentation.” The conditional tense is telling. It may. Whether it will depends on whether Europe’s political leaders can overcome the national instincts that have fragmented the continent’s defense for three decades.
The money is there. The question, as SIPRI researcher Jade Guiberteau Ricard put it, is whether that translates: “Boosting spending alone will not necessarily translate into significantly greater military capability or independence from the USA. Those are far more complex tasks.”
