Bring Out the Big Guns

June 30, 2025 | James Torgerson, Senior Research Analyst

NATO has decided to take the phrase “don’t bring a knife to a gun fight” quite literally. Last week at the NATO summit in The Hague, the 32 member countries pledged to increase their defense spending as a percentage of GDP from the current 2% target share to a new 5% target share. The pledge includes spending 3.5% on defense items such as troops and weapons and 1.5% on defense-related initiatives such as critical infrastructure, cybersecurity, and resilience measures. This change comes on the heels of criticism from President Trump regarding the underspending of member nations on security, as well as his ambivalent comments on the U.S. commitment to collective defense under Article 5. Additionally, commitments to the alliance have been reinvigorated given the ongoing war in Ukraine and a desire to combat an increasingly hostile Russia.

This new commitment follows a trend of increased defense spending by NATO member states, as there are now significantly more members achieving the 2% target than in previous years. In 2021, the year prior to Russia’s invasion of Ukraine, only six member states achieved the 2% target, compared to 23 member states last year. Some members of NATO even pledged to spend 3.5% of GDP on defense prior to the rollout of the new 5% target. That said, and as this week’s chart indicates, only one NATO country (Poland) currently spends at that 3.5% level.

While the higher spending guidelines are groundbreaking, there is still significant progress that must be made for members to achieve this new level. For example, simply to meet the previously planned target of at least 3.5% of GDP, Germany would have to spend an extra €689 billion on defense through 2035. Similarly, Italy and France would each need to spend more than €400 billion. This increase in spending may provide near-term tailwinds for European equities, particularly defense stocks as detailed in a previous Chart of the Week. However, higher defense spending could add to already ballooning fiscal deficits in many member states, meaning inflation may remain elevated across Europe. While it remains to be seen if NATO members will achieve the new spending target and what the ultimate impact on financial markets will be as a result of these dynamics, one thing is certain: NATO is no longer willing to not be armed and dangerous.

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