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Europe's Defense Spending Explodes as Russia's Shadow Looms Over Budget Debates

MarketDash Editorial Team
18 days ago
Russia's invasion of Ukraine triggered a historic defense spending surge across Europe, with NATO allies hitting the 2% GDP target for the first time in 2025. But as budgets balloon toward €800 billion by 2029, questions emerge about fiscal sustainability and whether this military buildup comes at the cost of climate, housing, and social investments.

Russia's invasion of Ukraine more than three years ago didn't just redraw borders—it rewrote Europe's entire approach to defense spending. What was once a political third rail has become an urgent priority, and the numbers tell a remarkable story of transformation.

Defense expenditures that had been languishing at historic lows have absolutely ballooned. NATO's European allies collectively surpassed the 2% GDP threshold for the first time in 2025, a milestone that seemed almost unthinkable just a few years ago. The trajectory is even more striking: spending is projected to exceed €800 billion by 2029, representing a strategic pivot toward deterrence after Moscow's February 2022 invasion.

Here's the scale we're talking about: EU defense budgets across 27 member states reached €326 billion in 2024, up from €218 billion in 2021. That's a 50% increase in just three years. And while that kind of rapid militarization might feel necessary given the geopolitical climate, analysts are raising serious concerns about fiscal sustainability.

The Goldman Sachs Global Institute has warned that Europe faces significant fiscal challenges ahead. Consider France, which ranks as the EU's strongest military according to the Global Firepower Index. Its gross public debt is expected to climb from 116.3% of GDP this year to 120% by 2027. When you're already carrying that much debt, doubling down on defense spending raises uncomfortable questions about affordability.

"Europe's public finance debate has never been about what we can afford, but what governments choose to prioritize," Sebastian Mang, senior policy officer at the New Economics Foundation, told The Guardian. "Having already committed to higher defense budgets, plans to raise spending even further expose the double standard applied to investment in climate, housing and care."

That's the real tension here—not whether Europe can technically afford more defense spending, but what gets sacrificed in the process.

Europe's Military Awakening

The surge in European defense budgets signals a fundamental shift in military posture. Russia's aggression pushed global military spending to $2.7 trillion in 2024, according to the Stockholm International Peace Research Institute. Europe's share, including Russia, hit $693 billion—a quarter of the global total.

The EU's ReArm Europe initiative, launched alongside its 2022 Strategic Compass for Security and Defense, aims to accelerate military modernization and technological autonomy. The goal isn't just spending more—it's about reducing reliance on the United States and China by boosting Europe's self-sufficiency and industrial independence.

But there are obstacles. Jared Cohen, president of global affairs and co-head of the Goldman Sachs Global Institute, highlighted in June the persistent underinvestment, fragmentation, and overregulation that hamper Europe's defense industrial base. You can throw money at a problem, but if your industrial capacity is fragmented across 27 countries with different procurement systems and regulations, efficiency suffers.

NATO Raises the Stakes

NATO hasn't been sitting idle. At the 2025 Hague Summit, alliance leaders agreed to a new goal that would have seemed absurd a decade ago: increasing defense spending to 5% of GDP by 2035. The breakdown allocates 3.5% to core military needs and 1.5% to broader security-related spending.

According to NATO's latest estimates and the International Centre for Defense and Security, 2025 will be the first year in which all allies except Iceland meet the previous 2% GDP target. Even more striking, Denmark, Estonia, Latvia, Norway, and the United States are expected to exceed 3% of GDP in defense spending this year. Lithuania and Poland are going even further, spending more than 4% of their GDP on defense.

These aren't symbolic gestures—these are countries on Russia's doorstep taking the threat seriously.

"The new NATO spending target marks a decisive moment in the alliance's trajectory," SIPRI wrote in June. "It signals commitment, unity, and a response to the threat from Russia. But it also poses significant challenges, both fiscal and operational."

Germany's Defense Transformation

Germany's story is particularly fascinating because it represents such a dramatic policy reversal. Europe's biggest economy plans to ramp up its defense budget from €86 billion in 2025 to over €152 billion by 2029—reaching 3.5% of GDP, according to Reuters. That's nearly doubling defense spending in four years.

But there's a constitutional obstacle: Germany's debt brake limits government borrowing to just 0.35% of GDP. Meeting NATO's targets would have been impossible under those constraints. After intensive political negotiations, an exemption for defense-related spending was approved in March.

Under Chancellor Friedrich Merz's leadership, Germany can now borrow up to €378.1 billion for defense between 2025 and 2029. This enables Berlin to sustain its increased commitments without breaking its fiscal rules—technically speaking, anyway.

"This shift in German defense spending is a reminder of Germany's deeply problematic and decades-long underinvestment in its defense," experts at the Atlantic Council's Europe Centre said. For decades, Germany essentially outsourced its security to NATO and the United States. That era is definitively over.

Defense Contractors Hit the Jackpot

European defense companies have been the clear winners in this spending surge. The numbers are almost comical in their scale.

German defense producer Rheinmetall AG (RHM: XETRA) reported 69% revenue growth over the 2.5 years from March 2023 to September 2025. Its share price? It soared from €270 to €1,716 in the same period. That's more than a six-fold increase.

BAE Systems (BAESY), Thales, Leonardo, and Saab have all reported significant increases in revenue and share prices during the same period. When governments suddenly decide they need to spend hundreds of billions on weapons systems, ammunition, and military technology, the companies that make those things tend to do quite well.

The economic effects extend beyond defense contractors. Germany's Kiel Institute for the World Economy has forecast that Europe-wide annual GDP growth will increase by around 0.9-1.5% through 2028 if defense spending rises from 2% to 3.5% of GDP—assuming the spending prioritizes high-tech and local production.

"Military spending is no more harmful in recessions than in economic booms," the institute wrote. "Spending should either be countercyclical or smoothed over the cycle, and the GDP gains may be much smaller if spending is financed with tax increases rather than borrowing."

That's the optimistic case. But Bruegel, a Brussels-based think tank, offered a more cautionary note in April. Production fragmentation and domestic procurement bias reduce efficiency by forcing countries to favor domestically produced defense components. Instead of pooling resources and buying the best equipment at scale, each country wants its own domestic defense industry to get a piece of the pie. That drains overall efficiency.

The Political Tightrope

Russia's growing defense budget and aggressive posture have clearly spurred Europe to action. The economic modeling suggests these efforts could add another 0.9-1.5% to annual EU GDP growth, which sounds positive.

Europe's top defense firms have seen revenues surge—Rheinmetall by 69% and BAE Systems (BAESF) by 28% between Q1 2023 and Q3 2025, driven by rising military spending and growing order backlogs.

But here's the uncomfortable reality: pushing defense spending to 5% of GDP by 2035 means those resources come from somewhere. That could mean less funding for refugee integration, education, climate initiatives, housing programs, and social services. For European leaders already dealing with political fragmentation and populist pressures, these are not easy tradeoffs.

"Long-term investments to revitalize European defense have yielded some progress," Cohen wrote. "But strategic autonomy and a self-reliant European defense sector are unlikely in the short and medium term. Such changes would require sustained political commitments and cooperation among the EU's 27 member states and their partners at levels we have not yet seen."

And that's the real challenge. Europe can write bigger defense checks, but creating an integrated, efficient defense industrial base requires the kind of sustained political cooperation that has historically been difficult to achieve. Each country has its own defense contractors, its own strategic priorities, and its own domestic political considerations.

The spending surge is real. The commitment is there. But whether Europe can translate higher budgets into genuine strategic autonomy remains an open question—one that will play out over the next decade as these massive investments either transform European security or simply prove that you can't buy military effectiveness without addressing deeper structural issues.

Back to News

Europe's Defense Spending Explodes as Russia's Shadow Looms Over Budget Debates

MarketDash Editorial Team
18 days ago
Russia's invasion of Ukraine triggered a historic defense spending surge across Europe, with NATO allies hitting the 2% GDP target for the first time in 2025. But as budgets balloon toward €800 billion by 2029, questions emerge about fiscal sustainability and whether this military buildup comes at the cost of climate, housing, and social investments.

Russia's invasion of Ukraine more than three years ago didn't just redraw borders—it rewrote Europe's entire approach to defense spending. What was once a political third rail has become an urgent priority, and the numbers tell a remarkable story of transformation.

Defense expenditures that had been languishing at historic lows have absolutely ballooned. NATO's European allies collectively surpassed the 2% GDP threshold for the first time in 2025, a milestone that seemed almost unthinkable just a few years ago. The trajectory is even more striking: spending is projected to exceed €800 billion by 2029, representing a strategic pivot toward deterrence after Moscow's February 2022 invasion.

Here's the scale we're talking about: EU defense budgets across 27 member states reached €326 billion in 2024, up from €218 billion in 2021. That's a 50% increase in just three years. And while that kind of rapid militarization might feel necessary given the geopolitical climate, analysts are raising serious concerns about fiscal sustainability.

The Goldman Sachs Global Institute has warned that Europe faces significant fiscal challenges ahead. Consider France, which ranks as the EU's strongest military according to the Global Firepower Index. Its gross public debt is expected to climb from 116.3% of GDP this year to 120% by 2027. When you're already carrying that much debt, doubling down on defense spending raises uncomfortable questions about affordability.

"Europe's public finance debate has never been about what we can afford, but what governments choose to prioritize," Sebastian Mang, senior policy officer at the New Economics Foundation, told The Guardian. "Having already committed to higher defense budgets, plans to raise spending even further expose the double standard applied to investment in climate, housing and care."

That's the real tension here—not whether Europe can technically afford more defense spending, but what gets sacrificed in the process.

Europe's Military Awakening

The surge in European defense budgets signals a fundamental shift in military posture. Russia's aggression pushed global military spending to $2.7 trillion in 2024, according to the Stockholm International Peace Research Institute. Europe's share, including Russia, hit $693 billion—a quarter of the global total.

The EU's ReArm Europe initiative, launched alongside its 2022 Strategic Compass for Security and Defense, aims to accelerate military modernization and technological autonomy. The goal isn't just spending more—it's about reducing reliance on the United States and China by boosting Europe's self-sufficiency and industrial independence.

But there are obstacles. Jared Cohen, president of global affairs and co-head of the Goldman Sachs Global Institute, highlighted in June the persistent underinvestment, fragmentation, and overregulation that hamper Europe's defense industrial base. You can throw money at a problem, but if your industrial capacity is fragmented across 27 countries with different procurement systems and regulations, efficiency suffers.

NATO Raises the Stakes

NATO hasn't been sitting idle. At the 2025 Hague Summit, alliance leaders agreed to a new goal that would have seemed absurd a decade ago: increasing defense spending to 5% of GDP by 2035. The breakdown allocates 3.5% to core military needs and 1.5% to broader security-related spending.

According to NATO's latest estimates and the International Centre for Defense and Security, 2025 will be the first year in which all allies except Iceland meet the previous 2% GDP target. Even more striking, Denmark, Estonia, Latvia, Norway, and the United States are expected to exceed 3% of GDP in defense spending this year. Lithuania and Poland are going even further, spending more than 4% of their GDP on defense.

These aren't symbolic gestures—these are countries on Russia's doorstep taking the threat seriously.

"The new NATO spending target marks a decisive moment in the alliance's trajectory," SIPRI wrote in June. "It signals commitment, unity, and a response to the threat from Russia. But it also poses significant challenges, both fiscal and operational."

Germany's Defense Transformation

Germany's story is particularly fascinating because it represents such a dramatic policy reversal. Europe's biggest economy plans to ramp up its defense budget from €86 billion in 2025 to over €152 billion by 2029—reaching 3.5% of GDP, according to Reuters. That's nearly doubling defense spending in four years.

But there's a constitutional obstacle: Germany's debt brake limits government borrowing to just 0.35% of GDP. Meeting NATO's targets would have been impossible under those constraints. After intensive political negotiations, an exemption for defense-related spending was approved in March.

Under Chancellor Friedrich Merz's leadership, Germany can now borrow up to €378.1 billion for defense between 2025 and 2029. This enables Berlin to sustain its increased commitments without breaking its fiscal rules—technically speaking, anyway.

"This shift in German defense spending is a reminder of Germany's deeply problematic and decades-long underinvestment in its defense," experts at the Atlantic Council's Europe Centre said. For decades, Germany essentially outsourced its security to NATO and the United States. That era is definitively over.

Defense Contractors Hit the Jackpot

European defense companies have been the clear winners in this spending surge. The numbers are almost comical in their scale.

German defense producer Rheinmetall AG (RHM: XETRA) reported 69% revenue growth over the 2.5 years from March 2023 to September 2025. Its share price? It soared from €270 to €1,716 in the same period. That's more than a six-fold increase.

BAE Systems (BAESY), Thales, Leonardo, and Saab have all reported significant increases in revenue and share prices during the same period. When governments suddenly decide they need to spend hundreds of billions on weapons systems, ammunition, and military technology, the companies that make those things tend to do quite well.

The economic effects extend beyond defense contractors. Germany's Kiel Institute for the World Economy has forecast that Europe-wide annual GDP growth will increase by around 0.9-1.5% through 2028 if defense spending rises from 2% to 3.5% of GDP—assuming the spending prioritizes high-tech and local production.

"Military spending is no more harmful in recessions than in economic booms," the institute wrote. "Spending should either be countercyclical or smoothed over the cycle, and the GDP gains may be much smaller if spending is financed with tax increases rather than borrowing."

That's the optimistic case. But Bruegel, a Brussels-based think tank, offered a more cautionary note in April. Production fragmentation and domestic procurement bias reduce efficiency by forcing countries to favor domestically produced defense components. Instead of pooling resources and buying the best equipment at scale, each country wants its own domestic defense industry to get a piece of the pie. That drains overall efficiency.

The Political Tightrope

Russia's growing defense budget and aggressive posture have clearly spurred Europe to action. The economic modeling suggests these efforts could add another 0.9-1.5% to annual EU GDP growth, which sounds positive.

Europe's top defense firms have seen revenues surge—Rheinmetall by 69% and BAE Systems (BAESF) by 28% between Q1 2023 and Q3 2025, driven by rising military spending and growing order backlogs.

But here's the uncomfortable reality: pushing defense spending to 5% of GDP by 2035 means those resources come from somewhere. That could mean less funding for refugee integration, education, climate initiatives, housing programs, and social services. For European leaders already dealing with political fragmentation and populist pressures, these are not easy tradeoffs.

"Long-term investments to revitalize European defense have yielded some progress," Cohen wrote. "But strategic autonomy and a self-reliant European defense sector are unlikely in the short and medium term. Such changes would require sustained political commitments and cooperation among the EU's 27 member states and their partners at levels we have not yet seen."

And that's the real challenge. Europe can write bigger defense checks, but creating an integrated, efficient defense industrial base requires the kind of sustained political cooperation that has historically been difficult to achieve. Each country has its own defense contractors, its own strategic priorities, and its own domestic political considerations.

The spending surge is real. The commitment is there. But whether Europe can translate higher budgets into genuine strategic autonomy remains an open question—one that will play out over the next decade as these massive investments either transform European security or simply prove that you can't buy military effectiveness without addressing deeper structural issues.