Can European governments meet Trump’s defense spending demands?

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In this last post before Donald Trump re-assumes the U.S. Presidency, touching on European defense seems appropriate, given his recent call on NATO members to increase their defense spending to a whopping 5% of GDP.

The topic du jour here is generally emerging markets, but some EU members are considered emerging markets.

Besides, fiscal dominance throughout much of the block is also making the Eurozone periphery increasingly resemble EM, i.e. sovereign yields are artificially low in Italy, Greece, and elsewhere.

5% is destined to fail…

Poland supports Trump’s proposal, though its defense minister Władysław Kosiniak-Kamysz notes that it “will take another decade” to reach the 5% threshold across the continent. Warsaw has been increasing its defense expenditures, reaching 4.12% / GDP in 2024, and is aiming to reach 4.7% in 2025.

The U.S. spends 3.4% of its GDP on defense and in 2023 spent $916 billion, representing two-thirds of all NATO expenditures.

Yet several European defense ministers have noted that the 5% target is unrealistic, with Germany’s Boris Pistorius noting that would represent 40% of his country’s national budget.

Yet across the European Union, this math makes little sense.

The EU’s 27 member states have overall general government expenditures that averaged out to 49.6% / GDP in 2022, with only 1.3% / GDP allocated to defense.

A 5% / GDP allocation “only” amounts to 10% of average EU member government spending, as opposed to the 40% figure that Pistorius cites.

Still, increasing defense spending could be politically fraught for cash-strapped European governments, which are combatting low growth, stagnating tax revenues, and opposition to social safety net spending cuts.

For EU country spending, social protection was, by far, the largest category, at 19.5% / GDP. The other items above or near 5% of GDP were health, general public services, economic affairs, and education.

…but 2% no longer seen as enough.

Although NATO’s 32 members have already committed to reaching defense spending of 2% / GDP, only 24 have done so.

While above the 2% level, budgetary strains and government instability will make any increase in defense spending in France difficult to achieve.

For its part, the UK has a 2.5% target, though the timeline is unclear.

Germany is about to hold a snap federal election: the opposition Christian Democrats are poised to win but haven’t pledged to reach any numerical targets in response to Trump’s latest salvo.

Sweden met the threshold in 2024 with 2.1% / GDP defense expenditures, with its foreign minister Maria Malmer Stenergard recognizing the “need to invest more in our defense.”

In a similar vein, NATO Secretary-General Mark Rutte has stated that governments should “shift to a wartime mindset.”