NATO’s new defense spending target will more than double European military budgets by 2035, with significant economic implications, clients heard at a recent Nordea event on Arctic security policy. The commitment, announced at the 2025 NATO summit, requires member countries to spend 5% of GDP annually on defense and security-related expenses by 2035—more than doubling the previous 2% target.

Europe’s Largest Peacetime Defense Spending

Europe is preparing for its largest peacetime defense spending in decades, and the economic implications will be significant, according to experts speaking at a Nordea event for institutional clients on Arctic security policy and the economic outlook. In 2025, EU defense spending reached just over EUR 380bn (2.1% of GDP), meaning the new target requires a substantial escalation that will fundamentally reshape European economies.

The 5% target is split into two parts: 3.5% for core defense obligations and 1.5% for broader security measures, including cyber defense, counterterrorism, and Arctic security. This shift reflects growing concerns over Russia’s military activities in the Arctic and the need for a more integrated European defense strategy.

The ReArmEurope Strategy

The EU’s ReArmEurope plan, launched in March 2025, provides the economic framework for this buildup. The strategy aims to reduce Europe’s reliance on foreign military suppliers, particularly the United States, and to boost domestic defense manufacturing and innovation. According to Nordea analysts, this will require significant investment in infrastructure, research and development, and workforce training.

ReArmEurope also emphasizes the need for increased collaboration among EU member states, with a focus on joint defense projects and shared military capabilities. This includes the development of a European defense industrial base, which is expected to create thousands of jobs and stimulate economic growth in key sectors such as aerospace, electronics, and advanced materials.

Economic Implications for Member States

The increase in defense spending will have far-reaching economic implications for member states. According to a report by Nordea, the 5% target will require an additional EUR 250bn annually in defense spending by 2035. This will necessitate significant fiscal adjustments, including potential increases in taxation or reallocations of existing budgets.

Some countries, particularly those with lower GDPs, may struggle to meet the target without external financial support. The EU has proposed a new defense fund to assist smaller member states, but details on funding mechanisms and contribution levels remain under discussion. The economic burden of meeting the 5% target could also lead to increased public debt in some countries, particularly those with already high deficits.

Despite these challenges, many European leaders see the increase in defense spending as a necessary step to ensure regional security and geopolitical stability. According to a recent statement by the European Commission, the ReArmEurope strategy is not only about military preparedness but also about strengthening the European economy through technological innovation and industrial competitiveness.

Analysts warn, however, that the transition to a more militarized economy could have unintended consequences. For example, increased defense spending may divert resources from other critical areas such as education, healthcare, and infrastructure. This could create long-term challenges for economic growth and social welfare in some countries.

The implications of this spending increase extend beyond Europe. As the EU strengthens its defense capabilities, it may reduce its reliance on U.S. military support, potentially altering the balance of power in transatlantic relations. This could lead to a more multipolar global security landscape, with Europe playing a more prominent role in defense and security matters.

Looking ahead, the EU and NATO will need to closely monitor the economic impact of this spending increase and adjust policies accordingly. The next major NATO summit, scheduled for 2027, will provide an opportunity to review progress and address any emerging challenges.