The issue of the appropriate level of defence spending for each NATO Ally is as old as NATO itself. It touches upon two core debates for the Allies. First, as NATO’s mission is to ensure the security of the Euro-Atlantic area, defence spending supports the ability of Allies to preserve peace and to deter all threats, at all times.

Defence spending, therefore, needs to be well aligned with the security environment – but how much is enough? Second, defence spending is greatly connected to the debate on burden sharing. European Allies and Canada are, often rightfully, criticised by the United States for not carrying their fair share of the collective-defence burden. In this context, how much is enough for each Ally?

The profound degradation of the security environment since the illegal annexation of Crimea by the Russian Federation in 2014 has renewed the burden-sharing debate amongst Allies. The issue has become even more acute since Russia’s full-scale invasion of Ukraine in February 2022, which demonstrated that the risk of a major conflict involving a nuclear armed potential adversary was not as remote as many had hoped.

The 2014 “Defence Investment Pledge” (DIP) – made by Allies at the 2014 Wales Summit, the first NATO summit held after the illegal annexation of Crimea – established an important baseline by setting the goal of at least 2% of GDP spent on defence by all Allies as a political commitment agreed at the level of Heads of State and Government. As a result of the DIP, European Allies and Canada have invested an extra USD 350 billion since 2014, with eight consecutive years of increased defence spending.

Graph showing defence expenditure as a share of GDP (%) (based on 2015 prices and exchange rates). © NATO

It is important, however, to look not only at figures (e.g. the number of NATO member states at 2% or the amount of money added) but also at the priorities and defence capabilities delivered as Allies gradually increase defence spending (which is not an end in itself, particularly in times of competing budget priorities). In the run-up to the 2023 Vilnius Summit and the 75th anniversary of the Alliance, which will be celebrated in Washington, D. C. in 2024, it is also worthwhile to revisit the relevance of the current 2% target and to try to define the terms of a sustainable and long-term effort.

Looking back: defence spending during the Cold War and post-Cold War era

During the Cold War, defence spending for NATO Allies (even putting the United States aside) routinely averaged more than 3% of GDP, with some significant variation over time, but rarely falling below 2%. In the post-Cold War era, there was a first significant drop in the early 1990s and a further 20% decrease roughly 20 years later (including a reduction of the NATO command structure) following the global financial crisis of 2008. This led to a significant decrease in both the volumes and the readiness of the armed forces of most Allies. Moreover, new NATO Allies tended to decrease defence spending as they joined the Alliance, strengthening the perception that some Allies were free riding at the expense of others.

In the last decades, these declines of defence spending by NATO Allies were in sharp contrast with the trends elsewhere in the world. According to the – rather conservative – figures of the Stockholm Peace Research Institute (SIPRI) database, since 2000, Russian defence spending grew by 227% while China’s expanded by 566%. Defence spending remained quite flat over the same period (up by only 22% including the latest increases) in NATO Europe and Canada, with a low point in 2014. These average figures obviously do not capture the diversity of situations from one Ally to another, but the overall trend is revealing, and it has only been – rather slowly – reversed since 2015.

Graph showing NATO Europe and Canada – defence expenditure (billion US dollars, based on 2015 prices and exchange rates).
The situation today: the implementation of the 2014 Defence Investment Pledge has transformed the Alliance defence landscape

In the aftermath of Russia’s illegal annexation of Crimea, NATO Allies endorsed the Defence Investment Pledge (paragraph 14 of the 2014 Wales Summit Communiqué), which remains to this day the political bedrock of their commitment to increase defence spending. It was carefully worded with the aim of producing results within a decade (by 2024), making the pledge demanding but realistic. It not only set the target of 2% of GDP for defence spending writ large, but also laid down an additional objective for Allies of “spending more than 20% of their defence budgets on major equipment, including related Research & Development” – which is equally important, as it encourages Allies to invest in new defence capabilities. Even with this additional nuance, it quickly became clear that the 2% number was the financial and political benchmark against which Allies’ efforts would be primarily assessed, including in the context of renewed transatlantic squabbles over burden sharing during the Trump presidency.

As demonstrated in the 2022 NATO Secretary General’s Annual Report, the effort to reach these targets has been substantial. Since 2015, according to the official NATO figures, the number of countries meeting the 2% target went from 3 to 7 and those above the 20% investment target rose from 7 to 26, out of 30 Allies (Finland became the 31st NATO member country in 2023, and is therefore not included in these numbers). Most Allies now have firm plans to meet the guidelines in the coming years, and altogether this represents an additional USD 350 billion that have been spent by non-US Allies (compared to foreseen spending should the budgets have remained flat since 2015).

Although the overwhelming majority of Allies have increased defence spending as a share of GDP, there is still some significant diversity amongst them. Allies generally fall into one of three groups, each representing roughly a third of the Alliance: those already meeting the 2% target or almost there; those moving fast towards that objective and expected to meet it in the near future; and those with plans to meet the 2% target but still lagging behind (currently below 1.5%) and unlikely to meet the objective soon.

Looking forward: there is still work to do to rebuild forces and regain capabilities

Although eight consecutive years of increases in defence spending do make a difference, the extra money has not yet enabled all Allies to address the consequences of the previous cuts and years of declining defence budgets. It requires years of sustained effort to rebuild forces that in many instances had become quite hollow. From this perspective, the substantial increases underway today allow Allies to pursue three related and equally important objectives.

First, the least visible but nonetheless critical effort is to reconstitute forces at the right level of readiness and military effectiveness. In short, this is about training and exercising, procuring ammunition and spare parts to ensure that the forces of NATO Allies are combat-ready – at short notice, under any circumstances and in sufficient numbers. The war in Ukraine has publicly shown that many Allies were struggling to find available ammunition stockpiles to donate to Ukraine, or to reequip their own forces, and could only deploy limited combat-ready forces at short notice. This line of effort is of critical importance to meet the demanding scenarios associated with the defence of the Euro-Atlantic area and will require a sustained effort over time to ensure that Allies meet the appropriate standards.

Second, Allies are addressing capability shortfalls in domains that had been neglected during more than 20 years of focus on crisis management and counter-insurgency engagements (e.g. in the wider Middle East and Africa), which had focused on a different set of priorities and tools. The NATO Defence Planning Process has enabled Allies to identify these key capability shortfalls, and thus to begin rebuilding high-end capabilities in the land, maritime or air domains through the acquisition of modern platforms and enablers. Allies are also focused on rebuilding industrial capacity across the Alliance. Targets and priorities may vary from one Ally to another depending on size and location, but the priority for NATO across the board is regaining the military and industrial capacity to address the challenges of high-intensity warfare scenarios after years of shrinking inventories. Specific focus areas include land warfare (armour, artillery and enablers), integrated air and missile defence, and underwater operations.

Third, increased defence spending allows Allies to better prepare for the future. NATO’s technological edge has always been a key advantage for the Alliance. Investing in defence fosters research, develops the next generation of equipment and enablers, and ensures that NATO stays competitive in new domains of operations such as space or cyberspace. This focus on innovation is the key to NATO’s future success in an environment where the West’s technological edge can no longer be taken for granted. This will require a much closer cooperation with diverse actors in the private sector, academia, and regulatory authorities, including the European Union.

Each of these priorities on its own justifies a renewed effort on defence spending. The three combined make it clear just how crucial a sustained effort is, particularly in the degraded security environment that we live in today.

How much is enough? The renewed terms of the defence-spending debate

As NATO approaches the Vilnius Summit in July 2023 and its 75th anniversary in 2024, the terms of the debate are rapidly evolving. More and more Allies announce plans to go well above the 2% target and to make major investments in new equipment and capabilities. Some suggest reviewing the targets upwards, while others remain concerned with the consequences of a constrained fiscal environment and their ability to make good use of budgets that are expanding too fast. In this context, it is important to recognise that 2% should be a floor rather than a ceiling. And it is equally important to make the case for a sustained effort over the next decade and beyond, or at least until the security environment becomes more reassuring.

Unfortunately, the security environment in Europe and beyond will remain unstable for the foreseeable future. The longer the war in Ukraine continues, the more it turns into a protracted conflict requiring long-term support to Ukraine and solid deterrence and defence measures to prevent the extension of the conflict to NATO territory. Notwithstanding the hopefully favourable outcome of this war, Russia is likely to remain hostile and/or unstable, with its core military capabilities mostly undiminished outside of the land domain. On Europe’s southern flank, an arc of instability extends from West Africa to Afghanistan, with multiple semi-failed states and possible further destabilisation, fostered inter alia by Russian actions. Strategic competition with China, including through increased Chinese presence in the Euro-Atlantic area, generates further risks of potentially major consequences.

Fortunately, despite the instability in the global security environment, increasing defence spending is largely within the fiscal capabilities of NATO Allies, which are some of the most economically developed nations on the planet. NATO Allies do not intend to enter a new form of arms race and spending 2% remains significantly below the Cold War average. And in the current security environment, public opinion supports defence spending, in particular in Northern and Eastern Europe, and this support has been growing. According to NATO public opinion research, most Allied citizens (74% in 2022 versus 70% in 2021) think that defence spending should either be maintained at current levels or increased (there are some significant differences amongst Allies, from 85% to 52% support, but always with a majority supporting). Just 12% think that less should be spent on defence. Nevertheless, given the political sensitivities of defence spending amongst many domestic audiences, a robust and sustained effort requires a strong democratic consensus, and therefore a strong argument. To make this effort acceptable, it is important to relentlessly explain the security rationale behind this effort, but also to point at its fiscal sustainability and its economic benefits for domestic industry and technology, and thus to local economies and communities.

A sustained effort is key: some policy recommendations

As the Alliance approaches 2024, the tenth anniversary of the Defence Investment Pledge, all eyes will be focused on this initial deadline for reaching the 2% target. The 2023 Vilnius Summit and the 2024 Washington Summit will therefore be opportunities for NATO Leaders to review achievements and agree future commitments. These could include:

  • A renewed pledge to achieve the 2% and 20% targets without delays or caveats, these figures being identified as floors rather than aspirational ceilings, as many Allies are now well above these benchmarks.
  • A pledge to sustain this level of effort as long as necessary, which is critical to rebuild our militaries.
  • A focus on addressing the capability shortfalls identified in the NATO Defence Planning Process, including through common funding where needed or more efficient.
  • A reflection on how to better connect NATO guidelines with EU activities, which are becoming more significant, including through investment in capabilities and technology to ensure that both lines of effort are mutually supportive.

The defence investment and budget conversation cannot and should not be disconnected from the wider strategic debate amongst Allies as they address the future of the transatlantic relationship, 75 years after the birth of NATO. This requires Allies to fully acknowledge how much the security environment has changed, and how much the Alliance itself has changed to meet the challenge – not just over 75 years, but particularly in the last ten. Only through this acknowledgement will Allies be able to draw honest and clear lessons for a new era of NATO’s history.

Source – NATO