ED - This article is part of a series looking at the affordability of increasing European defence spending and funding the war in Ukraine.

See the accompanying articles:

LONG READ: Europe can’t afford the Ukraine war

LONG READ: Europeans face recession, financial crises, as they struggle to boost defence spending

US President Donald Trump has cut off all aid to Ukraine and dumped the problem in Europe’s lap. But Europe can’t afford to pay for the Ukraine war, nor for the modernisation of its own defence sector. Mired in economic stagnation and having underinvested in its defence sector for decades, it will have to literally beg, borrow or steal hundreds of billions of euros to raise the money it needs to replace the US. 

In the latest blow to Europe’s efforts to try and bring the US on board in the latest efforts to muster enough support to keep Ukraine in the game, the Trump administration said it will not participate in the meeting of the coalition of the willing scheduled for September 4 in Paris.

A recent meeting of the EU foreign ministers in Copenhagen on September 1 discussed ways of supporting Ukraine with more money and materiel, but concluded Europe’s efforts would come to little without continued US backing.

In 2023, the US accounted for just over two thirds (68.7%) of all Nato defence expenditure; even under a hypothetical scenario where all members spent 5 % of GDP, its share would remain over half (54 %). But now Nato is all but dead as Trump snaps shut the security umbrella that European Nato members have huddled under since the fall of the Soviet Union in 1991.

Trump is not just pulling back from Ukraine, even his commitment to Nato’s Article 5 collective security clause is now in question; Trump explicitly said that the US would not come to the defence of any country that does not meet its spending of 2% of GDP commitments. In the new deal, Europe will have to pay for any US weapons sent to Ukraine and European Nato members now have to increase their defence spending to 5% of GDP by 2036.

At the same time, Europe will now have to come up with $100bn a year that the war in Ukraine costs and another $900bn that is needed to modernise the EU defence sector, according to Brussels’ ReArm (video) plan presented by European Commission President Ursula von der Leyen on March 4. On top of that the Draghi report concluded that Europe has lost its competitive edge and needs to spend €800bn per year just to keep up with countries like China and America.

A notable example of Europe's failure to innovate is the fact that there are only eight European websites sites that made the most recent world’s top 50 most visited URLs. Four of those are based in Russia (Yandex, Dzen, VK, MailRu), while the other four are all porn sites, one of which  (xHamster) is also Russian.

Not only does Europe not have this money, Europe is slipping into recession and crises. Germany says it can no longer afford to pay for its social services and France and the UK are on the verge of asking for International Monetary Fund (IMF) bailout loans. Almost all of Europe is suffering from anaemic growth, cost-of-living crises, elevated energy costs, and high budget deficits. With external debt of over 100% of GDP in several countries, they can’t even afford to borrow their way out of their deepening holes.

Already forced to make deep cuts into basic services at home and facing the prospect of making even deeper cuts if the EU government has any hope of meeting just the defence spending commitments, the heavy military spending on Ukraine is already causing political shocks.

For the first time simultaneously right wing parties now lead the polls in the UK, Germany and France. Right-leaning parties are already in control in Hungary, Italy, Austria and the Netherlands. At this stage, one of the appealing strategies for Russian President Vladimir Putin must be to do nothing other than keep grinding away in the Donbas and wait for the right wing, largely pro-Russian, parties to take over in the three E3 major economies that is leading the coalition of the willing and pull whatever remains of Europe’s support for Kyiv over the next few years.

Standing in for US troops

A lot of the burden for protecting Europe will fall to Germany and Poland, with Finland providing an important backstop. The US currently maintains about 100,000 troops stationed in Europe and if Russia were to invade the current strategy is built around the assumption European forces have to hold out for as long as they can while they wait for another 200,000 US reinforcements to arrive and rush to the frontlines in the east.

With the US pull back, the EU needs to replace the 300,000 American troops, complete with heavy armour and support, in a tightly commanded well-coordinated force. During the discussions of forming an EU peacekeeper force for Ukraine in April, European powers admitted they would struggle to come up with 30,000 soldiers.

Germany is expected to provide roughly a third of the arms, money and men for a new European defence force, but after massively underinvesting in its defence sector since the 1990s it already needs a decade simply to rebuild its existing military stockpile, which has been depleted by supplies to Ukraine.

“Currently, German military capabilities fall severely short of the capabilities needed and committed to allies. Germany’s 2022 pledge to provide Nato with two divisions – typically around 40,000 troops – by 2025 and 2027 faces major setbacks,” says the Brussels-based think tank Bruegel in a report.

Most of the attention is on the US’ vast store of weapons and tech, but a draw down would cause a much more mundane problem that will be even more expensive: Europe will have to completely rebuild its military logistics: the north-south road and bridge network is inadequate to move the huge number of tanks and trucks about and create a Continent-wide logistics system to coordinate its dozen armies. The US currently controls the European military logistics system.

“Nato works under the assumption that the Supreme Allied Commander Europe is a top US general – but that can only function if the US takes a leadership role and provides strategic enablers,” says Bruegel. Under Trump, that is not going to happen, leaving the EU forces a headless hydra. “Failure to coordinate means much higher costs and individual efforts will likely be insufficient to deter the Russian military.”

On paper Europe has a larger economy, better technological base and more men in its collective armies, if you include reservists. In practise, Russia already has a million veterans under arms now with extensive battle experience, with an economy already on a full war footing and a much improved command and logistics system, tempered in the forge of more than three years of combat in Ukraine. A European defence force is far from ready and the whole system needs to be overhauled, say analysts at the Bruegel think tank.

However, European defence spending is surging and this year is expected to overtake US spending for the first time since WWII to reach a total of €170bn vs US spending of €168bn, according to the Aviation Week Intelligence Network. And whereas only three of the 36 Nato members were meeting the Welsh 2% of GDP spending requirement when it was imposed in 2016, today 31 members spend that much, according to Nato data. 

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Guns or butter?

Europe is faced with two sets of giant defence costs: supply Ukraine and keep its government function; and reequip its own ramshackle armies.

Currently, none of Nato’s 32 members spends more on defence than either healthcare or education. However, if the new 5% defence spending target is adopted, then 21 countries that currently invest less than 5% in education would end up allocating more to the military than to schooling. Only Poland and the Baltic states are near the Nato spending requirement, while the combatants of Ukraine and Russia obviously vastly exceed the threshold—Ukraine by necessity, Russia militarily and economically.

During her speech on rearming, von der Leyen admitted that currently Russia produces arms in three months that it takes Europe and Ukraine an entire year to make. To match Russia’s investment and production, efforts across Europe would need to surge. And that still has not happened.

The only country coming close is Poland that and saw the government dedicate 70% of the additional funds to equipment purchases this year. The German effort is largely centred on its largest weapons-maker Rheinmetall, which has been investing heavily on its own. By contrast, Putin has militarised the whole economy and converted hundreds of manufacturing plants to military production that are working 24/7 and invested heavily into things like tank, drone and missile production. The shortfall has prompted some to ask if Ukraine can go it alone.

The Bundeswehr, which will have to do a lot of the heavy lifting, is in a shambles. Von der Leyen herself is partly to blame as while German Defence Minister between 2013 and 2019, she failed to reform the military. Europe basically stopped spending on defence in 1991. Germany had some 2,500 tanks in 1991. Today it has less than 400, and half of those don’t work, according to a report by the Kiel Institute for the World Economy released last year.

As bne IntelliNews has been reporting for several years, European governments failed to sign the defence sector procurement contracts needed for the privately owned companies to make the investments needed to lift production, despite a large scale war breaking out in its backyard.

Last year the Draghi report roasted European leaders for dropping the ball on investment promoting innovation that has allowed the EU to fall far behind the likes of China and the US. He highlighted the lack of investment into the defence sector as a particular problem.

Draghi called out Brussels again in August saying the events of 2025 have exposed a harsh truth: the European Union can no longer believe its big economy brings it global power and influence. “This year will be remembered as the year in which this illusion evaporated,” Draghi said, who is also a former president of the European Central Bank.

To hit the 5% threshold, European Union countries, whose debt pile already tops 80% of output, would between them have to nearly triple the €325bn euros ($377bn) they spent on defence last year to more than €900bn as part of von der Leyen’s ReArm plan, says Bruegel.

European defence spending is currently about 2% of GDP on average and highly fragmented. Bruegel suggests an increase by about €250bn annually to around 3.5% of GDP is warranted in the short term but given the sorry states of all the leading coalition of the willing countries that increase is “highly unlikely.”

And all the talk of setting up a centralised pan-EU procurement system to cut costs and standardise systems is still just that – talk. No action has been taken to replicate the US logistics and command structures, which will probably lead to an operational chaos should Russia cross the Polish border into the EU.

Debt & deficits

Europe has been hit by a perfect storm of rising costs, sinking growth, growing debt, and high food and energy inflation of the polycrisis after the entire burden of supporting Ukraine dropped in its lap.

The European powers have three options to come up with the money they need to fund both their own expanded defence budgets and Ukraine: cut domestic spending, borrow more, or confiscate the $200bn of Russian money that is frozen in Euroclear. They are considering all three but are making little progress.

Even finding an extra €250bn per annum is going to be hard. Poland is estimated to have spent more than 4% of GDP on defence last year, and Greece 3%, Germany and France spent around 2% of GDP, and Portugal, Italy, Belgium and Spain somewhat less than that. With heavy debts and large deficits, few EU countries will be able to bring defence spending up to 3.5% of GDP in the short-term.

Defence spending gap to 3.5% GDP
Country or Group	Spending Gap to Reach 3.5% GDP Target (USD bn/year)
UK	41.2
Germany	63.6
France	44.9
Italy	46.5
Spain	36.8
NATO ex U.S.	373.8
source: Reuters

 

François Heisbourg, senior adviser for Europe at the International Institute for Strategic Studies said: "Everyone knows that France, Belgium, the UK, Spain and Italy are absolutely not in a position to keep this type of commitment." Spain has already bailed out of the Nato summit commitment and won itself an exemption. Most of the other big countries clearly intend to ignore the non-binding commitment made in the Hague in the same way as they ignored the previous 2% commitment made in Wales.

According to Capital Economics and other expert estimates Germany, France, Italy, and the UK would need additional borrowing beyond current fiscal commitments to reach 5% of GDP defence spending, typically an extra 2–3 percentage points of GDP each year.

Selected European defence and economic indicators (2025)

Country	Standing Army + Reservists	GDP Growth (%)	Budget Deficit (% GDP)	Defence Spending (% GDP)	Defence Share of Budget (%)	External Debt (€ bn)	External Debt (% GDP)	Debt Interest Payments (% of Budget)
Germany	185,000 + 34,000	0.4	2.7	2.4	14	$7.1trn	69	1
France	204,000 + 38,000	0.6	5.4 – 5.6	2	3.6	€8.1trn	114	2.5
UK	138,000 + 70,000	1	4.8	2.3	5.3	$20.6trn	130	8.3
Italy	171,000 + 14,500	0.7	3.3	2	3.2	$2.9trn	136.7	6.8
Finland	24,000 + 870,000	1	3.7	2.5	5	$687bn	82.1	2
Poland	216,000 + 37,000	3.4	6.9	4.5	8.5	$467bn	53.5	4.8

Source: national statistics, bne IntelliNews estimates

If financed through borrowing, Capital Economics says this raises future debt ratios by:

·        Germany: ≈1–1.8 pp → from ~70% today to mid‑70s, possibly approaching 80% by mid‑2030s, according to Bruegel.

·        France: ≈ 1–1.8 pp → from ~113% in 2024 to ≈ 116–118% by 2026, and higher thereafter with extra defence financing.

·        UK: ≈ 2–2.3 pp → from ~130% today to ~132–133% within coming years, assuming current plans continue.

·        Italy: ≈ 3 pp+ → from ~136% today to ~139–140% or more, depending on borrowing path.

 

Selected European countries - Additional debt to get to 5% GDP defence spending
Country	Defence % GDP (2025 baseline)	Additional spending to reach 5 %	Debt‑to‑GDP increase (bps)	Likely future debt/GDP
Germany	~2.4 % → ~5 %	+ 2.6 pp (~€70 – 80 bn p.a.)	~1–1.8 pp	From ~70 % → ~71–72 % (or up to ~84 %)
UK	~2.3 % → ~5 %	+ 2.7 pp (~£50–60 bn p.a.)	~2.3 pp	From ~130 % → ~132–133 %
France	~2.0 % → ~5 %	+ 3.0 pp (~€60–70 bn p.a.)	~1–1.8 pp	From ~112–115 % → ~114–117 %
Italy	~1.6 % → ~5 %	+ 3.4 pp (~€60 bn+ p.a.)	~3.0–3.5 pp	From ~136 % → ~139–140 %
Source: National statistics, Bruegel, Capital Economics

 

With moderate low debt and a recent constitutional debt reform that allows for more borrowing, Berlin has enough credit power to get to 3.5% of GDP on core defence by 2029, but reaching full 5% would still demand substantial extra borrowing, says Capital Economics.

With a huge public debt and a large deficit, Italy is under the most strain, with debt‑to‑GDP rising by 3–3.5 percentage points, likely pushing it past 140% to reach the defence spending target.

The UK would see a smaller relative debt rise (2.3 pp), though on top of already high debt levels (130 %). France faces modest debt increases but nonetheless would require large annual budget allocations for defence at a time when it is desperately trying to reduce state spending by €44bn and bring down a crippling budget deficit from 5.4% of GDP and the government is on the verge of collapse again.

"They will not get there," Guntram Wolff, senior fellow of the Bruegel think-tank, said of the 5% goal. "If you are a highly indebted country, you can't issue more debt, it means very difficult budgetary choices," he said of the hefty tax hikes or spending cuts that it would require.

Increased borrowing and interest payments come at a time when the servicing debt is already eating up budget money. The International Monetary Fund (IMF) data suggests major Western European states typically face interest‑payments equal to 1 – 3 % of GDP, which translates to approximately 5–15 % of total government expenditure, depending on debt levels. In the UK the government is already spending over 8% of the budget on servicing debt.

“Britain's public finances are starting to resemble a Ponzi scheme,” Daily Telegraph columnist and bne IntelliNews contributor, Liam Halligan, said in a recent social media post. “This week's official fiscal report for June reveals that no less than four-fifths of the money the UK government is borrowing is now being spent on interest payments on existing debt.”

 

EU relaxes the rules

The Maastricht treaty fixed a member state maximum debt at 60% of GDP. All the western original EU members have long since blown through that limit and have been living on their credit cards ever since, with the notable exceptions of Germany and Poland.

“Reaching 5% defence spending will inevitably require deep cuts to welfare, healthcare, education, social services, and business investment,” Italy's former Prime Minister and anti-establishment leader Giuseppe Conte said recently.

In the short-term, Brussels is stepping up to the plate with a new debt facility to help members raise some of the money they need for defence spending. The European Commission has relaxed the debt cap rules again and invoked “fiscal flexibility” (escape clause) to accommodate higher borrowing.

By activating the Stability and Growth Pact’s “national escape clause”, Member States could collectively create up to €650bn in fiscal space over four years by allowing 1.5 percentage points of GDP to be diverted to defence spending—without breaching EU deficit rules.

The proposal includes creating a €150bn SAFE fund from which countries can borrow specifically for defence purposes and relaxed the debt level rules to permit up to +1.5 pp of GDP in additional defence spending across EU members without triggering excessive-deficit limits.

The EU has tripled its defence loan plan to €3bn via its investment arm, the European Investment Bank (EIB). Moving defence spending from the national balance sheet to “loans” from the EIB is a dodge to fudge the accounts and keep country rations down. Technically the EIB’s development bank charter forbids it from investing into armaments, but again this is being fudged by channelling the credits into “R&D” etc.

Nineteen EU countries have applied to the €150bn SAFE (Security Action for Europe) defence loans fund, many of which will be used to support the Ukrainian defence industry. Von der Leyen said last week: "SAFE provides the capabilities that Europe needs most. These are joint procurements, including air and missile defence, cyber defence, and of course, drones. I am very pleased that 19 Member States, including Latvia, have already applied for support through SAFE. I am happy to announce that we have fully committed the entire amount – €150bn. Many countries have also indicated they will use this instrument to support the Ukrainian defence industry."

But the SAFE €150bn facility is a one-time loan. Bruegel estimates to just get to the 3.5% of GDP defence spending target, member states will have to spend €250bn per year. Even with “fiscal flexibility” member states may be able to borrow another €650bn over the next five years, but at the cost of massively increasing their debt-to-GDP ratios at a time when interest payments are already eating heavily into government expenditure.

At this year’s Ukraine Recovery Conference (URC2025) von der Leyen also floated a new Ukraine Investment Fund, which the EU seeded with $250mn that she said will “unlock” $10bn in investment from the private sector. However, fund managers bne IntelliNews has talked to said it will be “years” before they will make serious commitments to Ukraine.

“It’s a great story, for sure,” one well known manager told bne IntelliNews, “but we will need to wait several years because the risk of a second Russian invasion will hang over the investment case for a long time. We need to be sure the wars are over before we can commit.”

Just the annual spending estimates per year needed to bring military spending up to 5% of GDP from the four selected countries table above comes to €248–280bn per year for the next decade.

There appears to be no way that member states will be able to get close to the 5% GDP Nato spending commitment without making deep cuts to domestic spending and borrowing heavily. And that is before considering the $100bn a year Ukraine needs to run its country and war. Currently, the Ukrainian budget is running at a $48bn a year budget deficit that is exclusively funded by foreign borrowing and is short between $8bn and $16bn in commitments to get to the end of 2026.

All this is just for defence spending. In order for Europe to regain its competitiveness in the face of mounting competition from the likes of China and the US, Draghi recommended that the EU invest €800bn per year for the foreseeable future. Already struggling to meet just the increased defence spending, clearly this broader spending is not going to happen. That threatens Europe with the same fate as Argentina, which slipped from being one of the world’s top-ten richest economies at the start of the 20^th century to a backward basket-case by the end of the same century.

 

Country, Defence, Healthcare, and Education spending as percentages of GDP:
Country	Defence	Healthcare	Education
Poland	4.1%	7%	4.7%
Estonia	3.4%	7%	5.3%
United States	3.4%	16.5%	5.4%
Latvia	3.2%	7.6%	4.6%
Greece	3.1%	8.5%	4.1%
Lithuania	2.9%	7.3%	4.3%
Finland	2.4%	9.7%	6.5%
Denmark	2.4%	9.4%	5.3%
United Kingdom	2.3%	10.9%	5%
Romania	2.3%	5.8%	3.3%
North Macedonia	2.2%	7.6%	3.3%
Norway	2.2%	8%	4%
Bulgaria	2.2%	7.7%	4.7%
Sweden	2.1%	10.9%	7.6%
Germany	2.1%	11.8%	4.5%
Hungary	2.1%	6.4%	4.7%
Czech Republic	2.1%	8.5%	4.8%
Turkiye	2.1%	3.7%	2.6%
France	2.1%	11.9%	5.4%
Netherlands	2.1%	10.1%	5.1%
Albania	2%	6.2%	2.7%
Montenegro	2%	10.9%	4.4%
Slovakia	2%	7.7%	4.8%
Croatia	1.8%	7.2%	4.1%
Portugal	1.6%	10%	4.8%
Italy	1.5%	8.5%	4.2%
Canada	1.4%	11.2%	4.1%
Belgium	1.3%	10.8%	6.4%
Luxembourg	1.3%	5.8%	4.7%
Slovenia	1.3%	9.4%	5.4%
Spain	1.3%	9.7%	4.3%
Iceland	0%	9%	7.1%
Source: NATO, World Bank — Al Jazeera English (AJE)

 

Current defence spending as % of GDP (2024/2025)
Country/Group	Defence spend %GDP
Poland	~4.15 %–4.7 % (Poland is NATO leader) sipri.org+3reuters.com+3nypost.com+3
Baltic states	Estonia ~3.37 %, Latvia ~3.26 %, Lithuania ~3.12 % (2024)
Nordics (Denmark; Finland; Sweden)	Denmark 2.42 %, Finland 2.30 %, Sweden ~1.43 % rising; Denmark aiming 3 % by 2025, Estonia and Latvia to reach ~4–5 % by 2026
Germany	~1.9 % in 2024, rising to 2.4 % in 2025; pledged to reach 3.5 % by 2029
France	2.05 % in 2024 (€64.7 bn)
UK	2.28 % in 2024 (£81.8 bn)
Italy	~1.61 % in 2024
Belgium	~1.28 % in 2024; aiming 2 % by mid 2025 with €4 bn increase
Spain	~1.51 % in 2024; lowest among NATO; committed to reach 2 % by 2029
Ukraine	~34.5 % of GDP in 2024 (≈ US $64.7 bn)
Russia	~7.05 % of GDP in 2024 (≈ US $149 bn)
Source:  Al Jazeera English (AJE)