Post-Ukraine Invasion, EU's Defense Budgets Soar Despite Fiscal Strain

The Russian invasion of Ukraine more than three years ago has reshaped Europe's security landscape.. 

Defense expenditures, once languishing at historic lows, have ballooned. NATO's European allies collectively surpassed the 2% GDP threshold for the first time in 2025. Projected to exceed €800 billion by 2029, this increase represents a strategic pivot toward deterrence after Moscow's invasion of Ukraine in February 2022. 

After budgets reached €326 billion across the 27 members of the European Union (EU) in 2024, up from €218 billion in 2021, analysts have raised concerns about the EU budget’s financial sustainability.

The Goldman Sachs Global Institute warned that Europe faces significant fiscal challenges. The gross public debt of France, the EU’s strongest military according to the Global Firepower Index, will increase to 120% of GDP in 2027 from 116.3% this year, raising concerns 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 (NEF), 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.” 

Surge in European Militarization Post-Ukraine Invasion

Rising defense budgets signal Europe's shifting military posture, with Russia's aggression pushing global military spending to $2.7 trillion in 2024, and Europe's share, including Russia, to $693 billion, according to the Stockholm International Peace Research Institute (SIPRI). 

The EU's ReArm Europe initiative, alongside its 2022 Strategic Compass for Security and Defense, aims to accelerate military modernization and technological autonomy, with a planned €800 billion by 2029.

The initiatives aim to accelerate defense technology innovation and reduce reliance on the US and China by boosting Europe’s self-sufficiency and industrial independence.

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.

NATO Agrees to Higher Defense Spending

NATO has also stepped up its spending commitments. At the 2025 Hague Summit, NATO leaders agreed to a new goal of increasing defense spending to 5% of GDP by 2035. Core military needs will receive 3.5% of the expenditure, and 1.5% will go to broader security-related spending. 

The leading 6 NATO countries by military expenditure in 2024, Source: Our World in Data, SIPRI, 2024.

NATO’s latest estimates indicate that 2025 will be the first year in which all allies, except Iceland, will meet the previous defense spending target of 2% of GDP, according to the International Centre for Defense and Security (ICDS).

Furthermore, NATO expects that Denmark, Estonia, Latvia, Norway, and the United States will exceed the 3% of GDP defense spending threshold. Lithuania and Poland will spend more than 4% of their GDP on defense this year.

Source: World Bank World Development Indicators, Goldman Sachs Global Institute, June 2025

"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 Increases Defense Spending Ambitions

Germany, Europe's biggest economy, will ramp up its defense budget from €86 billion in 2025 to over €152 billion by 2029 – an increase to 3.5% of GDP, Reuters reported. It is, however, uncertain how Germany will meet the NATO defense spending target of 2% of GDP without continued contributions from its special defense fund. 

The country’s constitutional debt brake limits government borrowing to 0.35% of GDP. In March, an exemption for defense-related spending was approved following intensive political negotiations. 

Source: NATO, Goldman Sachs Global Institute, June 2025.

Under Chancellor Friedrich Merz's leadership, Germany can now borrow up to €378.1 billion for defense between 2025 and 2029. This will enable Berlin to sustain its increased defense commitments. 

"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. 

Defense Industry Benefits from NATO Spending 

European defense companies have benefited significantly from Europe's efforts to bolster its arms. 

German defense producer and contractor Rheinmetall AG (RHM: XETRA) reported 69% revenue growth over the 2.5 years from March 2023 to September 2025. Its share price soared to €1,716 from €270 since March 2023. 

Source: Yahoo Finance, Rheinmetall (RHM:DE) Share Price, 19 November 2025.

Similarly, BAE Systems (OTCPK: BAESY) (OTCPK: BAESF) (BA: LSE), Thales (TCFP: PA), Leonardo (LDO: BIT), and Saab [SAAB-B: STO] have reported significant increases in revenue and share prices in the same period.

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, by prioritizing 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."

Bruegel, a Brussels-based think tank, cautioned in April that production fragmentation and domestic procurement bias reduce efficiency by forcing countries to favor domestically produced defense components, thus draining overall efficiency. 

EU's Defense Expansion Needs Political Cooperation

Russia's growing defense budget and aggressive posture have spurred Europe to increase military spending. These efforts could add another 0.9-1.5% to annual EU GDP growth.

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

Pushing defense spending to 5% of GDP by 2035 may divert resources from key areas such as refugee integration and education, adding to the political and social challenges facing European leaders.

"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."

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