All 32 member states of the North Atlantic Treaty Organization are expected to meet the alliance’s long-standing benchmark of spending at least 2 percent of their gross domestic product on defense in 2026, a historic milestone for an alliance that saw only 10 of its members meet the target as recently as 2023. The development, confirmed by NATO’s annual defense expenditure report and by projections from multiple national finance ministries, reflects a fundamental shift in European security attitudes driven primarily by Russia’s full-scale invasion of Ukraine in February 2022 and the subsequent recognition that NATO’s conventional deterrent requires investment levels significantly above those that characterized the post-Cold War “peace dividend” era of the 1990s and 2000s. NATO’s combined allied defense spending now exceeds $1.5 trillion for the first time in the alliance’s history, with European NATO members collectively spending $559 billion in 2025 and projections for 2026 showing continued growth driven by the German and French defense budget expansions alongside spending increases in virtually every central and eastern European member state.

The achievement of universal 2 percent compliance came alongside the formal setting of a higher ambition at the NATO Hague Summit in June 2026, where alliance members agreed to a new target of 3.5 percent of GDP for defense and security spending by 2035, with a breakdown of 2 percent for direct military spending and a further 1.5 percent for spending on related security measures including civil resilience, cybersecurity, and military infrastructure. The new target reflects both the sustained threat assessment that has driven spending increases since 2022 and the US political pressure – consistently applied by both the Biden and Trump administrations – for European allies to take more of the financial burden of NATO from American taxpayers. Germany, under Chancellor Friedrich Merz, has been the most visible example of the European defense spending transformation: Berlin’s defense budget allocation for 2026 reaches approximately €117.2 billion, a figure that would have been unimaginable as recently as 2021 when Germany was spending approximately 1.5 percent of GDP on defense and was the subject of persistent US criticism for its unwillingness to meet the 2 percent guideline.

European Defense Industrial Expansion

The surge in NATO defense spending has created intense demand for European defense industrial production that the continent’s defense manufacturers have struggled to meet. European defense companies including BAE Systems, Rheinmetall, Leonardo, Airbus Defence and Space, MBDA, and Thales have each reported record order books and capacity expansion programs, but the lead times for complex defense systems – typically three to five years from contract to delivery for major platforms – mean that the current spending surge will not fully translate into deployed capability for several years. Rheinmetall, the German armored vehicle and ammunition manufacturer that has become a symbol of Germany’s defense reindustrialization, is building new production facilities in multiple countries and has expanded its workforce by tens of thousands since 2022. The ammunition production constraints that affected NATO’s ability to supply Ukraine in 2023 and 2024 have been partially addressed through emergency capacity expansion, but producing the quantities of artillery shells, missiles, and other consumable munitions that modern high-intensity warfare consumes remains a challenge that NATO planners acknowledge has not been fully solved. The Ukraine war that has driven these spending increases has simultaneously served as the most demanding test of NATO’s ability to sustain a partner’s defense over an extended period, and the lessons from that experience are directly shaping the alliance’s investment priorities for the remainder of the decade.