NATO Pushes 3.5% GDP Defense Spending Amid Industry Concerns

NATO leaders convened in The Hague this month to discuss a significant increase in military budgets, driven by pressure from the United States. This move comes as Europe aims to enhance its defense capabilities and reduce reliance on the United States. However, a critical question remains: can Europe's arms industry meet the increased demand?

NATO Secretary General Mark Rutte expressed concern over the industry's ability to ramp up production. "This is really keeping me up at night, making sure that we not only ramp up spending, but also ramp up defence industrial production," he stated. The demands on NATO's European members are substantial, with new hardware targets requiring the largest armament spree in decades. Rutte has advocated for a commitment to increase defense spending to 3.5 percent of GDP within seven years, along with an additional 1.5 percent for security-related areas such as infrastructure. This would translate to hundreds of billions of extra euros annually.

While countries appear largely supportive, German Defense Minister Boris Pistorius highlighted a significant challenge: the industry's capacity to deliver on orders. "It is about how much money is really able to be spent… if industry is not able to deliver what we ordered," he noted. This issue will be a focal point in The Hague, with NATO hosting an industry forum alongside the summit.

Following years of underinvestment post-Cold War, the European Union has introduced various initiatives since Moscow’s 2022 invasion. National budgets have increased, and Brussels has plans to mobilize an additional 800 billion euros. A key focus is ensuring that most of this money is spent on European-made weapons to enhance the continent's self-reliance. However, persistent issues include a lack of long-term orders, insufficient capacity, high costs, lengthy production times, and industry fragmentation.

Industry leaders report that orders are increasing, albeit not as quickly or for as extended a period as hoped. They insist that businesses are already investing in expansion. The CEO of Swedish defense giant Saab, Micael Johansson, noted that his firm has increased its workforce by 6,000 people and quadrupled ammunition production in recent years. "Absolutely, we can do more — and fortunately, many of us have invested at risk to increase capacity," he said. However, there is a concern that a sudden surge in spending could lead to price hikes and inflation, reducing the overall value for money.

To address these challenges, the EU plans to unveil measures next week to streamline regulations and reduce bureaucratic hurdles. "It cannot be that the defence industry needs to wait five years to have a permit to build a new factory," said EU Defense Commissioner Andrius Kubilius. One potential solution for long-term capacity building is collaborating with Ukraine, which has developed expertise in cost-effective and efficient military technology during its conflict with Russia.