1. Sustainability of 5% as a Structural Expenditure
The proposal to allocate 5% of GDP to defense is based on the premise that the European Union lacks sufficiently robust deterrence or defensive capabilities without NATO’s backing, or even with it, and that this percentage would substantially increase them. If we accept this hypothesis as valid, without evaluating whether the percentage is appropriate, the debate shifts to fiscal sustainability and the ability of states to assume a structural expenditure of such magnitude.
To gauge this effort, it is useful to compare it with other essential public spending items. In education, Spain allocated 4.59% of GDP in 2022, France 5.32%, Italy 4.07%, Germany 4.47%, and Sweden around 6–7%. In healthcare, Spain allocated 6.68% of GDP in 2024, Italy 6.27%, France 9.74%, Germany 10.58%, and Sweden approximately 9%. Meanwhile, pension spending in the EU ranged in 2019 between 5% and 15% of GDP, a percentage expected to rise due to the pressure of an increasingly aging population. An additional 5% for defense would, in many countries, represent an allocation comparable to healthcare, illustrating the scale of the proposed change.
The capacity to absorb this increase depends on the fiscal situation of each country. In 2024, the tax burden is high in European countries: France reaches 45.2% of GDP, Italy 42.5%, Sweden 42.3%, Germany 40.7%, Spain 37.1%, and the United Kingdom 34.4%.
Furthermore, public debt levels across European countries remain highly heterogeneous. Between 2023 and 2024, Spain exceeds 107% of GDP, France 113%, Italy 135%, and the United Kingdom 101%, while Germany, Poland, Sweden, and Denmark are between 62% and 30%. These debt levels have been sustained over the past decade thanks to an exceptionally expansive monetary environment, with low financing costs, moderate inflation, and positive nominal growth. The European Central Bank’s monetary policy has been decisive in this process. However, this sustainability is contingent, as structural imbalances between public revenues and expenditures remain uncorrected.
Here is where the nature of the 5% becomes crucial. The analysis changes radically depending on whether it is a temporary or cyclical increase, motivated by a specific threat, or a structural and permanent commitment to defense spending. If the increase were temporary, it could be financed through higher deficits or debt, treated as an extraordinary cyclical expense, similar to what occurred during a pandemic. However, if the goal is to maintain a stable 5% of GDP annually in defense, then we are facing a structural change in the size of the state, which requires equally structural sources of financing.
Furthermore, economic logic indicates that building military capabilities entails recurring financial commitments (maintenance, personnel, technological renewal), so it would make no sense to make a massive effort for one year only to reverse it immediately. Therefore, if 5% is considered necessary, it must be understood as structural expenditure.
In the current fiscal context, especially for Western European countries, permanently adding several additional points of GDP to the public budget is highly demanding. The key question then becomes: how is it financed? The alternatives are limited:
- Increasing taxes. This is the most direct way to obtain structural revenues. However, a significant increase in the tax burden can affect disposable income, consumption, and private investment. It also presents obvious political difficulties, as the costs are visible and immediate for taxpayers.
- Increasing public debt. This option may be viable if the basic condition of sustainability is met, which states that nominal economic growth must exceed the real interest rate on debt. As long as this relationship holds, the debt-to-GDP ratio can stabilize or even decline. However, the current monetary environment is different from previous years. With the European Central Bank’s balance sheet reduction process (Quantitative Tightening), sovereign financing no longer enjoys the same support as during the quantitative easing phase. Consequently, the marginal cost of financing an additional structural 5% would likely be higher than three years ago.
- Cutting other budget items. This would involve reducing social, healthcare, educational, or other public investment spending. From a political and social perspective, this is a complex option with significant distributive effects.
Consequently, this creates a risk of a ‘crowding-out’ effect. This can manifest in various ways: higher public borrowing that absorbs available savings and raises capital costs; higher tax pressure that reduces consumption and private investment; or displacement of productive public investment toward military spending.
The macroeconomic risk is that if potential growth is weakened by lower civil investment or lower accumulation of human capital, the very economic base that sustains defense in the long term is undermined. In other words, financing this 5% via debt depends on economic growth, but excessive and poorly financed defense spending can erode that same growth.
Nevertheless, it would be incomplete to consider this expenditure solely as a fiscal burden. Defense investment also generates positive economic effects, as it creates a multiplier effect on demand, generates qualified employment, activates industrial value chains, and acts as a driver of technological innovation.
2. Is 5% necessary?
Defense and security constitute the foundation of any socioeconomic system. Without physical and legal security, neither education, the healthcare system, nor the welfare state can be sustained. Institutional and economic stability ultimately rests on the guarantee of protection against external threats. From this perspective, prioritizing defense is not an ideological choice but a necessary condition for the existence of other public policies.
The question is whether current threats justify a permanent effort of this magnitude. Is our deterrence capacity truly insufficient? Is there a real risk we cannot defend against today without a substantial increase in spending?
Europe has deficiencies in military organization, and its defensive structure relies heavily on NATO’s umbrella. Strategic uncertainty in recent months has intensified the debate over this dependence. However, today we are still part of a military alliance that constitutes a very strong defensive block.
At the same time, we must consider the possibility of a spiral effect. If the European Union significantly increases its spending and other powers do the same, the result could be a spiral of innovation, capabilities, and growing budgets in which the relative increase in power is limited. In other words, everyone spends more, but the strategic balance barely changes. The economic history of arms races shows that when competition is systemic, additional effort does not always translate into a proportional improvement in relative security.
International data reinforce a clear conclusion: countries that significantly exceed 5% of GDP in defense are usually engaged in active conflicts or direct threat environments. In 2024, Ukraine allocated around 34% of GDP to defense; Russia exceeded 7%; Israel was near 9%. In contrast, in consolidated Western economies, levels are considerably lower: the United States around 3.4%, Poland over 4%, while Germany, France, and the United Kingdom are around 2%. The EU average barely reaches 1.9%.
Historically, except in war or extreme regional tension contexts, very few countries have maintained levels above 5% of GDP for decades. The pattern is clear: there is a direct correlation between active conflict and extraordinary military effort, which is logical.
In the current European context, we face a war on continental soil. Support for Ukraine responds both to political principles and the desire to prevent the conflict from spreading to EU territory. For Central and Eastern European countries, the Russian threat is perceived as immediate, while for Southern countries, in addition to the Eastern dimension, tensions in the Sahel and their potential implications for stability, migration, and security are of concern.
This context explains the pressure to increase spending. However, the fundamental question remains: does the current situation necessarily require a structural 5% of GDP in all member states, or could a sufficient level of deterrence be achieved through a more efficient combination of coordination, specialization, and selective spending?
The debate, therefore, is not only about how much to spend, but under which specific threats, with what time horizon, and with what clearly defined strategic objective. Without this prior delineation, the risk is turning a temporary response into a permanent and hard-to-reverse budgetary commitment.
3. Proposals for Smart Rearmament
We face a dilemma, because there is a strategic need to increase defense spending, not necessarily to 5%, but there are severe fiscal constraints faced by most European economies, especially in the South. If a structural 5% were financed exclusively via taxes, debt, or cuts, the economic and political cost would likely be unsustainable.
However, this dilemma is almost irresolvable if we maintain the traditional analytical framework. The key is not only how much to spend, but how it is spent, who finances it, and for which specific capabilities. Smart rearmament requires addressing three dimensions simultaneously: industrial efficiency, financial innovation, and strategic clarity.
Based on Andrew Turner CB CBE’s article in Karve, I outline a series of medium-to-long-term solutions.
3.1. Europe as a single customer: ending industrial fragmentation
The most serious problem of European defense spending is not its volume but its structural inefficiency. Maintaining 27 different weapon systems with separate supply chains is an inefficiency that no budget increase alone can solve. Thus, we have capabilities but lack command structure.
Moreover, compared to countries like China or the United States, the European arms industry is small. We have some specialization in certain areas, but it is residual compared to the majors.
The solution lies in acting on demand, not just supply. Proposed measures are:
- European joint procurement mechanism: following the successful COVID-19 vaccine acquisition model, the EU should act as a major demand aggregator. This would allow:
- Economies of scale: negotiate lower prices for common materials (ammunition, armored vehicles, communication systems).
- Standardization: eliminate incompatibility between armies, facilitating operational and logistical interoperability.
- Duplication reduction: avoid multiple countries incurring the same R&D costs separately.
- European conditionality: EU funds allocated to defense (current or future) could be conditioned on national spending occurring within European cooperation programs. If purchases are not made within the EU defense single market, no community funding is granted. This would incentivize industrial consolidation and the creation of “European champions” capable of competing globally.
- Armament Schengen: weapons, military vehicles, and ammunition could move freely between member states without border checks. There would be a shared military intelligence system, equivalent to the civilian Schengen Information System (SIS), to monitor suspicious movements and coordinate operations.
Spending 2% more efficiently in a coordinated manner can generate more defensive capacity than spending 5% in a fragmented way. This is the first and most important lever. Of course, it is a complex lever, requiring absolute trust among states, ceding national sovereignty, and having real common threats.
3.2. Mobilizing Private and European Capital
Even with better spending, a net increase in expenditure is likely needed. To avoid placing the entire burden on already strained public budgets, alternative sources of financing must be explored:
- European Rearmament Bank (ERB): a financial institution guaranteed by the EU could issue low-interest debt to fund large infrastructure and common defense capability projects. This would act like a “NextGenerationEU” for defense, relieving pressure on national debts and taking advantage of lower EU-wide financing costs.
- Venture Capital Model for Dual-Use Innovation: Stepwise investment (Angel-Venture-Equity) for tech startups in technologies with both civilian and military applications, e.g., AI, drones, cybersecurity, new materials, quantum computing.
- The Ministry of Defense would act as the “first customer” or “anchor investor,” assuming initial risk during the research phase. Once technology matures, private capital (investment funds, venture capital) would enter later stages to scale it, seeing a guaranteed market and shared risk. Commercial success of these technologies in civilian markets or military exports to third countries would generate economic returns that offset the initial public investment. Defense spending thus becomes an investment with returns, not merely a cost.
3.3. Strategic redefinition: capabilities, not percentages
Finally, no budget increase or financing system modification will work without a clear strategy. Setting a 5% target as a starting point without asking why is meaningless.
It is necessary to define the threat and the response. Member states and the EU must jointly develop a plan that answers the key questions posed in this text:
- What are the concrete threats over the next 2, 5, or 10 years? (Terrorism? Disinformation? Cybersecurity? Sahel instability? Russia?)
- What specific military capabilities are needed to deter or, if necessary, respond to each threat? (Air defense? Mobility? Intelligence? Cyber defense?)
- How do we organize ourselves to have these capabilities as efficiently as possible.
Only after this strategic planning exercise can the necessary budget be determined. Perhaps it will be 5%, or perhaps a well-invested 2.5% will suffice if combined with the efficiency and innovative financing measures proposed. That budget would respond to a shared political and strategic project, not merely to external pressures.
4. Conclusion
Welfare depends on defense, yet defense itself requires fiscal sustainability; without it, neither can be secured. Smart, efficient, and strategic investment ensures security without jeopardizing economic stability. Achieving the right balance requires clear priorities, coordinated spending, and innovative financing mechanisms.
