Allies to agree to spending hike but will they deliver? Clutch Fire

Fireworks could kick off during NATO’s annual summit this week, as the U.S. pushes its allies to sharply increase their defense spending to 5% of their gross domestic product (GDP).

The 5% figure is made up of 3.5% of GDP that should be spent on “pure” defense, with an extra1.5% of GDP going to security-related infrastructure, such as cyber warfare capabilities and intelligence.

While member states say they’re happy to hit that milestone, and some countries are not too far off that mark, others don’t even meet the 2% threshold that was agreed over a decade ago.

While they might pledge to increase defense spending, whether these promises materialize will be the key question.

Talk is cheap and timelines can be vague — but concerted action is what the U.S. and President Donald Trump, who’s attending a NATO summit for the first time since 2019, will want to see.

NATO members on Sunday agreed in principle to a big increase in their defense spending, Reuters reported, but Spain has already pushed back.

After diplomats on Sunday agreed on a compromise text pertaining to the spending rise, Spanish Prime Minister Pedro Sanchez said Spain would not have to meet the 5% target as it would only have to spend 2.1% of GDP to meet NATO’s core military requirements.

“We fully respect the legitimate desire of other countries to increase their defense investment, but we are not going to do so,” Sanchez said in an address on Spanish television, according to the news agency.

“The U.S. is looking for everybody to say, ‘Yeah, we mean it. We have a plan. 5% is real. We’re going to get there’,” Kurt Volker, former U.S. ambassador to NATO and distinguished fellow at the Center for European Policy Analysis (CEPA), said Wednesday.

“But one thing to watch for is if the messaging is actually on point. Some of the messaging from some of our European allies, at least when they back brief their own media and their own parliaments is, ‘Yeah, 5% but it’s really 3.5% and 1.5%, and that can be pretty much anything’ … So there’s going to be a whittling down [of defense spending pledges] almost immediately,” Volker noted at a CEPA briefing ahead of the NATO summit.

“And if that is over emphasized, you’re going to have a clash with the U.S.,” Volker added.

The stakes are high as allies meet in The Hague in the Netherlands on June 24-25, given ongoing conflict in Ukraine and war in the Middle East threatening to destabilize the global economy.

Defense analysts say this year’s meeting could be the most consequential in the alliance’s 77-year history, with the U.S.’ spend-pushing heavily forewarned before the summit.

U.S. Defense Secretary Pete Hegseth was emphatic as he said 5% “will happen” at a separate NATO gathering earlier this month, with NATO Secretary General Mark Rutte also widely plugging that message to allies too.

Back then, and arguably at the height of the White House leader’s irritation with the bloc, only six member states met the 2% target, including the U.S. Times have changed, however; by 2024, 23 members had reached the 2% threshold, according to NATO data.

While some greatly surpassed that target — such as Poland, Estonia, the U.S., Latvia and Greece — major economies including Canada, Spain and Italy have lagged below the contribution threshold. No NATO member has so far reached the 5% spending objective, and some are highly likely to drag their feet when it comes to getting to that milestone now.

The U.K., Poland and Germany have already said they intend to increase defense spending to the requisite target, but their timeline is unclear. The UK is also reportedly trying to delay the spending rise among by three years, according to the i newspaper. CNBC has reached out to Downing Street for comment.

Spain and Italy are seen as major holdouts against the 5% target, after only committing to reach the 2% threshold in 2025. Canada meanwhile spent 1.3% of GDP on defense in 2024, NATO estimates suggest, even less than Italy, Portugal or Montenegro.

Spending 5% on defense is a target, but not a given, Jason Israel, senior fellow for the Defense Technology Initiative at CEPA, said Wednesday.

“Every single country … is trying to figure out how they’re going to thread that needle of being able to make the commitment, but also make the accounting work when every single nation has to make trade offs against what is generally unpopular, massive increases in defense spending,” he noted, stressing it’s a “long way from commitments … to actual capability,”

European aerospace and defense companies are following NATO spending commentary and commitments closely, but say they’re stuck in limbo between pledges and action by way of concrete government procurement.

The leaders of Leonardo, Embraer and Saab told CNBC last week the continent needs to act decisively and collectively to make long-term commitments to defense spending and investment contracts to enable companies like theirs to scale-up their production capacity and manufacturing capabilities.

“If we go for 3.5% [of pure defense spending] across the European part of NATO, that will mean a lot, and more will be needed in terms of capacity. But we need to understand the capability targets better,” Micael Johansson, the chief executive of Swedish defense company Saab, told CNBC.

“We can do more, and I think we need to come together in Europe to create more scale, also in what we do to align demand, align requirements, so we can actually be competitive player in internationally. So there’s a lot to do still,” he said.

Roberto Cingolani, CEO of Italian defense firm Leonardo, agreed that “there’s a lot of work to be done.”

“Leonardo has a capacity boost program at the moment because we are quite aware of the fact that we have to increase the production of specific platforms, defense systems, electronics and technology solutions. It is not only matter of money, it’s matter of priority. It’s matter of reducing the fragmentation among countries in Europe,” he told CNBC’s Charlotte Reed at the Paris Air Show.

Defense companies needed to know what will be expected of them ahead of time, Cingolani said, given the complex nature of global supply chains that underpin the defense industry.

“We have approximately 5000 companies in the supply chain, and we are in 160 countries in the world. So it’s very complicated,” he noted. “You have to invest in supply chain. You have to make investments. You have to protect the supply chain. But of course, we also have to face a shortage of raw materials … There is no no simple solution. If there were a solution, we would have done it already,” he said.