Last Updated on July 15, 2026 by Fiza Khurram
The Biggest European Defense Buildup Since the Cold War
At last year’s NATO summit in The Hague, alliance members agreed to one of the most consequential commitments in the organization’s history: raising defense and security-related investment to 5% of GDP by 2035, split between 3.5% for core military capabilities and 1.5% for broader resilience spending covering cyber defense, critical infrastructure and supply-chain security. It is a target that, if fully realized, would represent the highest sustained level of European defense investment in modern history surpassing even the 3-4% of GDP European nations spent through the 1970s and 1980s at the height of the Cold War.
The Numbers Are Already Moving
This is not merely a paper commitment. European allies and Canada increased defense expenditure by more than $90 billion (in 2021 prices) in 2025 alone a nearly 20% jump from 2024 pushing collective European and Canadian defense spending to 2.3% of combined GDP, up from just 1.4% a decade ago. For the first time in NATO’s history, every single ally met or exceeded the previous 2%-of-GDP benchmark, and Norway has become the first European country to out-spend the United States on defense on a per-capita basis.
| Metric | Figure | Context |
| Global defense spending, 2025 | $2.63 trillion | Record high across all NATO allies |
| European/Canadian defense spending increase, 2025 | +20% (nominal ~$139B) | Steepest annual rise on record |
| Germany defense spending, 2025 | €95.0bn (~$107bn) | +18% in real terms year-over-year |
| Pentagon FY2027 budget request | $1.45 trillion | +44% vs. FY2026 enacted level |
| NATO defense/security target by 2035 | 5% of GDP (3.5% core + 1.5% resilience) | Agreed at The Hague summit, June 2025 |
Not Everyone Is on Board
The 5% figure was itself a compromise, watered down from an initial U.S. push and negotiated up from a proposed 3.5% middle ground floated by NATO’s secretary-general. Spain notably refused to fully commit, with Prime Minister Pedro Sánchez writing to NATO leadership that the pledge was “unreasonable” given the country’s existing debt levels and inflationary pressures; Madrid was ultimately permitted to pursue “its own sovereign path” rather than being forced into lockstep with the rest of the alliance. The episode illustrates the tension running through the entire pledge: political solidarity with Washington versus genuine fiscal capacity to deliver on paper commitments, particularly for southern European economies already managing tight budgets.
De-Americanization Alongside Rearmament
A less-discussed dimension of the buildup is Europe’s parallel push to reduce reliance on American technology and military hardware even as it spends more overall. European governments are increasingly directing new investment toward homegrown space, AI and data center capacity rather than defaulting to U.S. hyperscalers and defence primes, reflecting a broader recalibration of the transatlantic relationship following friction over trade, Ukraine policy, and diverging approaches to Russia. Analysts describe this as the most significant restructuring of Europe’s defence and technology infrastructure since World War II.
How Markets Are Positioning
For investors, the spending pledge has already reshaped sector allocations. Goldman Sachs has flagged Europe’s defence sector as having transitioned from an undervalued backwater to one of the region’s fastest-growing industries, and several U.S.-listed defence ETFs have seen substantial inflows as a way to capture the multi-year spending wave. Strategists note that different funds capture different parts of the theme: some concentrate on mega-cap prime contractors, others use equal weighting to lift mid-tier suppliers of drones, autonomous systems and counter-drone technology that fall under the resilience-spending tier, and still others broaden into cybersecurity and defence IT services.
What to Watch
The credibility of the entire framework rests on execution rather than promises. Allies must now submit annual, incremental spending plans demonstrating measurable progress toward the 2035 target turning a political pledge into something closer to a programmable, trackable revenue stream for defence contractors. With 2026 marking the twelfth consecutive year of real-terms growth in European defence spending, the direction of travel looks firmly set; the open question is whether fiscally strained members can sustain the pace without provoking a domestic political backlash over competing budget priorities.