New NATO target in line with our previously revised forecast

NATO’s commitment to spend 5% of GDP annually on defence by 2035 is broadly in line with the change to our defence-spending assumptions that we made in March, when we lifted core defence spending from 2% of GDP to 3% by 2030 and to 3.5% by 2035. We expect the 1.5% of GDP additional spending on “resilience and infrastructure” will entail little actual new spending.

As a result of the upgrade to our defence-spending assumptions in March, we forecast the Eurozone GDP will be 0.5% higher by 2030.

We expect the defence ramp-up will initially be debt-financed. Over time, however, economies will need to rely on higher taxes or lower expenditure elsewhere. We see common EU-level financing as unlikely in the near term.

As an upside scenario, if the extra “resilience and infrastructure” pledge results in additional spending, Eurozone GDP would be roughly 1ppt higher than our current forecast by mid-2030.