Debt and Rearmament
Fiscal Constraints and the Sustainability of NATO Defence Spending
NATO countries face a delicate balancing act between urgent rearmament needs and fiscal sustainability. Public debt levels across the Alliance are at historic highs, constraining the ability of many governments to boost defence spending without risking financial instability. Countries with ample fiscal space, like Germany, have responded to new security threats by creating special off-budget funds and invoking fiscal exceptions to finance military modernization. Highly indebted allies – exemplified by Italy, France, and Greece – confront far tougher choices. Past rearmament cycles offer mixed lessons: Cold War military buildups were often enabled by U.S.-led burden-sharing and deficit spending, but they also led to inflationary pressures and future austerity measures. Defence expenditure can stimulate economic activity through demand and innovation, yet evidence suggests its multipliers are modest and it may crowd out more productive investment if financed through heavy borrowing. Going forward, innovative fiscal frameworks will be crucial. EU rules are already being relaxed to accommodate defence outlays, and mechanisms like common EU defence funds or special sovereign instruments (e.g. “defence bonds”) could help distribute the load. Ultimately, sustaining higher NATO military spending in the 2020s–2030s without destabilizing public finances will require prudent debt management, targeted investments with economic spillovers, and greater multilateral coordination to ensure the security dividend does not come at the expense of long-term fiscal health.