Defence Spending

Discussion surrounding a potential United States (U.S.) withdrawal from NATO has remained one of the defining debates since the beginning of Donald Trump’s second presidency. In recent months, particularly following the war involving the U.S. and Israel against Iran, tensions within the alliance have intensified, with President Trump openly criticising several European NATO allies and questioning their value to the alliance. As a result, the central question is no longer limited to whether Washington could formally leave NATO. Increasingly, attention should shift toward a more pressing issue: could Europe manage its security independently without substantial American support? What would be the strategic, military, and economic cost of such a shift, and would European states be capable of rebuilding or reorganising their defence capabilities quickly enough to confront emerging threats?   Importantly, despite the significant legal, political, and institutional constraints facing any U.S. president seeking to withdraw from NATO entirely, Washington could still adopt alternative approaches that stop short of formal withdrawal while substantially reducing its role within the alliance. Such measures could include lowering financial contributions, scaling back troop deployments across Europe, or withdrawing critical weapons systems and strategic capabilities currently provided by the U.S. In such a scenario, how vulnerable would Europe become, and how prepared would it be to fill the resulting gaps?

Modern patterns of armed conflict are shifting from time-limited operations reliant on advanced, low-volume technologies to protracted confrontations driven by industrial attrition and the large-scale deployment of autonomous systems. This transition exposes critical deficiencies in the traditional defence industrial base's production capacity. As munitions stockpiles decline amid ongoing conflicts in Eastern Europe and the Middle East, military assessments increasingly identify manufacturing capability, supply chain resilience, and the speed of industrial mobilisation as decisive factors in strategic competition, alongside technological innovation.   In response to these dynamics, national security institutions are moving to reactivate historically grounded models that integrate the commercial manufacturing sector into military production. This approach was notably deployed during the Second World War, when Ford Motor Company redirected its civilian production lines to manufacture bombers, Chrysler Corporation established dedicated facilities for tank production, and General Motors allocated its industrial capacity to the production of aircraft engines and munitions.   The current operational environment demands a sustained supply of conventional mechanical platforms and expendable systems, including unmanned aerial vehicles and sensor-equipped tactical vehicles. As battlefield requirements increasingly outpace the production capacity of defence manufacturers, the automotive sector emerges as a uniquely positioned industrial base, combining large-scale output with advanced mechanical engineering capabilities. This reality necessitates a focused assessment of the structural and technical attributes that make it the most viable sector for rapid conversion to support military production.

A defence economy comprises the fiscal, industrial, and budgetary systems through which a state finances, maintains, and adjusts its military capacity. During peacetime, these systems tend to remain stable; in wartime, they become the main mechanism through which conflict transforms a nation’s economic structure. The escalation of Israeli military operations since October 2023 and the broader confrontation with Iran and its regional proxies have caused a defence-economy shift, leading to significant realignments in how the conflicting sides allocate public resources, incur debt, and prioritise expenditure.   This analysis examines how sustained military escalation has reshaped the defence economies of its three key actors: Israel, Iran and the United States. It assesses both short-term fiscal responses and longer-term budget trajectories, arguing that the conflict has not produced a temporary spending spike but a structural transformation, one that has widened deficits, crowded out civilian services, mobilised domestic defence industries, accelerated sovereign credit deterioration, and embedded elevated military spending into national budgets in ways that will persist well beyond any ceasefire. Across the Middle East, the boundaries between battlefield expenditure and national economic health have become increasingly difficult to separate.

In the wake of the recent NATO summit, European leaders have committed to a landmark pledge: raising defence spending to 5% of GDP. Hailed by its backers as a historic move, the agreement reflects a sharp shift in European threat perception, driven not only by Russia’s ongoing war in Ukraine but also by the renewed pressure from Washington under the return of the Trump presidency. The "Trump effect" has reignited long-standing fears over the reliability of U.S. security guarantees, pushing Europe to take on greater defence responsibilities.   But while the pledge signals a tougher European posture, it raises pressing concerns. Can Europe realistically meet such ambitious targets without undermining the very democratic model it seeks to defend? As defence budgets grow, many fear this could come at the cost of welfare, social cohesion, and democratic checks, exposing the continent to a deeper risk: the creeping militarisation of European politics and the erosion of its democratic dividend.