Only Estonia and Lithuania Achieve NATO’s 2 Percent Target with Sound Public Finances

Of 25 European NATO countries including Sweden only Estonia and Lithuania achieved NATO’s 2 percent target with sound public finances in 2023. This is the conclusion reached by researchers at the ifo Institute in a new EconPol study. Finland, Greece, Hungary, Latvia, Poland, Romania, and Slovakia spent more than 2 percent of their economic output on defense, but at the same time had public debt of more than 60 percent or a budget deficit of more than 3 percent in relation to economic output. This means they are above the EU’s Maastricht limits. Although these were suspended for 2023, they will apply again from 2024. The current budget forecasts do not indicate any significant improvement in public finances in 2024 compared to 2023. The United Kingdom reached the NATO target in 2023 with spending of around 2.1 percent, but also had public debt of around 97 percent and a budget deficit of 3.7 percent of economic output.

“We have left low interest rates behind. Permanently higher defense spending has to go hand in hand with sound public finances,” says ifo military expert Marcel Schlepper. Seven of these 25 European NATO countries including Sweden already spend more money on interest payments than on defense. Italy is out in front. The Italian government’s interest payments amount to almost three times its defense spending. Hungary, Spain, and the United Kingdom also spend almost twice their defense budgets on interest. Germany is in the middle of the pack: the country now spends half as much on interest on public debt as it does on defense. “Although debt allows us to react to crises in the short term, it is not a long-term solution,” says ifo researcher Niklas Potrafke.

In the current tense economic environment, some European countries are finding it difficult to increase defense spending in line with NATO commitments. To date, the 2 percent target has been achieved almost exclusively on NATO’s eastern flank. The ifo Institute’s calculations show that, with the exception of Luxembourg, all other European NATO countries could also achieve the 2 percent target through minor adjustments. Governments would have to cut around 1 percent of spending in other policy areas and use these funds for defense. However, EconPol Director Florian Dorn points out: “Europe is in a dilemma. Every available euro is needed for defense as well as for investments and for the economic and climate transformation.”

Questions can be directed to: Marcel Schlepper, Schlepper@ifo.de