Published Date: July 7, 2025
Author: HANetf
NATO offers up compromise to achieve 5% of GDP target – NATO members will be meeting in the Netherlands on June 24-25 for a gathering that will set the course of European Security. While the U.S. continues to push for an increase to a 5% of GDP target, NATO has offered a compromise plan proposing 3.5% of GDP on “hard military” spending with an additional 1.5% for newer, non-traditional “defence related” spending by 2032. The latter 1.5% could be used for improving infrastructure, such as rail lines and bridges to withstand the weight of military convoys. In addition to infrastructure, cybersecurity and advanced technology for weaponry would also be accommodated under the 1.5% of non-traditional spend. Major nations such as Germany and France are in favor of the compromise proposal ahead of the June NATO Summit.
UK plants to boost spending to 3% of GDP – New UK defence spending plans include an “ambition” to spend 3% of the UK’s GDP on defence by 2034 and build up to 12 attack submarines. Prime Minister Keir Starmer said the UK military is moving to “war-fighting readiness” and that the government will “innovate and accelerate innovation at a wartime pace”. The PM, however, declined to set a precise date for when UK defence spending would hit 3% of GDP. In addition, these spending targets are below the compromise 3.5% amount being proposed by NATO. British Chancellor Rachel Reeves said the government wants to turn the UK into a “defence industrial superpower.” All of this news sent British defence stocks, such as BAE Systems and Babcock, soaring.
Europe’s defence boom –Europe’s defence industry has been on a tear in 2025, outstripping its US counterparts in growth. Europe’s defence titans – such as Rheinmetall, Leonardo, Thales, Safran and Airbus – are now reporting average revenue growth of 22.2% year-on-year, double the 12.4% posted by the largest US contractors. Europe’s large-cap defence firms now hold backlogs equivalent to nearly 49 months of sales – up from around 30 months two years ago. In practical terms, that means many companies are already booked solid through the end of the decade. NATO-Europe spent approximately €326bn on defence in 2024, a 17% increase year-on-year, with new multi-year spending plans feeding directly into corporate order books. Decades of under-investment mean European inventories of munitions, vehicles and spare parts are historically thin; replenishment alone is a multi-year exercise. In short, Europe’s defence sector is in the midst of a genuine growth renaissance. Revenues are advancing at double-digit rates and order books now stretch to almost four years of revenue.
Saab sees Europe streamlining defence amid spending push – The European defence market needs to align requirements and demand in order to create scale as it attempts to boost capability, the CEO of Swedish defence group Saab said. He notes, “every country cannot be tailoring the requirements to different sorts of versions. Europe has a big catch up to do in terms of capability that we need to have in place to take care of our own security,” Johansson said, adding that defence capabilities will still need to be built up even if a peace deal in Ukraine is achieved. Beyond improving capabilities in Europe, he said that he has seen a greater willingness for collaboration between countries other than the U.S. for defence products, and that European players are prepared to establish sovereign capabilities in the countries they partner. The Thai Air Force chose to purchase its Gripen fighter jets in August last year, selecting Saab over Lockheed Martin’s F-16 fighter jets even though Thailand is a security ally of the United States. He also noted that Saab’s fighter jet programme is building more unmanned capabilities.
Hegseth presses Asia for spending – At a meeting in Singapore, U.S. Defence Secretary Pete Hegseth called for Asian allies to follow Europe’s lead and increase its spending as a percentage of GDP to thwart China’s rising military presence in the region and to avoid aggression against Taiwan. Hegseth argues it doesn’t make sense for Europe to spend 5% of GDP, while key allies in Asia spend a much lower amount despite formidable threats from China and North Korea. The London-based International Institute for Strategic Studies has found that Asian spending on weapons and research is currently only 1.5% of GDP. South Korea leads the region is spending with 2.6% of GDP. Hegseth also urged Australia to increase its defence spending to 3.5% of GDP, an equivalent of 100 billion Australian dollars ($65bn) annually, and 40 billion Australian dollars ($25bn) more than it spends currently.
Data as of 31.05.2025. Sources available upon request.
Source: VettaFi as of 31.05.2025. For illustrative purposes only.
Global military spending spiked last year, drawing comparisons to the Cold War era. According to the World Economic Forum, 86% of the respondents surveyed see government borrowing as the path to fund defence spending. Global public debt is expected to rise by an additional 2.8% of GDP this year, according to a recent IMF assessment, putting it on track to hit 100% of GDP by the end of this decade. Higher defence spending is also likely to significantly improve life economic growth and the hope is that interest rates will come down to make funding it cheaper. Whereas the U.S. continues to push NATO to spend 5% of GDP on defence, NATO’s latest compromise of a combination of 3.5% on hard defence spending and 1.5% on infrastructure, cyber security, and future of defence applications may make the 5% of spend more palatable for NATO countries and ultimately acceptable to the US. All of this will be decided at the next NATO Summit in the Netherlands in June.
Source: TMXVettaFi. Additional sources available upon request.
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