Defence vs. Deficits: Navigating NATO Targets Under EU Fiscal Rules

Geopolitical instability has triggered a fundamental shift in national security priorities across advanced economies, from Eastern Europe to the Middle East. Under renewed US pressure, NATO allies have agreed to a defence spending target of 5% of GDP, including 3.5% for core military outlays. At the same time, the European Union’s (EU) revised fiscal framework, introduced in 2024, predates this strategic pivot and now confronts member states already grappling with elevated deficits and tightening consolidation paths. From a sovereign credit perspective, rising defence budgets present a structural challenge that could strain already-stretched public finances. With limited room under Stability and Growth Pact (SGP) thresholds, the path to fiscal and strategic alignment is uncertain. This KBRA report assesses the potential estimated impact on fiscal positions as defence spending increases, using scenario-based assumptions grounded in official institutional frameworks.

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