NATO Defence Spending: Accelerating Rearmament in 2026 and European Readiness

Overview of NATO's Defense Spending Growth

Perun begins by addressing how NATO's defense spending has evolved since 2022, highlighting the significant changes occurring in response to shifting global security dynamics. In recent years, NATO has transitioned from what he describes as the "2% era," where most member states fell short of the 2% GDP benchmark for defense spending, to a new period of increased financial commitment.

The Russian invasion of Ukraine in 2022 served as a wake-up call, making it clear that the previous state of underinvestment was no longer tenable. As Perun notes, NATO members responded to this new threat environment in varied ways. While some states immediately ramped up their defense budgets, others adopted a more gradual approach to reach the 2% target, hindered in part by political challenges and constrained global supply chains. For example, the surge in demand for defense equipment caused price spikes and order backlogs, further complicating efforts to quickly bolster national arsenals.

Perun emphasizes that by 2026, this landscape had transformed dramatically. New data revealed that NATO's collective defense spending saw a 50% increase within four years, growing from just under $1.2 trillion in 2022 to over $1.8 trillion in 2026. While the smallest year-over-year increase occurred between 2022 and 2023, spending surged significantly from 2025 to 2026, adding nearly $200 billion in nominal terms during that span.

Crucially, this rise in defense expenditure wasn't uniformly distributed. Perun points out that whereas U.S. defense spending grew comparatively modestly, about 20% over this period, non-U.S. NATO members doubled their collective spending. Consequently, the once-large disparity between the U.S. and its European allies has narrowed significantly. In 2021, U.S. defense spending exceeded the rest of NATO combined by twofold. By 2026, European NATO members alone are projected to approach levels of defense spending comparable to what the U.S. contributed just a few years prior.

However, Perun warns not to take these figures at face value. Given the significant inflation, supply chain challenges, and rising material costs that have plagued global markets in recent years, some of the increase in nominal defense budgets merely compensates for higher costs rather than representing a true expansion in military capability. Adjusting for inflation, it becomes clearer that NATO's defense spending experienced a real-term increase of about 26% from 2021 to 2026, translating to an additional $300 billion in constant 2021 U.S. dollars.

Even when inflation is accounted for, the shift is stark. Non-U.S. NATO members contributed roughly $275 billion of this real-term increase, marking a 77% growth in their spending compared to 2021 levels. This acceleration signals a deliberate effort by European members to meet new commitments and close the defense investment gap with the United States. For example, Perun highlights Germany’s decision to relax its "debt brake" policy, unlocking crucial resources for defense spending.

Perun also traces these trends back to the 2025 NATO summit in The Hague, where member nations introduced new targets to meet emerging security challenges. The 2% GDP target for defense was replaced with two new benchmarks: a 3.5% core defense target, aimed at fortifying traditional military capabilities, and an optional 5% target that includes investments in "soft defense" areas, such as infrastructure and logistics. While the latter was designed to promote resilience, its inclusion is unlikely to drastically alter investment patterns, as such expenditures align with many countries' existing priorities.

These new targets, compounded by favorable financing mechanisms like the European Union’s SAFE program, have fueled Europe’s military resurgence. This EU initiative provided a massive fund composed of low-interest loans to support defense spending, while additional measures sought to unlock an estimated €800 billion in defense investments. Despite these efforts, challenges persist, including regulatory hurdles and questions around balancing public and private sector roles in defense production.

Perun concludes this section by juxtaposing NATO’s defense spending figures against estimates of Russian expenditures. While Russia has substantially increased its own defense budget since the Ukraine war began, reaching as much as $220 billion annually, this pales in comparison to NATO’s financial clout. Between 2025 and 2026 alone, NATO’s spending growth effectively added what amounts to an entire Russian defense budget. However, Perun cautions that nominal comparisons don’t capture the full story, as purchasing power and regional economic differences play a pivotal role in determining real military capability. Adjusting for military purchasing power parity (PPP) revealed that NATO’s investment offers an even stronger real-term advantage over Russian spending, narrowing the gap between American and European investment further.

Ultimately, as Perun points out, the reason for this surge is not about engaging in a financial arms race for its own sake. For NATO, particularly its European members, this accelerated spending is primarily about ensuring their own security in a world where a direct confrontation with Russia is no longer outside the realm of possibility. The broader strategic implications of these shifts, including their significance to global stability, will be explored in the sections that follow.

Impacts of Industrial and Strategic Shifts in European Defense

Perun explains that while Russia has increased its defense spending significantly during its conflict with Ukraine, NATO's non-U.S. members have also ramped up their budgets considerably. Nonetheless, a disparity in spending capacity remains. In nominal terms, Russian defense spending by 2026 is still less than half of what non-U.S. NATO allies combined spent in 2023. However, given Russia's centralized government and state-owned defense industry, it benefits from efficiencies such as the capacity to standardize equipment and indirectly subsidize defense through state-affiliated entities. These factors, paired with the nature of a wartime economy, allow Russia to stretch its defense spending more effectively than some NATO nations. According to the Robertson methodology, Russia's military purchasing power provides more than double the return per dollar compared to the United States.

However, this advantage has been shrinking over time. Perun points out that in 2017, Russia reportedly derived three times the purchasing power from its defense budget compared to the United States. By 2025, this figure had dropped to a ratio of 2.16:1. This reduction is attributed primarily to Russia’s economic challenges, such as inflation, sanctions, high borrowing costs, and elevated wartime costs, including significant increases in personnel expenditures. He explains that personnel costs, including signing bonuses, death payments, and other benefits, have skyrocketed for Russia since 2022, sometimes exceeding the individual costs seen in NATO states. Furthermore, while Russia has scaled up defense production, doing so under current conditions has been neither easy nor cost-effective. The need for additional labor, extended working hours, and susceptibility to drone strikes targeting factories has compounded these challenges.

Pivoting back to NATO, Perun emphasizes the considerable variance in spending levels among member nations over time. He categorizes NATO countries into tiers based on their share of GDP allocated to defense. The first tier includes high net contributors like Lithuania, Estonia, Latvia, Poland, Greece, Denmark, Sweden, and Norway, which are spending over 3.5% of GDP on defense in 2026. Many of these nations either meet or exceed NATO’s projected 3.5% requirement for 2035. In this tier, certain countries, such as Estonia and Lithuania, even surpass NATO's advanced 5% target for core defense spending.

Perun observes a proximity effect among high net contributors. Countries geographically close to Russia, such as the Baltic states and Poland, tend to spend significantly on defense, driven by perceived threats. Wealthier Scandinavian nations like Denmark, Norway, and Sweden, which view Russia with suspicion, also fall into this category.

The second tier, spending between 2.5% and 2.9% of GDP on defense, includes nations like Turkey, Germany, Finland, the Netherlands, and the United Kingdom. Meanwhile, some nations hover slightly above the 2% mark, such as Romania, France, Italy, and Portugal. There's also a group of countries at or barely above 2%, often employing creative accounting to meet minimum NATO requirements, including Belgium and Spain.

Perun notes that Slovenia, while below 2% as of 2026, is expected to adjust its defense expenditures now that it has a new government in place.

A key development across NATO has been a marked increase in equipment investment as a proportion of overall defense budgets. During the pre-Crimea era, non-U.S. NATO members allocated about 19% of their defense budgets to new equipment compared with 26% in the U.S. By 2026, these percentages rose to 33% and 30%, respectively. Perun highlights that this increase in equipment spending has significantly shifted the strategic landscape, enabling NATO to build substantial military capabilities in a shorter time frame.

In terms of sheer cash, the most dramatic example of increased defense spending comes from Germany. Perun describes how, after years of underinvestment, Germany has committed to significant investments across a range of defense needs, including air defense systems, transport vehicles, and infantry fighting vehicles. These figures have grown to over $47 billion for military equipment in 2026; this is approximately ten times what Germany spent just over a decade ago.

European nations have also bolstered their production of long-range strike capabilities in response to lessons learned from the ongoing Russia-Ukraine war. Perun reports that NATO has committed approximately €50 billion to precision strike systems, with the United Kingdom leading development in various areas. He further explains that this involves not only testing but also advancing new missile systems, such as the Franco-Italian SAMP/T NG air-defense system and the French Naval Cruise Missile, in addition to traditional reliance on U.S. systems like the Patriot missile or Tomahawk cruise missile.

Moreover, Perun identifies a distinct effort by European NATO countries to bolster their domestic defense industrial base, aiming to reduce over-reliance on American military equipment. For instance, European countries are working on producing and maintaining their own equipment. For example, Germany has taken steps to establish a production facility for the Patriot missile system domestically. Similarly, European alternatives to U.S.-designed munitions, such as the guided rocket systems developed in France for counter-unmanned aerial systems (C-UAS), showcase Europe's push for greater defense autonomy. These initiatives not only enhance self-reliance but boost regional defense industrial capacity while maintaining interoperability with existing NATO systems.

The shifts in spending priorities and industrial strategies within NATO underscore the alliance's broader objective to strengthen European defense independence while ensuring cohesion with U.S. contributions. Yet, Perun notes the inherent challenges in balancing industrial competitiveness with alliance cooperation, as the buildup of local and regional production capabilities might introduce conflicts of interest. Despite the complexity, Perun concludes that the trend toward diversification of defense suppliers and increased regional autonomy will likely continue.

Strategic Implications for European Readiness and Regional Security

Perun argues that escalating defense expenditures in NATO countries, particularly by European allies, are reshaping the strategic calculus between the alliance and Russia. This transformation is driven by three key factors: the strengthening of NATO's eastern flank, the democratization of escalation, and the opening of Russia’s interior to targeting by advanced NATO systems.

Strengthening NATO's Eastern Flank

Perun highlights that the eastern NATO member states are significantly ramping up their military capabilities in ways that surpass the growth of the broader alliance. He points out that Poland has dramatically increased its personnel numbers, while the Baltic states remain among the highest proportional defense spenders. The addition of Finland and Sweden to NATO has changed the strategic geography of the region, creating a stronger northern bulwark against potential Russian aggression. Meanwhile, major NATO members like Germany have stationed additional forces in the region, such as the permanent deployment of Germany's 45th Panzer Brigade in Lithuania.

This growing presence of forces, Perun argues, serves dual purposes. On one hand, it strengthens Eastern Europe’s capacity for a robust defense against military threats. On the other hand, it complicates any hypothetical Russian strategy relying on "gray-zone warfare." Perun explains how "little green men" operations, covert forces posing as local pro-Russian insurgents, would be far riskier with a Panzer brigade stationed in Lithuania, ready to counter them. Furthermore, the deployment of combat-ready assets in eastern NATO states acts as a "tripwire," highlighting that any military action by Russia against one of these nations would drag major European powers into the conflict.

Perun notes that the strengthening eastern flank not only ensures the defense of these territories but also impedes the plausibility of Russia's strategy of short-term military escalation followed by de-escalation through intimidation or negotiated settlements. For the Baltic states, the ability to stonewall an invasion from the outset is far preferable to losing territory and having to attempt a costly recapture. This same calculus extends to Poland, which aims to fight along its borders rather than allowing the conflict to breach its interior regions.

Democratization of Escalation

Perun describes "the democratization of escalation" as a profound shift brought by NATO's rearmament, particularly through providing advanced capabilities and decision-making autonomy to nations on the eastern flank. European allies are investing in systems that give them greater ability to respond to Russian provocations independently, without relying entirely on other NATO members, including the United States.

For example, Estonia has acquired its own medium-range air defense system, enabling it to counter violations of airspace without always deferring to neighboring states or external allies. Poland, too, is heavily investing in long-range weapons that will give it significant leverage over Russian forces if required. Perun emphasizes that these developments introduce complexity for Russia’s strategic calculations. Instead of solely deterring the United States from escalating, Moscow now faces potential action from individual NATO allies like Poland or Estonia, each capable of launching strikes into Russian territory if they deem it necessary.

This newfound autonomy disrupts Russia's assumptions about centralized NATO decision-making. The proliferation of advanced capabilities across various NATO states makes it increasingly difficult for Russia to predict or influence alliance responses in future crises. As these smaller NATO countries acquire their own long-range capabilities, the number of independent actors in NATO with direct influence over escalation grows, raising both the risks and uncertainties for Russia.

Threats to Russia’s Interior

Perun explains that NATO rearmament also makes the Russian interior increasingly vulnerable to attack. With more forces stationed on the eastern flank and advanced long-range systems being developed and acquired by European NATO allies, Russia faces growing threats to critical infrastructure and military installations deeper within its borders. These include expectations of more advanced missile and drone systems capable of precise strikes far behind the frontlines.

From Moscow’s perspective, this magnifies the costs of any military confrontation with NATO. Russian analysts understand that their own modernization and production efforts are heavily constrained by domestic financial pressures and the ongoing war in Ukraine. Even though Russia has achieved notable milestones in specific areas, such as drone development and ballistic missile production, the country struggles to keep pace in other critical areas such as modern tanks, advanced protection systems, and armored personnel carriers. Perun mentions how Russia has had to rely on aging Soviet-era designs for its military hardware and to sideline ambitious modernization programs like the T-14 Armata tank or Koalitsiya self-propelled guns, which have seen minimal deployment.

Perun underscores the stark contrast in investment strategies between NATO and Russia: while European NATO members are focused on acquiring next-generation capabilities that will come online in the next decade, Russia is forced to focus on producing and maintaining equipment for immediate use in the war. This prioritization of quantity over modernization may allow Russia to sustain its current military presence but undermines its ability to remain competitive as NATO capabilities improve over time.

Risks and Uncertainties

Although NATO's investment trend appears strong, Perun discusses several potential risks that could disrupt its trajectory.

• Sustainability of Spending: The political and fiscal sustainability of the 3.5% GDP defense spending target agreed upon by NATO members remains uncertain. Perun points out that prioritizing military investment requires significant trade-offs, especially amidst global challenges like energy crises and demographics. Member nations must balance defense budgets against other pressures, such as domestic economic needs or debt reduction.

• Investment in Appropriate Capabilities: Perun poses the critical question of whether NATO’s increased funding is being allocated optimally. He observes a strong focus on conventional platforms such as tanks, warships, and fighter jets, which are key to immediate force expansion. However, he warns that these systems must be complemented by investments in emerging technologies like advanced drones and ammunition stockpiles. NATO must avoid over-investing in platforms that might struggle to adapt swiftly to the challenges posed by modern warfare, especially as demonstrated in Ukraine.

• Inflation and Rising Costs: Perun recalls that military markets have been hit hard by inflation, particularly as demand has spiked due to both the war in Ukraine and the Middle East unrest. Supply chain constraints and rising prices for critical commodities risk diminishing the real value of increased budgets, especially if cost growth remains unchecked. Perun emphasizes the importance of investing in tangible readiness over inflated prices or profit margins to ensure that NATO achieves its deterrent goals.

• U.S. Involvement: A final concern relates to the timeline and role of the United States in NATO's rearmament efforts. While European countries have been ramping up their investments and increasingly aiming for autonomy, they won’t achieve comparable capabilities overnight. Perun notes that, during this interim period, the U.S.’s position as the central pillar of European security remains vital. This poses risks if the American commitment to European defense wanes before these investments materialize fully.

The Broader Context

Perun concludes by reiterating the critical trajectory of European NATO rearmament since 2022, emphasizing that if these trends hold, they could decisively alter the military balance between NATO and Russia in the long term. Tangible contracts and procurement efforts are being finalized, although much of the delivery and operational capability of next-generation systems remains years away.

In contrast, Russia’s economic and military foundation shows signs of strain. Rising oil prices may provide temporary relief, but long-term structural issues, such as financial instability and limited industrial capacity, mean that Russia is increasingly unlikely to match NATO’s rate of modernization or expansion. Furthermore, with Russia's attention and resources consumed by its war in Ukraine, it risks falling further behind as NATO continues to move forward with its rearmament plans. Russian attempts to maintain approximate parity with NATO could result in unsustainable economic burdens, comparable to those seen in the Soviet Union’s final years.

Despite uncertainties about budgets, inflation, and the trajectory of U.S. involvement, the overarching trend is clear: NATO is undergoing a historic transformation in its defense posture, and the implications for regional security and European readiness are profound.

What was said, and when

The points this article makes, and the moment in the recording where each was said. Every time below opens the recording at that moment.

• Perun begins by addressing how NATO's defense spending has evolved since 2022, highlighting the significant changes occurring in response to shifting global security dynamics. 04:02.
• In recent years, NATO has transitioned from what he describes as the "2% era," where most member states fell short of the 2% GDP benchmark for defense spending, to a new period of increased financial commitment. 04:02.
• The Russian invasion of Ukraine in 2022 served as a wake-up call, making it clear that the previous state of underinvestment was no longer tenable. 04:21.
• By 2026, NATO's collective defense spending saw a 50% increase within four years, growing from just under $1.2 trillion in 2022 to over $1.8 trillion in 2026. 08:13.
• While the smallest year-over-year increase occurred between 2022 and 2023, spending surged significantly from 2025 to 2026, adding nearly $200 billion in nominal terms during that span. 08:13.
• Whereas U.S. defense spending grew comparatively modestly, about 20% over this period, non-U.S. NATO members doubled their collective spending. 09:02.
• In 2021, U.S. defense spending exceeded the rest of NATO combined by twofold. 09:40.
• By 2026, European NATO members alone are projected to approach levels of defense spending comparable to what the U.S. contributed just a few years prior. 09:40.
• Adjusting for inflation, NATO's defense spending experienced a real-term increase of about 26% from 2021 to 2026. 10:13.
• This real-term increase translates to an additional $300 billion in constant 2021 U.S. dollars. 10:13.
• Non-U.S. NATO members contributed roughly $275 billion of this real-term increase, marking a 77% growth in their spending compared to 2021 levels. 10:13.
• Germany relaxed its "debt brake" policy, unlocking crucial resources for defense spending. 06:37.
• The 2025 NATO summit in The Hague introduced new defense spending benchmarks: a 3.5% core defense target aimed at fortifying traditional military capabilities and an optional 5% target for investments in "soft defense" areas. 05:45.
• The European Union’s SAFE program provided a massive fund composed of low-interest loans to support defense spending. 06:37.
• These EU measures sought to unlock an estimated €800 billion in defense investments. 06:37.
• Russia has substantially increased its own defense budget since the Ukraine war began, reaching as much as $220 billion annually. 16:16.
• Between 2025 and 2026 alone, NATO’s spending growth effectively added an amount equivalent to an entire Russian defense budget. 08:48.
• Purchasing power and regional economic differences play a pivotal role in determining real military capability. 11:59.
• Adjusting for military purchasing power parity revealed that NATO’s investment offers an even stronger real-term advantage over Russian spending. 42:45.
• Given Russia’s centralized government and state-owned defense industry, it benefits from efficiencies like equipment standardization and indirect subsidies. 16:30.
• The Robertson methodology suggests Russia's military purchasing power provides more than double the return per dollar compared to the United States. 16:58.
• In 2017, Russia reportedly derived three times the purchasing power from its defense budget compared to the United States. 17:53.
• By 2025, this figure dropped to a ratio of 2.16:1. 17:53.
• Russia's reduction in purchasing power advantage is attributed to inflation, sanctions, high borrowing costs, and elevated wartime costs. 19:14.
• Russia’s personnel costs, including signing bonuses, death payments, and other benefits, have skyrocketed since 2022. 18:31.
• Despite scaling up defense production, Russia faces challenges from labor demands, extended working hours, and drone strikes targeting factories. 18:51.
• Non-U.S. NATO countries' equipment investment rose from 19% of their defense budgets during the pre-Crimea era to 33% by 2026. 26:07.
• Germany allocated over $47 billion for military equipment in 2026, approximately ten times what it spent a decade prior. 30:37.
• NATO committed approximately €50 billion to precision strike systems, with the United Kingdom leading development in various areas. 32:28.
• Germany established a production facility for the Patriot missile system domestically to bolster defense industrial capacity and autonomy within NATO. 34:24.