Issue Meeting NATO's 5 percent Hague pledge and its fiscal and growth trade-offs

Summary

At the Hague summit on 24 and 25 June 2025 NATO allies pledged to invest 5 percent of GDP in defence and security by 2035. At least 3.5 percent is to go to core defence as defined by NATO and to capability targets, and up to 1.5 percent to protecting critical infrastructure and networks, civil preparedness, innovation and the defence-industrial base, with annual implementation plans and a review of the path in 2029. The EU escape clause gives members temporary room to spend more from 2025 to 2028, but the higher spending must then be absorbed into permanent budgets, and one scenario implies extra fiscal consolidation of about 0.4 percentage points of GDP a year over 2029 to 2032. That adjustment would coincide with spending pressure from the digital and green transitions and from ageing, so differences in fiscal space are likely to shape how fast members can raise defence budgets. Past EU evidence suggests defence spending lifts activity with cross-border spillovers, but multipliers are larger when import content is low, fiscal space is ample and public investment is efficient, and today's simultaneous build-up may yield less. The report therefore sees joint procurement, a larger European production share, R&D-heavy spending and defence market integration as decisive for turning the pledge into economic and industrial gains.