How Europe Made Rearmament Look Cheap

On the morning of 24 June 2026, Rheinmetall's share price plunged 20% — because the German state, facing runaway costs, had cancelled the construction of six F126 frigates, Germany's largest surface-warship programme. A single cancelled order — an extraordinarily large one, admittedly — and more than €11 billion was wiped off the market value of Europe's biggest ammunition maker in a single day. That moment says more about the continent's past four years than any summit communiqué does: the European Union, founded as a “peace project”, now runs a rearmament programme large enough for one government decision to send a shockwave through the stock market. This series traces where the money came from, where it ends up — and who will eventually pay for it. Part one is the anatomy of the shift: how NATO's 2% target became 5% within a decade.

1. The chronology of the shift: from 2022 to the Ankara summit

The shift can be dated precisely. On 27 February 2022, three days after Russia launched its invasion of Ukraine, the German chancellor, Olaf Scholz, told the Bundestag that this was a Zeitenwende — a change of era — and announced a €100 billion special fund to equip the Bundeswehr. Until then, Germany had for decades spent less on defence than the 2% target NATO set in 2014.

The next step came in March 2025. On 4 March, Ursula von der Leyen, the president of the European Commission, presented the ReArm Europe plan — later renamed Readiness 2030 after Italian and Spanish objections — aimed at mobilising some €800 billion of defence spending in total. The plan has two main pillars: member states' additional defence spending is exempted from the EU's fiscal rules for four years, and a €150 billion joint credit line is created.

That second pillar, the SAFE (Security Action for Europe) regulation, cleared the Council on 27 May 2025 and entered into force on 29 May. A month later, at the NATO summit in The Hague on 24–25 June 2025, the allies — with one exception — committed to devoting 5% of GDP to defence and defence-related spending by 2035.

The latest development came at the NATO summit in Ankara on 7–8 July 2026. The closing declaration reaffirmed the Hague commitment, announced more than $50 billion of new procurement, and recorded that European allies and Canada had increased their investment in core defence capabilities by more than $139 billion in 2025. (That figure is not the increase in total defence spending but in capability investment narrowly defined; for total spending, see the European Defence Agency and NATO numbers below.) For 2026, the allies promised Ukraine €70 billion in military equipment, support and training, and undertook to maintain at least that level in 2027 as well — though on the Kyiv Independent's reading, a substantial part of the sum is made up of commitments announced earlier, so the number is not entirely new money. That distinction runs through the whole series: the headline total of rearmament announcements and the amount of genuinely new money are two different things.

The Hague 5% target has two components: at least 3.5% of GDP in core defence spending (forces, equipment, meeting NATO's capability targets), plus up to 1.5% for “defence-related” spending — critical infrastructure, cyber security, civil preparedness, the defence industry. The path to that target will be reviewed in 2029.

Spending has already risen — and faster than the planners themselves expected. According to data published by the European Defence Agency (EDA) on 16 July 2026, the 27 EU member states spent €343 billion on defence in 2024 (1.9% of GDP), but €418 billion in 2025 — 20% more than a year earlier, by the agency's reckoning — which is 2.2% of GDP; for 2026 it forecasts €454 billion, or 2.4% of GDP. The scale of the acceleration is clear from the agency's own earlier estimate: a year previously it had put 2025 at €381 billion, and the outturn came in €37 billion higher. In 2025, 23 member states already spent at least 2% of GDP on defence, procurement of military equipment rose to €115 billion, and spending on defence research and development is set to rise from €17 billion in 2025 to €20 billion in 2026. André Denk, the EDA's chief executive, reckons that on current trends member states' defence spending could reach €547 billion by 2029. The NATO secretary general's annual report describes the same process from a different angle: European allies and Canada together spent $574 billion on defence in 2025, 20% more in real terms than in 2024. The two figures cover different groups and different yardsticks — the EU's 27 member states in euros, and the European NATO members together with Canada in dollars — but the direction is the same on either measure: steeply upwards.

2. Where everyone stands: front-runners, non-participants, one exemption

The aggregate masks wide variation. NATO's 2025 spending table puts Poland top of the GDP-share list at 4.48%, followed by Lithuania (4.00%), Latvia (3.73%) and Estonia (3.38%) — every one of them a country bordering Russia or Belarus. At the other end of the scale, Spain was the only ally to obtain a formal exemption from the 5% target: in a letter to the NATO secretary general, the Spanish prime minister, Pedro Sánchez, called the target “unreasonable and counterproductive” for Spain and set the Spanish ceiling at 2.1% of GDP — undertaking in return to meet the capability targets even so.

Germany is the engine. The 2026 budget, passed in November 2025, contains €82.69 billion of regular defence spending plus €25.5 billion from the expiring special fund — some €108 billion in all. The planned path rises to more than €152 billion by 2029, which would put Berlin at the 3.5% core target before 2030. To make that possible, parliament also reworked the debt brake written into the Basic Law: defence spending above 1% of GDP now falls outside the brake. One distinction matters here, because the two are so often conflated: the €500 billion German special fund also agreed in 2025 is not defence money — it goes to infrastructure and climate objectives, while what makes defence spending effectively “unlimited” is a separate rule. The money now has a clear purpose: under the strategy presented by the defence minister, Boris Pistorius, in April 2026, Germany would build Europe's strongest conventional armed forces by 2039, adding 10,000 personnel in 2026.

“This is a quantum leap that is ambitious, historic and fundamental to securing our future.”

— Mark Rutte, NATO secretary general, on the 5% target, 23 June 2025

Nineteen member states applied for the SAFE credit line by the deadline of 29 July 2025; the €150 billion envelope was, in effect, fully spoken for. Poland heads the indicative allocation with €43.7 billion, followed by Romania (€16.7 billion), Hungary and France (€16.2 billion each), then Italy (€14.9 billion). Germany, Sweden and the Netherlands did not apply for any of it — they can borrow more cheaply on the market than through the EU facility — but they are taking part in the SAFE-linked joint procurements with their own money. Hungary's envelope is a story in itself: of the 19 applicants, the Hungarian plan is the only one still awaiting approval, and the government that took office after the April 2026 election is now reported to be asking for only around €10 billion of the €16.2 billion. Part three of this series returns to that in detail.

GDP-share figures depend on the source and the year; the table uses NATO methodology throughout.

3. The mechanics: why does this money look so cheap?

The genuinely interesting point is not that Europe is spending more, but on what terms. Behind the €800 billion headline there is no single pot of money being paid out; there are two financial techniques, and what they have in common is that they make the spending painless today and push the bill into the future.

The second technique is SAFE. The Union borrows in the market on the strength of its own credit rating — better than that of most member states — and passes the money on as loans, with maturities of up to 45 years and a 10-year grace period on repayments. On a SAFE loan signed today, principal repayments begin in the mid-2030s and can run into the 2070s. For whoever takes that decision today, the costs fall almost entirely beyond the current political horizon.

SAFE is not only cheap money; it is tied funding. For purchases financed through SAFE, at most 35% of the component cost may originate outside the EU, Ukraine and the EEA/EFTA countries, and as a general rule the purchase has to take the form of joint procurement by at least two member states. This “buy European” rule is a channel for industrial policy: the credit line steers demand towards the continent's factories — including, as part two will show, the ones in Hungary — and unlike national budgets, this money cannot be used to buy American or South Korean weapons.

Together, these two techniques explain the apparent paradox: why it was precisely the countries that borrow at higher yields and have the least fiscal headroom (Poland, Romania, Hungary) that asked for the largest envelopes, while the states with the best credit standing (Germany, Sweden, the Netherlands) stayed out. SAFE's actual function is not “financing a common European army” but an interest subsidy: it distributes the Union's ratings advantage to those for whom market borrowing is expensive. Put another way, the tighter a country's fiscal position, the more attractive this particular structure becomes — which is to say the system encourages extra spending and extra borrowing precisely where there is least room for either.

There is one further structural feature: the Hague target is an input measure, not an output one. It does not specify how many air-defence batteries or how many trained brigades Europe will field, only what share of GDP it will spend. The two are not the same: the spending target is “met” even when prices go up — and defence-industrial prices, as part two will show, have risen drastically. The loosely defined 1.5% “defence-related” band, meanwhile, leaves room for member states to relabel existing outlays — roads, bridges, cyber-security systems — as defence items. That makes the target politically easier to meet than it looks; how much of it becomes actual military capability is a separate question.

4. The counter-argument: the threat is real, and the backlog goes back decades

The critique of the mechanics above would be decisive only if there were no real security challenge behind the spending wave. There is. Russia has been running a full war economy since 2022, and NATO's eastern flank in Europe — the four countries spending the largest share of GDP — experiences that as a direct threat on its own doorstep. Nor is it in dispute that Europe spent decades living off the post-Cold War “peace dividend”: the Draghi report on EU competitiveness puts the additional investment the European defence industry needs over the coming decade at some €500 billion simply to keep pace, and because national procurement is so fragmented, the money is spent inefficiently.

Seen from that angle, the escape clause and the long-dated joint loan are not a trick but a reasonable instrument: deterrence is usually cheaper than fighting a war, and if the investment creates real capability, a long repayment schedule is justified — later generations will benefit from the protected infrastructure and the security it provides. Joint procurement is also, in principle, a way of holding prices down: longer production runs, fewer parallel development programmes. It is a strong argument, and it cannot simply be waved away. The question it leaves open — and the one at the heart of this series — is not whether Europe should be spending on defence, but who is checking, along the way, whether the hundreds of billions made “cheap” in this way really do turn into capability rather than into higher prices and profit.

5. What to watch over the next two to three years

Five measurable indicators will decide whether the jump from 2% to 5% turns out to be a genuine shift or a statistical exercise:

• The 2029 NATO review. The Hague declaration timed the check on the trajectory for that year — that is when it will become clear how many countries are slipping, and what the alliance does when they do.
• The pace of SAFE disbursements. The largest envelope, Poland's €43.7 billion, was approved by the Commission in February 2026, and Lithuania received its first instalment of €956 million in June; the key question is how much of it turns into actual contracts.
• The split between “core” and “related” spending. If most of the increase shows up in the flexible 1.5% band, that points to relabelling rather than capability-building.
• The escape clause running out in 2028. After that, additional defence spending counts towards the deficit again — and in several countries' budgets, rearmament will come up against the 3% rule for the first time.
• Prices. If ammunition and equipment prices keep rising, GDP-share targets will buy less and less real capability for the same money.

In summary. In four years, Europe has built a financial machine that has taken defence spending out of peacetime budget discipline: national spending exempted from the rules and joint borrowing with 45-year maturities have together set off a spending wave at a pace not seen in decades — defence spending by European NATO members rose from 1.4% of GDP in 2014 to 2.3% in 2025 — and done so in a way that leaves the bill politically all but invisible. The bill has not disappeared; it has been shifted in time. In the parts that follow, we look at who collects the revenue (the defence industry's record years and the Hungarian factories), and then at who pays the bill, and when. Two numbers from this part are worth keeping in mind: €16.2 billion — Hungary's SAFE envelope, still unapproved, of which the current government is now asking for only around €10 billion — and 2.07%, which is what Hungarian defence spending amounted to in 2025, against a commitment of 5% by 2035. The tension between those two is the subject of part three.