Policy Brief 42 - The European Defense Spending Trilemma

Executive Summary 

Recent geopolitical developments (Russia’s war in Ukraine, growing instability in the Middle East, and the U.S. strategic pivot toward the Indo-Pacific) require European countries to rethink their defense strategies.  

In this context, reinforcing NATO’s collective security has become increasingly urgent, yet in this effort European countries are constrained by a structural trilemma involving the pursuit of security, fiscal stability, and domestic political support.  

Inaction on the defense front risks further weakening the Transatlantic alliance, particularly if NATO’s defense spending benchmark rises from 2 percent to 3.5 percent of GDP.  

However, rapid and indiscriminate budget increases could trigger significant risks, including inflationary pressure, fiscal imbalances, and domestic opposition.  

To navigate these challenges, we propose a strategy based on three integrated components. 

First, defense spending should increase gradually and selectively. Although European defense budgets remain below the 2 percent threshold, there is clear room for growth. However, these increases should focus on strategically relevant areas such as research and development, joint procurement, and operational readiness.  

When properly designed, such investments can yield positive macroeconomic outcomes, particularly in high-tech industrial ecosystems.  

Second, structural reforms are essential in three key areas: enhanced European cooperation in procurement and operations, the creation of national innovation agencies inspired by US DARPA, and the modernization of defense planning, financial governance, and personnel management.  

These reforms would improve efficiency, interoperability, and long-term strategic effectiveness. Finally, the accounting perimeter of defense should be updated.  

European countries should include within their defense budgets all expenditures that substantively contribute to NATO’s core missions, such as cybersecurity, critical infrastructure protection, and resilience against hybrid threats.  

This methodological adjustment would reduce the gap between actual and declared efforts, enhancing national credibility and legitimacy.  

We apply this strategy to Italy. Despite being the EU’s third-largest economy, Italy allocates only 1.51 percent of its GDP to defense. Raising this share to 2 percent or 3.5 percent would require increasing the defense budget from €28 billion to €40 or even €70 billion.  

Without accompanying structural reforms, such growth would be politically unsustainable and economically counterproductive.  

Therefore, we advocate a phased, reform-oriented, and strategically coherent approach that aligns defense effectiveness with fiscal responsibility and democratic legitimacy. 

Policy Recommendations 

Italy’s defense posture stands at a critical juncture. The convergence of mounting international insecurity, persistent fiscal constraints and rising expectations from NATO and the European Union demands a strategic reassessment of how defense policy is conceived and executed. Italy cannot afford either strategic inertia or a simplistic expansion of military expenditure.  

What is needed instead is an integrated model that balances effectiveness, fiscal sustainability, and political legitimacy. 

This model rests on three mutually reinforcing components.  

1. First, defense investments must increase in a selective and gradual manner, targeting high-value sectors such as joint procurement, research and development, cyber defense and operational readiness. Sudden or indiscriminate increases risk inflationary pressures, administrative delays and political backlash, especially in a country facing public debt pressures and demographic constraints⁴¹ 

2. Second, structural reform is essential. Italy must adopt a legally binding multi-year defense programming law, similar to France’s Loi de programmation militaire⁴². It must also restructure its procurement system to align with European investment cycles and reduce the imbalance caused by personnel costs, which still absorb approximately 70 percent of the defense budget⁴³. Reaffirming the 2011 objective to bring this share below 50 percent by 2030 would free up substantial resources for strategic reinvestment. 

3. Third, Italy must redefine the scope of what counts as defense. Modern threats do not respect institutional boundaries. Activities such as cyber resilience, infrastructure protection and maritime security contribute directly to NATO’s core missions and should be counted accordingly. Reclassifying these expenditures is not a statistical maneuver but a strategic update. It would increase transparency, align Italy’s accounting with NATO principles and reduce the nominal gap between effort and reporting. 

Taken together, these reforms would allow Italy to move credibly toward the two percent target while preserving macroeconomic balance and political cohesion. This model may also serve as a replicable strategy for other European allies navigating the same trilemma between security, fiscal constraints, and domestic legitimacy. 

IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.

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