The Battle for Financial Resources That Will Shape Europe’s Future
Stockholm — “Money makes the world go round,” sings the showgirl Sally Bowles in the famous musical “Cabaret,” set against the backdrop of Weimar Republic’s decline. It is certain that money will shape Europe’s future as political leaders across the continent face painful decisions about how to allocate public funds in an increasingly volatile world.
Three urgent priorities are expected to strain public financial resources in Europe over the next few years. The first—and most obvious—concern is defense. The driving force behind increased military spending stems primarily from the desire to respond to the aggression of Russian President Vladimir Putin, as well as continuous criticism from former U.S. President Donald Trump directed at America’s NATO allies. Combined, these pressures have made bolstering Europe’s defense posture a strategic necessity.
The second priority is the urgent need to support Ukraine in its fight against Russia. Should Ukraine’s defenses collapse, it is likely that Russia would lash out in a vengeful fury. Ensuring that Ukraine can continue to defend itself requires European governments to surpass their current defense spending commitments.
Finally, there is the lengthy process of preparing the upcoming European Union multiannual budget, which will cover the period from 2028 to 2034. The European Commission has already presented its proposal, but the real challenge lies ahead, as member states and the European Parliament must conduct internal negotiations before agreeing on final figures.
The Commission’s proposal includes increased funding for security, global commitments, and competitiveness, along with additional support for Ukraine. While these priorities have widespread backing, reallocating the necessary resources to finance them remains a contentious issue. It is safe to say that the Commission is heading towards a bitter political showdown before reaching consensus.
Despite the intensity of these budgetary battles, the budget proposed by the Commission amounts to only 1.26% of Gross National Income in the 27 EU countries. While this figure exceeds the current rate of 1.13%, the net increase is relatively modest once accounting for the debt service costs resulting from the borrowing spree following the COVID-19 pandemic.
When it comes to defense, however, the numbers become significantly more critical. Defense budgets across Europe have grown nearly a third in recent years, with most NATO member states spending around 2% of their GDP or nearing that benchmark.
Yet even this is no longer sufficient. At the NATO summit in June in The Hague, members pledged to spend 3.5% of GDP on defense by 2035, with an additional 1.5% allocated for overall defense and security-related investments. This additional 1.5% appears crafted to appease Trump, who has repeatedly urged European allies to increase military spending to 5% of GDP. Much of this additional spending is expected to rely on creative accounting rather than genuine new funding.
Support for Ukraine during the war and the eventual reconstruction of the country will require significant financial commitment. Although estimates vary, $100 billion annually, for example, would constitute just over 0.4% of the total GDP of the EU and the UK combined—an enormous sum, but one that is by no means easy to manage.
At some point during the 2028-2035 budget period, the costs of rebuilding Ukraine will need to be addressed. Some studies estimate that the reconstruction costs may reach roughly $500 billion, although this figure includes areas that may remain under Russian control in the foreseeable future. Much will also depend on whether security guarantees and Ukraine’s prospects of EU membership create an environment conducive to massive private investment.
Of course, new demands may arise, further straining Europe’s financial resources. For instance, several European governments have already cut development aid or redirected parts of it to support Ukraine. While this may be a necessary short-term response to the Russian invasion, the long-term consequences remain unclear.
Currently, only Norway, Sweden, and Denmark meet the UN target of allocating 0.7% of Gross National Income for development aid. Following significant cuts to foreign aid by the Trump administration and the closure of the U.S. Agency for International Development, there is a strong argument for Europe to fill this gap. A more desperate world will be more unstable and less secure, making development a strategic and moral necessity.
Meeting all of these commitments will not be easy, particularly for governments already grappling with large deficits and high public debt. My estimate is that the Northern European countries will reach NATO’s defense spending goal of 3.5% of GDP before 2035, while Southern European countries—excluding Greece—are unlikely to achieve it. With France, Italy, and Spain heading to elections by 2027, the political appetite for cutting spending to increase defense budgets is likely to remain limited.
This trend is already evident in the distribution of aid to Ukraine. In the first four months of 2025, Nordic countries contributed $6.8 billion, the UK provided $5.3 billion, and Germany around $760 million, while Spain and Italy provided only a small fraction of these amounts.
Ironically, the EU countries often labeled as “frugal” are the very ones willing to provide funding to bolster common union priorities. On the other hand, less economically stable countries tend to advocate for more borrowing, even though their capacity to do so is limited.
These tensions are now fueling the heated battle over Europe’s financial resources. The contrast is stark between NATO’s swift approval of massive spending commitments and the EU’s debate over much smaller amounts. Regardless of the outcome, the upcoming financial battle will test the ability and willingness of Europe’s leaders to confront serious emerging security challenges.
