investing.com – Western European governments face a complex balancing act between addressing security threats and managing financial constraints, according to CITI analysts.
As President Trump renews calls on NATO allies to increase defense spending, questions arise about how Western Europe will respond.
Citi highlights that Trump's pressure could push European countries to allocate 3% of GDP to defense spending, but that target may not be achieved until the 2030s.
If countries resist these demands, there could be “real ambiguity around US security guarantees,” which would likely force Europe to unilaterally strengthen its defense capabilities.
In Eastern Europe and Scandinavia, countries such as Poland are already spending 4-5% of GDP on defense in response to growing security concerns.
However, Western European countries, including the UK and France, have been slower to act, according to the bank. Financial constraints, especially in the UK, are said to be major barriers.
“The UK’s strategic defense review in 2025 may prove a clear example of the pressure on the UK Treasury adviser,” City said.
They added: “In the medium term, we believe Europe’s spending is likely to rise (although 3% of GDP may be optimistic), in order to meet US demands.” “If European defense spending moves to 3% of GDP in the medium term, we expect that to add 30% to valuations across the sector.”
Ultimately, Citi notes, the slow action in Western Europe reflects a tension between addressing the long-term security risks posed by Russia and the immediate fiscal discipline demanded by bond markets.
As Citi says, “Given current fiscal constraints…we do not expect to hear significant near-term increases in defense spending.”
