Meeting Nato’s Higher Defence Spending Target Will Weigh On Eu Credit Profiles

Germany have so far allocated around 10.5% of Its Budget (1.2% of GDP) Towards Military Spending. To meet the previos Nato Target of 2% of GDP, The Government Relved on A Special Defense Expenditure Fund of Eur 100bn Agreed in 2022. Following The Constitutional of the Gerch, Following Government Will Be ABLE TO FUND HIGHher Defence Spelling Through Increased Debt Issuance. Without Significant Budget Re-Allocation, this would Imply addition Borrowing of More than Eur 100bn per year.

If Germany Were to Finance the Additional Speaking Without New Debt Issuance, The Country Willd Face The Largest Budgetary Impact of Around 17% of Central Government Revenues. This is ConsiderAbly Higher Compared Those of Other Large Europe Economies Such as France (8%), Italy (7%) and The United Kingdom (3%).

Without the agreed Opt-Out from the Higher speding Target, Spain would have the following Second Highhest Budgetary Impactic of Armond 11.4% of Central Government Revenues. Similarly, Due to ITS Relativly Small Military Budget, Belgium have has also argued for additional flexibility in meting the New Target as The Country Faces a High Budgetary Impact. Government Revenues.

In Absolute Terms, Germany’s Defence Spending ShortFall Remains the Largest, Standing At AROUND USD 106BN per year year Once The EUR 100BN SPECIAL DEFENCE Expenditure Fundef. 46bn), France (USD 45BN), The United Kingdom (USD 41bn) and Spain (USD 37BN).

FIGURE 1: ESTIMATED BUDGGETARY EFFORT RECHRED TO REACH 3.5% OF GDP DEFENCE SPEENDING TARGET
USD BN (LHS), % of Central Government (CG) Revenue Excluding Social Security Funds (RHS)

Categories defined by currently-assigned Scope Sovereign Rathings. Source: IMF, Scope Rathings Forecsts. Pace of Increased Military Spending to Vary ConsiderAbly in Europe Importantly, Scope Ratings’ Government Debt Forecasts Are Based on Varying Rates of Increase in Defense Spending. Governments in Central and EASTERN European EUROPE Are Expectioned to Accelerate their Efforts Upfront, While Southern Europe Countries (Like Belgium and France) Are Likely to Adopt a More Gradual Approach. Spain’s Decision to Opt Out of the Recent Nato Commitment Highlights this Divergence in Threat Perceptions.

From A Credit Rating Perspective, Any Assessment Also Goes Beyond the Compliance With Fiscal Rules Alone. Scope focuses on the Sovereign’s Broader Fiscal Stance, and Thus Budget Balances, The Sustainability of Interest Payments, and Medium-Term Debt Traderyes.

Higher Defense Expenditure Will Lead to Higher Borrowings and Deterioringing Sovereign Debt-To-To-Gdp travel SPEENDING ELSEWHERE OR INCREASE REVENENES.

Finance Defance and Security Emerges at the EU Level Given the Limited Fiscal Space Among Several Eu Member States, The Finance of Security and Defense Could Also Shift Towards the Europe Level. Centralizing Eu Security and Defense Finance Could Provide More Sustainable and Co-Ordinated Finance Across Eu Member States While Also Creating Economies of Scale in Defance. Such A Move Wound Mark A Significant Political Step Towards Deeper European Integration.

To address this Issue, the eu have adopted regulation setting up to the Security Action for Europe (SAFE) Initiative that will Provide An Additional Eur 150bn Line of Credit To Member States. Funded Through Eu -ysued Debt, Safe Will Offer Loans to Member States with Potential Advantages in Terms of Lowering Borrowing Costs and Extending Maturities, With Loans of Lower 10-YEAR GRACE Period for Principal Repayments.

The Implementation of this Program Expectioned to Increase eu Bond Issuance (Eur 662bn Outstanding as of June 2025) and Require A Larger Share of The Eu Budget to Stone. Over The Next Multi-Annual Financial Framework 2028-35.

Other Eu Initiats Including the European Defense Industry Program (EDIF), WHICH COURuld Provide Eur 1.5bn in Grants By End-2027, Wound Focus on Improving Croving Croving Procurement, StrengThening Defense Industry Supple CHAINS AND INCREASING ManUFACTING CAPACITIES.

Proposals ALSO INCLUDE OF A DEDICATED European Rearmannt Bank Modelled on Institutions Like The European Bank for Reconstruction and Development (EBRD). This Bank Wuld Be Funded by a Coalition of Willing States-Potentally Both Eu and Non-Eu NATO MEMBERS-WHICH WHW WOULD CONTRIBUTE INITIAL CAPITAL, ALLOWING THE BANK TO LEVERAGEAGEAGEAGEAGEAGEAGEAGEAGEAGEAGEAAGEAGEAGEAGEAGEAGEAGEAGCE The Bank Could Offer Lending Directly to Governments for Defense Procurement, and to Defance Companies to Expand Industrial Capacities.

Yet Another Proposal Is The Establishment of a Broader Defense, Security & Resilience (DSR) Bank, Aimed at Supporting Joint Procurement, Manufacting Scale-Up, and Strategic Allies, Including Trans-Atlantic and Indo-Pacific Partners.

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Eiko sievert is an Executive Director in Sovereign and Public Sector Rathings at Scope Rathings. Alvise Lennkh-YunusManaging Director of Sovereign and Public Sector Ratings at Scope, and and Brian MarlySenior Analyst in Sovereign Rathings at Scope Rathings, Contributed to Drafting This Commentary.