Key Points

• Rising tensions, particularly triggered by the war in Ukraine, have led to a significant increase in European defense spending.
• While several frontline states have exceeded NATO’s 2% GDP defense spending target, many European countries still fall short.
• The EU has adopted a strategic vision aiming to strengthen its security and defense posture by 2030. The ReArm Europe initiative seeks to mobilize up to €800 billion by 2029 to support joint procurement and reduce reliance on third countries.
• The war in Ukraine has exposed deficiencies in the European defense industry, particularly in the production of military equipment. Fiscal constraints, public debt, and political resistance in some EU member states may challenge the sustainability of increased defense spending.
• Several European countries have announced cuts in their aid budgets. More are likely to follow as the geopolitical situation worsens (Russian threats, economic development).
• As Europe focuses on security and defense, the tight definition of those terms does not include foreign aid. At the same time, the aid budget includes funding earmarked for migration and refugee support rather than humanitarian and development assistance.
• The aid system's reliance on a few mainly Western donors is being highlighted as the biggest challenge for aid agencies.
• Similar to China and Russia, Europe is also increasingly perceiving aid as “mutually beneficial partnerships”, as an EU initiative puts it.
• Aid agencies will face tough decisions on how to administer the already-scarce resources and which crises and affected people to prioritize.
• The pressure on aid agencies to build meaningful alliances with each other and the private sector to become more efficient, innovative, and impactful will most likely increase. The localization of aid will be accelerated.

Summary

European defense spending has sharply increased in response to rising geopolitical tensions, most notably the war in Ukraine. Recent developments have exposed critical capability gaps and prompted renewed efforts to strengthen the EU’s security and defense posture. The adoption of the Strategic Compass and new funding mechanisms, such as Germany’s €100 billion special fund, signal a shift toward greater defense readiness. While many frontline states have surpassed NATO’s 2% GDP target, many others still fall short. The EU’s proposed “ReArm” Europe initiative aims to mobilize up to €800 billion in the coming years, supporting joint procurement and reducing reliance on third countries. However, fiscal constraints and political resistance in some member states may challenge the sustainability of this renewed momentum.

The current geopolitical situation and the pressure to increase defense spending have led many European countries to cut their aid budgets. Domestic political and economic pressure, both on the rise with the increased influx of migrants over the last couple of years and the trade war initiated by the U.S. Trump administration, have significantly increased the incentive for countries to reduce their contribution to humanitarian and development assistance. As the highest proportion of aid donations comes from a few Western countries, it is clear that the aid sector and its funding need to be reformed. While foundations, the private sector, and other non-governmental donors can likely increase their spending, they cannot cover the gap left by decreased aid budgets. Other countries, namely China, Russia, and India, will presumably step in to expand their influence in the Global South. This will likely negatively impact Europe’s security and economy as those countries follow their own geopolitical agenda and objectives.