The 2% Baseline and Its Origins¶
NATO’s 2% of GDP defence spending guideline, affirmed at the Wales Summit in 2014 as a political commitment rather than a binding obligation, was conceived as a floor — the minimum below which meaningful contribution to collective defence was implausible. In 2014, only three NATO member states (United States, Greece, and the UK) met the threshold. The remaining 25 members, including most of Western Europe, operated at 1.0–1.8% of GDP, with Germany’s celebrated Bundeswehr consuming 1.19% of Europe’s largest economy.
The 2014 commitment set a ten-year target to reach 2% by 2024. The political events of February 2022 compressed that timeline in CEE while accelerating the debate about whether 2% is itself adequate for the threat environment that Russia’s full-scale invasion revealed. The Washington Summit in July 2024 formally affirmed that 2% was “a floor, not a ceiling,” and endorsed national plans by multiple members to move significantly above it.
The structural debate has sharpened under US political pressure. The Trump administration’s transatlantic pressure on European burden-sharing — articulated through statements about Article 5 conditionality for low-spending members — was not a new argument but a more explicit one than earlier administrations had made. European defence ministers who had spent years arguing that 2% was achievable eventually are now being asked to justify why 5% (the figure floated by Trump) is not the appropriate benchmark for nations facing a direct territorial threat.
CEE Spending Leaders: Poland, Estonia, and the Baltics¶
Poland is the outlier in CEE defence economics — a country of 38 million that in 2024 spent approximately 4.12% of GDP on defence, the highest proportion in the NATO alliance after the United States. Polish defence expenditure in 2024 reached approximately $34 billion in nominal terms, funding a procurement programme of extraordinary ambition (see procurement) and a plan to grow the armed forces to 300,000 personnel from approximately 165,000 in 2021.
The political context for Polish spending is direct border exposure: Poland shares a 232 km border with Kaliningrad Oblast, a 418 km border with Belarus, and a 535 km border with Ukraine. Warsaw’s political elite — across party lines — treats the Russian threat as existential rather than theoretical, and the domestic political economy of defence spending reflects this. Defence budget increases have been broadly popular, supported by a public that retains historical memory of occupation and partition unavailable to Western European electorates.
Estonia at 3.4% of GDP is the per-capita spending leader among smaller CEE members. With a GDP of approximately $38 billion, Estonia’s absolute defence spending is modest (~$1.3 billion), but the proportion reflects a strategic assessment that survival requires front-loaded investment in ATGM capability, K9 howitzers, anti-drone systems, and cyber defence. Latvia at 3.1% and Lithuania at 2.9% are similarly elevated above the old NATO average, though Lithuania has committed to reaching 3.5% by 2026.
The Baltic arithmetic is stark. Lithuania’s 50,000-strong armed forces (active plus reserve) are not sufficient to hold the Suwalki corridor against a peer threat without rapid reinforcement. Latvia’s 6,000-strong professional military — even with reservist mobilisation to 25,000 — cannot stop a determined Russian assault. The purpose of Baltic defence spending is not to generate independent deterrence but to ensure that enough resistance, intelligence, and delay capability exists to make the cost of aggression high and the time for NATO reinforcement available.
Romania at approximately 2.5% of GDP is the large-economy CEE outlier — a country of 19 million with a GDP of ~$360 billion spending roughly $9 billion on defence. Bucharest has made significant procurement commitments (Patriot, Abrams, HIMARS, K9) but faces structural constraints in translating budget into delivered capability: industrial corruption, procurement system inefficiency, and a defence ministry that has historically underspent its capital budget.
The Laggard: Hungary¶
Hungary’s position in CEE defence economics is anomalous. Operating at approximately 2.1% of GDP — above the old 2% floor but dramatically below regional peers — Budapest’s defence trajectory has been shaped by Viktor Orbán’s government’s qualified support for NATO’s eastern flank posture and its maintained economic relationships with Russia and China. Hungary has refused to allow NATO military supply convoys across its territory to Ukraine, declined to donate military equipment, and blocked several EU defence financing mechanisms.
The Hungarian military is acquiring Leopard 2A7HU tanks (44 contracted from KMW), Lynx IFVs (218 contracted from Rheinmetall), and Airbus H225M Caracal helicopters — a genuine capability upgrade. But the strategic ambiguity of Budapest’s alignment reduces the operational value of these acquisitions to alliance planning. NATO planners must account for the possibility that Hungarian territory and forces may not be fully available for collective defence scenarios, a contingency without Cold War precedent.
CEE Defence Spending 2020 vs 2024 vs 2026 Targets¶
| Country | GDP (approx. 2024) | 2020 % GDP | 2024 % GDP | 2026 Target |
|---|---|---|---|---|
| Poland | $830bn | 2.31% | 4.12% | 5.0% (proposed) |
| Estonia | $38bn | 2.28% | 3.43% | 3.5%+ |
| Latvia | $43bn | 2.16% | 3.15% | 3.5% |
| Lithuania | $72bn | 2.13% | 2.85% | 3.5% |
| Romania | $360bn | 2.05% | 2.47% | 2.5%+ |
| Czech Republic | $290bn | 1.34% | 2.19% | 2.5% |
| Slovakia | $130bn | 1.73% | 2.04% | 2.5% |
| Hungary | $195bn | 1.74% | 2.13% | 2.5% |
| Bulgaria | $100bn | 3.25% (NATO mission costs) | 2.04% | 2.5% |
| NATO Average (all members) | — | 1.77% | 2.71% | — |
What the Money Buys — and What It Doesn’t¶
Defence budget composition matters as much as the headline percentage. Defence spending divides into three broad categories: personnel costs (pay, pensions, healthcare), operating costs (fuel, training, maintenance), and investment (equipment acquisition, infrastructure). The ratio between these categories determines whether a high percentage of GDP is building genuine capability or primarily funding payroll.
Poland’s elevated spending is investment-heavy: approximately 45–50% of the defence budget flows into capital expenditure — procurement, infrastructure, and R&D. This is an unusually high ratio for any NATO member; the NATO average is closer to 25–30% for investment. The implication is that Polish defence spending is building long-term capability rather than sustaining a large standing force.
The Baltic states face a different constraint. With small absolute GDPs, even 3%+ spending produces relatively modest absolute procurement budgets. Estonia’s $1.3 billion at 3.4% of GDP is less than the annual operating cost of a single US aircraft carrier air wing. The Baltics compensate through specific capability choices (ATGM-heavy, K9 fires, cyber) and through leveraging allied pre-positioning — US pre-positioned equipment in the region multiplies Baltic defence without appearing in Baltic budgets.
Personnel cost is the hidden constraint. Growing Poland’s military from 165,000 to 300,000 personnel requires recruiting, training, arming, and sustaining an additional 135,000 soldiers — a personnel cost increase of approximately $3–4 billion annually at Polish military pay rates, before accounting for the equipment to arm the new formations. The competition between personnel growth and equipment procurement within a fixed (or slowly growing) budget is the central resource allocation tension in Polish defence planning.
The Procurement Backlog Problem¶
The most misleading metric in CEE defence economics is the committed procurement total. Poland has approximately $50 billion in signed or advancing contracts — F-35s, K2s, HIMARS, Patriot, K9s, ships, helicopters. This is a genuine commitment, reflected in multi-year payment schedules and US FMS letters of offer. But committed and delivered are different things.
The procurement backlog — contracts signed but equipment not yet delivered — means that CEE’s actual fielded capability in 2026 is substantially below what the contract figures imply for 2030. The F-35s will not arrive before 2024–2025 and deliveries run to 2030. The K2PL licensed production line is not yet operational. HIMARS deliveries run to the early 2030s for the full 486 launchers. Patriot batteries have multi-year delivery queues.
The backlog creates a capability gap that exists precisely during the period when Russian reconstitution is most constrained and NATO deterrence should be most credible. The defence economics challenge is not just spending more — it is converting committed procurement into fielded capability faster. This requires investment in training infrastructure, maintenance facilities, and the human capital to operate new systems effectively.
European Defence Fund and Collective Financing¶
The European Defence Fund (EDF), operational from 2021 with a €8 billion budget for 2021–2027, provides EU co-financing for collaborative defence research and development. CEE members have participated actively in EDF calls, using the mechanism to supplement national R&D budgets and to build collaborative programmes with Western European industrial partners.
The European Defence Industry Reinforcement through common Procurement Act (EDIRPA), operational from 2023, provides €500 million for collaborative procurement of defence products to replenish stocks depleted by Ukraine support. Poland, Romania, Estonia, and Lithuania have been active EDIRPA participants. The scale is modest relative to national procurement programmes, but the mechanism establishes a precedent for EU collective financing of defence that the Draghi Report (2024) argued should be expanded dramatically — up to €100 billion in collective debt issuance for European defence.
The Case for 3% as New Baseline¶
The structural argument for 3% of GDP as the new NATO baseline — rather than 2% — rests on four columns. First, the threat environment has materially changed: Russia’s demonstrated willingness to conduct a large-scale conventional war against a European neighbour invalidates the 2014 assumption that the 2% target reflected a deterrence-adequate investment. Second, the procurement pipeline has revealed industrial capacity constraints that require sustained investment above 2% to build strategic depth in munitions, spares, and reserve equipment. Third, the personnel challenge — growing and sustaining armed forces at the scale collective defence requires — has a long-term cost that 2% does not accommodate. Fourth, the residual US commitment to European defence may diminish further under domestic political pressure, requiring Europe to self-insure at a higher level.
The counter-argument is economic: 3% of GDP represents approximately €450 billion annually across NATO’s European members, compared to approximately €300 billion at 2%. The marginal billion euros is harder to spend efficiently as procurement systems, industrial capacity, and training infrastructure face saturation. The quality of spending — how effectively each defence euro translates into operational capability — matters as much as the quantity.
For smaller CEE economies, the sustainability question is acute. Latvia at 3.1% of GDP and a $43 billion economy spends approximately $1.3 billion on defence — a real burden on a country where defence competes with healthcare, education, and infrastructure for fiscal space. The EU’s defence financing mechanisms are partly a response to this arithmetic: allowing smaller members to participate in collective capability development without bearing the full capital cost from national budgets.
The Trump Factor and NATO’s Fiscal Architecture¶
US political pressure on European defence spending, intensified under the second Trump administration from January 2025, has been simultaneously productive and destabilising. Productive because it accelerated spending decisions that European governments had deferred — Germany’s February 2025 commitment to a special €500 billion infrastructure and defence fund, involving constitutional debt brake reform, was directly influenced by the changed US political context. Destabilising because Article 5 credibility depends on the certainty of collective defence commitment, and public questioning of that commitment — even strategically — erodes the deterrence value of the alliance’s posture.
CEE members are the primary beneficiaries of strong US security guarantees and the primary victims of their erosion. Poland has explicitly deepened bilateral defence commitments with the US — permanent troop stationing, pre-positioning, infrastructure investment — as a hedge against multilateral NATO uncertainty. Estonia, Latvia, and Lithuania have less bilateral leverage and depend more heavily on alliance mechanisms. Their defence spending levels reflect a rational calculation that spending more domestically reduces dependence on uncertain political commitments from distant allies.