Published by Global Banking & Finance Review®
Posted on February 14, 2025
3 min readLast updated: January 26, 2026
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S&P Global warns that Trump's NATO spending demands could impact Europe's credit ratings, urging joint debt issuance as a solution.
By Marc Jones
LONDON (Reuters) - The credit ratings of Europe's NATO members are likely to suffer if they ramp up defence spending in line with U.S. President Donald Trump's demands although they might drive the region to jointly issue debt, ratings firm S&P Global has said.
Despite almost doubling their defence expenditure since Russia annexed Ukraine's Crimea in 2014, European nations on average still spend below NATO's 2% of GDP guidelines, while the U.S. finances nearly two-thirds of NATO's military budget.
As a percentage of GDP, Europe's spending also works out as less than 60% of that of the U.S. - 1.9% of GDP this year versus 3.3% - something Trump's Vice President JD Vance again stressed as he arrived at a security conference in Munich on Friday where he will meet Ukrainian President Volodymyr Zelenskiy.
S&P looked at three scenarios: the first where European nations increase defence spending to the current NATO GDP-weighted average of 2.67% of GDP; a second where they match the current U.S. level of 3.3%; and a third where it jumps to the 5% of GDP Trump has called for.
Scenario one would mean the EU as a whole increasing defence spending by $242 billion a year. In scenario three, it would rise by as much as $875 billion.
S&P warned that the latter scenario in particular was likely to impact credit ratings, as it was "far beyond what individual states can finance without offsetting such outlays with other spending reductions or likely pressuring their creditworthiness."
For Germany and France, Trump's 5% demand would result in their respective budget deficits ballooning to 4.6% and 8.9% this year, versus the 1.7% and 6% that S&P currently forecasts.
For Romania, already in danger of being downgraded to "junk" status, the deficit would jump to 9.5% in the 5% of GDP scenario, while in non-EU member Britain it would worsen to 7% of GDP from a currently-forecast 4.3%.
It would mean almost all European countries having to reprioritise spending at a time when most are already grappling with slowing economic growth and rising social care costs due to aging populations.
"The political consequences of cutting social spending to offset higher spending on defence would likely be significant," S&P said.
Collective action could be an answer. Although key countries including Germany have long opposed joint EU debt issuance, "given the various messages coming out of Washington D.C," that could change, S&P said.
Such a plan could even include Britain, which formally quit the EU in 2020, and Norway which is also outside the bloc.
"The details of any collective funding arrangement... will determine its creditworthiness (credit rating)," S&P said.
(Reporting by Marc Jones; Editing by Aidan Lewis)
Trump's demands for increased NATO spending could lead to significant impacts on the credit ratings of European nations, particularly if they raise defense expenditures to meet these demands.
If Germany and France comply with Trump's 5% demand for defense spending, their budget deficits would balloon to 4.6% and 8.9% respectively, compared to current forecasts of 1.7% and 6%.
S&P Global examined three scenarios: one where European nations increase spending to 2.67% of GDP, another matching the U.S. level of 3.3%, and a third that could see spending rise by as much as $875 billion.
The political consequences of cutting social spending to accommodate higher defense budgets could be significant, as many European countries are already facing challenges with economic growth and rising social care costs.
Collective action might be a solution, as key countries like Germany could reconsider their opposition to joint EU debt issuance in light of the changing political landscape in Washington D.C.
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