The world is already witnessing a renewed global arms race, with major powers rapidly expanding and modernizing their militaries.

Amid rising global tensions and ongoing conflicts, influential political figures have warned that the West could soon face security challenges capable of reshaping its way of life. “We have to mentally get used to the arrival of a new era. The pre-war era,” said Donald Tusk, the former President of the European Council and now the Prime Minister of Poland, in 2024.

For many European nations that have historically underspent on defense, the full-scale invasion of Ukraine by Russia served as a wake-up call, and those who were still hesitant whether to invest in defence in security, faced pressure from the new administration in Washington DC.

The result was that NATO member-states have recently agreed to a new target – allocating 5% of their GDP to strengthen military and defence capabilities. Here are key terms and facts explained.

What is NATO?

The North Atlantic Treaty Organization (NATO) is a military alliance of 32 countries across North America and Europe.

It was founded in 1949 during the early stages of the Cold War and its primary aim is collective defence – stated in Treaty’s Article 5, under which an attack on one member is considered an attack on all of them. NATO was established to counter the growing influence of the Soviet Union and its satellite states (the Warsaw Pact) in Europe.

Following the collapse of the Soviet Union in 1989-91, NATO was maintained, but did not play a very important role, given that Europe’s security was taken for granted.

Yet, NATO expanded, accepting a number of Baltic, Central European and Adriatic states, from Estonia to Croatia.

Only once – after the 9/11 terrorist attacks on the US in 2001 – was Article 5 invoked.

Why has NATO regained importance?

The global security environment is changing quickly, with several high-stakes locations.

The most significant of these is Russia’s three-year-old full-scale invasion of Ukraine, which has strained NATO’s resources and destabilized Eastern Europe. The escalation of the conflict, ongoing since 2014, has served as a sobering reminder that large-scale conventional warfare remains a real threat in the twenty-first century and has brought attention to the vulnerability of nations that border Russia. In response, a number of NATO members have increased troop deployments on the Eastern Flank, strengthened air defenses, and provided Ukraine with military and economic support, actions that necessitate significant financial support and coordination.

Europe is not the only place where tensions run high, with China’s claim to Taiwan constantly rising in the Asia-Pacific area. While the US-backed Taiwanese government in Taipei maintains its independence, Beijing has stated time and again that it considers Taiwan a part of its sovereign territory. A Chinese invasion would not only massively disrupt global trade; but given Taiwan’s dominance in advanced semiconductor production it would likely mean drawing the US into a wider conflict, drawing it further from Europe.

Beyond these two major areas, North Korea’s missile tests and ongoing instability in the Middle East add further uncertainty. Together, these threats are frequently cited by policymakers as justification for expanding military budgets, strengthening alliances, and preparing for potential multi-front, global war.

Economic impact on European economies

For many NATO countries in Europe, the previous goal of 2% GDP spent on the military was already a challenge. Some European countries, which are not yet classified as High-Income Countries (HICs), struggle to meet the requirements, including Albania, North Macedonia and Montenegro.

Other countries express that it would be counter productive for their society to increase military spending. Prime Minister of Spain, Pedro Sánchez, warned that the 5% rule “comes at the cost of increasing taxes on the middle class, cutting public services and social benefits for their citizens.”

While no one argues that increasing military capabilities of a country is beneficial, many point towards the fact that it will come at the price of having to downgrade other vital sectors of the economy, and might result in political instability leading to changes in power.

While there is debate about whether this is a preventative measure or a sign that war is on the horizon, it is crucial to understand that military spending can boost the economy by influencing a number of variables, including the creation of jobs, sharp increase in certain industries output and through improvements to infrastructure. Therefore, if well-managed, greater defence expenditure can continue to benefit a nation even in the absence of conflict.

Italy and Spain are reluctant, Poland and Baltic states already there

Some large European economies, most notably Spain and Italy, are likely going to be avoiding enforcing new rules.

Italy, currently facing a severe economic crisis, is finding ways to work around the agreement by allocating funds to areas like soldier pensions and police forces rather than directly boosting its military capabilities. Additionally, Italy has revived a $15.7 billion project to build a bridge connecting Sicily to mainland Italy, listing it as defence-related investment although experts say that using boats to cross the strait is far more efficient.

Spain cites not only economic objections but also highlights that it does not feel directly threatened, a stance that is frustrating for Baltic and Eastern European states, such as Poland, Lithuania, Latvia, Estonia and Romania, which in the event of full-scale confrontation between Russia and NATO would turn into frontline states. A number of these states have not only met in advance, but exceeded the spending requirements. The countries of the Eastern Flank arguably have more at stake and greater incentive to invest heavily in military readiness.

The discussion is likely to be far from over – the US President Donald Trump has sought to pressure NATO members who underspend on defense. As NATO rules do not allow for a member-state to be expelled, Trump explored alternatives, such as imposing tariffs to penilise these countries.