The European Defence Agency projects that EU member states will collectively spend €454 billion on defence in 2026, equivalent to 2.4% of combined GDP—a significant jump from €418 billion in 2025. But the agency's biennial report, released this week, contains a sobering caveat: the military's ability to actually deploy these funds is increasingly constrained by industrial bottlenecks, bureaucratic inertia, workforce shortages, and doubts over long-term fiscal sustainability.
Why This Matters
• Italy is projected to be the only EU state where military spending will fall as a share of GDP in 2026, partly due to the absence of new allocations in the budget law and non-participation in EU loan schemes like SAFE.
• Most EU states are ramping up commitments to meet NATO's dual target of 3.5% of GDP for military spending plus 1.5% for security investments by 2035—a target Italy has not yet endorsed, leaving the country increasingly isolated in defence planning discussions.
• Germany will allocate €117.2 billion to defence in 2026, while France and Italy face tighter fiscal constraints.
• EU-wide defence investment surpassed €100 billion for the first time in 2024, representing 31% of total defence expenditure.
The Fiscal Reality Behind the Headlines
The European Union's defence spending trajectory has accelerated sharply since Russia's invasion of Ukraine in early 2022. Between 2020 and 2025, total defence expenditure across EU member states rose by nearly 63%, reaching €381 billion in 2025, or roughly 2.1% of GDP. The projected rise to €454 billion in 2026 marks another €73 billion increase in a single year.
Yet the EDA's analysis reveals a growing mismatch between political commitment and operational capacity. According to the agency, armed forces are struggling to absorb the influx of capital due to slow industrial production cycles, complicated procurement procedures, and a lack of skilled personnel. In practical terms, this means that even as governments allocate more funds, the military cannot convert them into operational capabilities at the same pace.
The problem is compounded by what analysts call "defence-washing"—the practice of inflating defence statistics by including items such as military pensions, healthcare costs, and coast guard expenditures. Italy, for instance, reached 2.01% of GDP in defence spending in 2025 partly through accounting reclassification rather than new operational outlays.
Italy's Divergent Path
While most EU nations are ramping up defence budgets, Italy stands out as an exception. Forecasts from the European Commission suggest that Italy will be the only member state to see a decline in military spending relative to GDP in 2026. This trend reflects both the absence of fresh allocations in the national budget and the government's decision not to participate in EU-backed lending instruments like the Security Action for Europe (SAFE), which offers up to €150 billion in emergency loans for defence investments. Italy's government cited debt sustainability concerns and the need to prioritize other spending—particularly pensions and healthcare—given the country's limited fiscal room under EU fiscal rules.
Despite an absolute increase in defence outlays—from $37.9 billion to $45.4 billion according to SIPRI data—Italy's spending is projected to be 14% lower in 2026 relative to the size of its economy compared to pre-Ukraine war levels. This places Rome in a delicate position as NATO allies move toward a new dual target agreed at the June 2025 summit in The Hague: 3.5% of GDP for baseline military spending plus an additional 1.5% for security-related investments by 2035. Spain was the only NATO member to abstain from that commitment.
To meet these NATO targets, Italy would need to increase defence spending to approximately €75-80 billion annually by 2035—a significant jump from current levels that would require either substantial new budget allocations or reductions in other government programs. Italy's fiscal constraints are tied to its high public debt and limited room for maneuver under the Stability and Growth Pact (EU fiscal rules limiting deficit and debt levels), even though a national safeguard clause (temporary exemption allowing higher defence spending without penalties) has been activated for 18 member states, including Italy, to allow greater budgetary flexibility for defence.
What This Means for Residents
For people living in Italy, the gap between European defence ambitions and domestic policy choices carries tangible consequences. The country's relatively modest defence posture could affect its influence within NATO and EU defence planning structures—meaning that decisions about European military strategy, procurement standards, and security priorities may increasingly be shaped by Germany, France, and Eastern European nations rather than Rome. This diminished voice directly impacts Italy's ability to advocate for initiatives serving its strategic interests, from Mediterranean security priorities to industrial policies.
Italy's industrial base—home to major defence contractors Leonardo (aerospace and defence systems) and Fincantieri (naval systems and submarine construction)—may struggle to capture a proportional share of the €1.5 billion European Defence Industrial Programme (EDIP) grants allocated for 2025–2027. Major defence contracts increasingly go to countries most visibly committed to NATO targets, potentially costing Italian firms thousands of jobs and limiting export opportunities. The fragmentation of Europe's defence industry, estimated to cost between €18 billion and €57 billion annually due to duplication and inefficiency, means that without deeper integration and strategic investments, Italian firms risk being sidelined in favor of more coordinated national champions in France, Germany, or Sweden.
On the fiscal side, the decision to forgo participation in SAFE loans limits Italy's ability to make large-scale, rapid acquisitions of new military equipment without crowding out other public spending priorities. This creates difficult trade-offs: increased defence spending could come at the expense of healthcare budget expansions, pension adjustments, or infrastructure investments—areas that directly affect residents' quality of life. The government must balance NATO pressure for higher defence spending against domestic demands for better public services, a tension that will intensify as European defence spending accelerates.
Industrial Bottlenecks and Bureaucratic Friction
The EDA's warning about absorption capacity reflects deeper structural weaknesses across the EU. Defence production timelines are measured in years, not months, and Europe's industrial base is still recovering from decades of underinvestment and contraction. Even with increased orders, European manufacturers struggle to scale output quickly.
Take ammunition as an example: Europe's combined production capacity for artillery shells is expected to reach approximately 2 million rounds by the end of 2025—a figure that roughly matches Russia's monthly output in 2025. This stark asymmetry underscores the challenge of rebuilding industrial surge capacity.
Administrative hurdles further complicate matters. Complex procurement procedures, unstable budgets, and unclear demand signals slow the translation of political commitments into tangible deliveries. The European Parliament has backed initiatives like the "Agile" programme to reduce red tape and accelerate the transfer of new technologies from industry to the battlefield, but implementation remains uneven.
Human capital is another constraint. The defence sector needs to upskill or retrain around 600,000 workers by 2030 to meet production targets. This includes engineers, technicians, and administrative staff capable of managing increasingly complex acquisition programs. In Italy, this represents an opportunity for workforce development, particularly if defence companies receive adequate orders to justify investments in training.
The Broader European Context
Germany's planned allocation of €117.2 billion for defence in 2026 represents the largest single-country commitment in the EU, with Berlin signaling its intent to exempt defence spending from standard budgetary controls and establish a €500 billion infrastructure fund. Among major European economies, Germany has increased its defence share by 72% since 2021.
France, the continent's leading military power, faces a different set of challenges. While its armed forces remain the most capable in Western Europe, maintaining and expanding that edge will require politically difficult trade-offs, including potential cuts to other areas of public spending, given the country's high debt load.
The Baltic states (Estonia, Latvia, Lithuania) and Nordic nations (Sweden, Finland, Denmark) lead the EU in proportional spending increases, alongside Poland. These countries also enjoy greater fiscal space to finance additional borrowing if needed.
Spain has raised military spending by 50%, pushing its defence burden above 2.0% of GDP for the first time since 1994. The Netherlands increased its share by 46%.
Long-Term Sustainability Questions
Despite the current surge, doubts persist about the long-term sustainability of elevated defence budgets. Weak economic growth, aging populations, and competing demands for public resources—from healthcare to climate adaptation—raise questions about whether European governments can maintain spending at or above 2.4% of GDP for the next decade.
The EU has introduced several tools to ease the fiscal burden. The Stability and Growth Pact's national safeguard clause (temporary exemption allowing higher defence spending without penalties), activated for 18 member states by February 2026, provides temporary budgetary flexibility. The SAFE mechanism offers emergency loans, and the EDIP grants aim to strengthen the defence industrial base. The European Peace Facility, funded outside the EU budget with over €17 billion, supports conflict prevention and international security.
Yet these instruments are stopgaps, not solutions. The EU's defence architecture remains fragmented, with procurement decisions driven by national interests rather than collective capability. The bloc continues to rely heavily on the United States for critical systems and strategic assets, limiting the economic multiplier effects of increased European spending and slowing progress toward genuine strategic autonomy.
Looking Ahead: What Italy Residents Should Know
The ReArm Europe/Readiness 2030 plan envisions a total of €800 billion in defence investments across the EU by the end of the decade. Whether European governments can deliver on that ambition will depend not just on political will, but on their ability to overcome the industrial, administrative, and fiscal constraints now coming into sharper focus.
For Italy, the next 18 months represent a critical window. The government must decide whether to formally endorse NATO's dual-target commitment, seek emergency SAFE loans for specific programmes, or maintain its current course of modest growth within existing fiscal constraints. Each path carries different implications: endorsing NATO targets would signal stronger European commitment but require difficult budget reallocations; joining SAFE would signal resolve but add to public debt; maintaining the status quo preserves fiscal flexibility but risks further marginalizing Italy in European defence decisions.
Residents should watch for policy shifts in 2026, as budget negotiations will reveal whether defence spending priorities change relative to healthcare, pensions, and infrastructure. The decisions made now will shape Italy's military capabilities, industrial competitiveness, and voice in European security decisions for the next decade.
