Northern Europe’s Defence Spend is Rising — Here’s Why

Archive edition · Market data and company circumstances reflect 7 June 2025, when this newsletter was sent.

Northern Europe’s Defence Spending Explained

If you’ve been following the headlines out of Europe lately, you might have noticed a recurring theme: Defence budgets are soaring.

With geopolitical tensions still simmering in Eastern Europe and the broader NATO alliance looking to strengthen its military presence, especially in its northern territories, several countries are ramping up their defence spending at a remarkable pace.

Let’s break down what’s happening with defence budgets in the Scandinavian and Baltic countries — including Sweden, Finland, Norway, Denmark, Latvia, Estonia, and Lithuania — and explain what this military build-up means for their economies, industries, and future growth prospects.

A NATO Target Few Met — Until Now

Scandinavia and Baltics Surpass 2% NATO Target, Most Eye 3%+.

Back in 2024, NATO required its member countries to spend at least 2% of their GDP on defence — a target that, for years, many members fell short of. That changed dramatically last year.

And it doesn’t stop there. With NATO leaders hinting at increasing the benchmark to 3.5% of GDP, and some like the new NATO Secretary-General Mark Rutte even suggesting a 5% target, countries in this region aren’t waiting around for official word. Latvia, Estonia, and Lithuania have already pledged to raise their defence budgets to 5% or more within the next five years.

Why the rush? The region sits precariously close to the Russian border, and with rising concerns about security, cyber threats, and military readiness, governments see beefing up their armies and equipment as a top priority.

• All seven Scandinavian and Baltic countries hit the 2% mark in 2024.
• Sweden edged slightly ahead at 2.1%, while Estonia surged to 3.4%.

Northern Europe’s Arsenal: Who’s Got What?

To understand how these countries compare militarily, it’s useful to look at both their equipment and the size of their armed forces.

The Baltic nations (Latvia, Estonia, Lithuania), while spending a significant percentage of their GDP on defence, still trail in terms of actual equipment and absolute defence budgets due to their smaller economies.

Combined, these seven nations have around 500,000 military personnel. However, only 120,000 are active troops — with Finland contributing more than half of that number. The rest are reservists, ready to be called upon if needed.

• Sweden and Finland together have 310 main battle tanks (MBTs) — nearly matching Germany’s 313.
• Sweden and Norway maintain a combined 10-submarine fleet.
• In per capita terms, Scandinavian countries are among the world’s biggest defence spenders after the United States.

Where is the Defence Money Really Going?

Modern defence budgets aren’t just about hiring more soldiers or buying tanks. Increasingly, they are capital-intensive — meaning a larger share is spent on advanced equipment, cybersecurity, infrastructure, and high-tech systems.

Interestingly, a significant portion of this spending goes towards imports:

This has raised concerns about dependency on foreign suppliers, especially from non-European countries like the United States.

• Finland allocated 46% of its defence budget to equipment.
• Lithuania spent 21% on equipment, with the rest on personnel and facilities.
• Sweden sources 25% of its defence equipment from abroad.
• Finland’s import dependency stands at a massive 75%.

How Defence Spending Affects the Economy

Now for the big question: What does all this extra defence spending mean for economic growth?

To estimate this, analysts use something called a defence multiplier — a measure of how much a country’s GDP increases for every additional euro spent on defence.

Latest research estimates:

Other countries fall somewhere in between.

This means that for every extra €1 billion Sweden spends on defence, its GDP could rise by €600 million over time, while Finland would see a €200 million boost.

• Sweden’s multiplier at 0.6
• Finland’s at 0.2
• Countries like Sweden have a stronger domestic defence industry, which keeps more of the money circulating within the local economy.
• Finland, on the other hand, imports most of its equipment, so a large chunk of its defence spending leaves the country.

Who Stands to Benefit?

Besides the military itself, several industries and sectors are poised to gain:

With NATO encouraging member countries to source more equipment locally and reduce dependency on non-European suppliers, there’s growing potential for Nordic and Baltic firms to grab a bigger share of these massive procurement contracts.

• Domestic defence manufacturers like Saab AB (Sweden — STO: SAAB B) and Kongsberg (Norway — OSE: KOG).
• Construction companies building military bases, bunkers, and defence infrastructure.
• Tech and cybersecurity firms supplying communication systems, drones, and surveillance tech.
• Logistics and transport providers ensuring equipment moves efficiently within and between countries.

What Could Change This Outlook?

While the forecasts are positive, a few factors could shift this picture:

For now, however, most governments in the region enjoy relatively low public debt and can afford to finance these military expansions through deficit spending without raising taxes or making severe spending cuts.

• If NATO scales back its defence spending target or delays implementing it.
• If peace negotiations reduce the need for military build-ups.
• If countries struggle with high public debt levels and need to cut back on spending elsewhere.

Why This Matters for Global Investors?

Even if you’re not based in Europe, these developments matter:

As we head toward the next NATO summit in June 2025, here are the key things to keep an eye on:

• Global defence suppliers are watching for new procurement contracts.
• Investors in military and aerospace stocks may see opportunities as budgets rise.
• Bond markets will keep an eye on how much deficit financing governments take on.
• Regional stability and energy markets could be influenced by military activity and strategic alliances.
• Will NATO officially raise its spending target to 3.5% or even 5% of GDP?
• How will countries fund these increases — through debt, taxes, or budget reshuffles?
• Will local industries be prioritized in defence contracts, or will foreign suppliers dominate?
• Which countries will ramp up their spending the fastest?

Archive note

This article preserves the analysis in our weekly newsletter sent 7 June 2025. Market prices, forecasts and company circumstances reflect the time of publication and may have changed.

This material is general information, not personal financial advice or a recommendation to trade. Investing and trading involve risk, including loss of capital.