Key Takeaways:
The US is demanding Europe take primary responsibility for its own conventional defense or face reduced American financial and military commitments to NATO.
Defense Secretary Pete Hegseth told NATO allies Thursday the US will review its military posture in Europe over six months and cut its alliance budget contribution if members fail to meet a 5% of GDP defense spending target.
"Make no mistake about it — this will be a real review," Hegseth said at NATO headquarters in Brussels. "It will be designed to ensure that NATO is moving fast and irreversibly toward Europe stepping up to take primary responsibility for the defense of Europe."
The US currently contributes 14.9% of NATO's roughly $5.75 billion annual budget, down from 22% a decade ago after previous rounds of American pressure. Hegseth said future dues payments will be contingent on allies meeting the 5% spending threshold agreed at last summer's NATO summit. The Pentagon is also investing $1.5 trillion in its own defense in 2027, which Hegseth described as an "arsenal of freedom" that backstops the alliance.
The ultimatum introduces the deepest uncertainty over the US security guarantee to Europe since the Cold War. NATO's supreme allied commander is already drafting backup plans after Washington signaled June 3 it would no longer supply an aircraft carrier, support ships, aerial refueling planes and dozens of fighter jets in a crisis — a move NATO Secretary-General Mark Rutte confirmed Thursday is effective immediately.
Hegseth's address, his first to NATO defense chiefs since returning to the administration, called for a "NATO 3.0" that reverts to a "real hard-line military alliance" focused on conventional deterrence on the continent. He singled out European allies for denying US forces access to bases for the military campaign against Iran, calling it "shameful" that American troops were put at risk. While the UK made an airfield available for US bombers, Spain banned the use of its installations.
The Pentagon in May canceled the deployment of an armored brigade to Poland, drawing criticism from leading Republicans who said they were not consulted. Sen. Thom Tillis (R., N.C.) said Wednesday that European allies have made significant progress in boosting military spending and cautioned against further cuts at next month's NATO summit in Ankara, which President Trump is expected to attend. Sen. Jeanne Shaheen (D., N.H.) said Russia's partnership with China and North Korea underscored the risks and urged Western nations to address those dangers cooperatively.
The last time the US signaled a comparable reduction in its European force commitment was in 2020, when the Trump administration announced the withdrawal of 9,500 troops from Germany. That move was partially reversed under the subsequent administration. The current review — covering both force posture and basing access — is broader in scope and ties financial contributions directly to allied spending behavior for the first time.
European defense stocks are likely to benefit as nations accelerate procurement to close capability gaps left by a potential US drawdown. The STOXX Europe 600 Aerospace & Defense index has already gained this year on expectations of higher NATO defense spending. Conversely, US defense primes with significant NATO basing and logistics contracts face revenue uncertainty. The euro could face headwinds if the alliance's cohesion is perceived to weaken, while gold may attract safe-haven flows amid the geopolitical uncertainty ahead of the Ankara summit.
This article is for informational purposes only and does not constitute investment advice.
