At the 2025 NATO Summit in The Hague a few weeks ago, member states pledged to allocate 5% of their annual GDP to core defense requirements and defense- and security-related expenditures by 2035. This represents a significant departure from the alliance’s longstanding 2% benchmark, particularly given that the current average defense spending among NATO members only marginally meets the 2% target.
European nations constitute the majority of NATO’s members. And since the onset of Russia’s invasion of Ukraine, several Eastern European countries—such as Poland—have substantially increased their defense budgets. Nevertheless, many European allies remain below the alliance average, rendering the new 5% objective highly ambitious. The United States continues to lead in defense investment, with expenditures approaching $1 trillion in 2024— double the combined defense spending of Europe and Canada — and has been an advocate for heightened commitments among NATO.
The new target of 5% of GDP is structured to address both immediate military needs and broader security challenges, with an ideal split of spending among 2 categories:
3.5% of GDP: core defense requirements
- Purpose: This portion is dedicated to traditional military expenditures.
- Coverage: Includes funding for active personnel, acquisition and maintenance of weapons systems, military equipment, R&D, and operational readiness.
1.5% of GDP: defense and security-related investments
- Purpose: This segment is allocated to areas that support and enhance national and alliance security beyond conventional military assets.
- Coverage: Encompasses investments in critical infrastructure (such as energy grids, transportation networks, and communication systems), network defense, and resilience against hybrid threats.
Direct ICT Spending Impact
Core defense Spending: A larger budget is expected to drive more funding for defense organizations and spark a ripple effect in ICT spending. According to IDC Worldwide ICT Spending Guide Enterprise and SMB by Industry, aerospace and defense ICT investments in Europe will top $11 billion in 2025—about 1% of the region’s total ICT expenditure.
Military modernization efforts are focused on upgrading command, control, communications, computers, intelligence, surveillance, and reconnaissance (C4ISR) systems, strengthening cyber defenses, integrating artificial intelligence for battlefield operations, and enhancing encryption to secure communications and protect against cyber threats. However, this category will likely represent only a small portion of the overall 3.5% GDP allocation to core defense requirements.
Assuming the 3.5% target equates to approximately $665 billion, it is expected that initially less than $20 billion will be directed towards digital modernization and related technologies. This restrained allocation stems from several pressing priorities:
- Many NATO members must rearm and modernize legacy military equipment, much of which is outdated or exceeded its operational life.
- There is an urgent need to rebuild naval fleets and replenish armament supplies, particularly after significant stocks were transferred in support of Ukraine.
- Substantial investment in unmanned aerial systems (drones), which are increasingly central to modern warfare, will also consume a major share of the available resources.
Therefore, while digital modernization is strategically important, the immediate proportion of defense spending dedicated to these initiatives will be modest in comparison to the broader requirements of re-equipping and reinforcing conventional military forces. Over time, this share may increase as foundational rearmament needs are addressed and digital technologies become further integrated into military operations.
Indirect ICT spending impact
Defense and security-related investments: Efforts are focused on securing critical infrastructure from both cyber and physical threats, enhancing national and international cybersecurity through advanced tools, investing in IoT and digital twin technologies for real-time monitoring, and promoting post-quantum cryptography and secure digital identities. However, the most significant portion of spending in this area will be dedicated to fundamental cybersecurity measures and the development of sovereign data and cloud capabilities. Much of this investment will address foundational requirements, such as fortifying existing networks, implementing robust data protection protocols, and ensuring compliance with national security standards.
While initiatives involving emerging technologies—such as post-quantum cryptography—are important for long-term resilience, these areas are likely to attract only limited funding initially. The focus will remain predominantly on basic cybersecurity infrastructure and sovereign data management until Europe further develops a robust innovation base in the defense technology sector. Heavy investment in more advanced and experimental digital solutions will depend on the establishment of this foundation and the maturation of European defense-driven technological ecosystems.
Induced ICT spending impact
This growth will create new opportunities for core defense solutions and benefit related industries, fueling wider momentum in the Defense Ecosystem. This momentum has therefore set off significant induced ICT spending, especially among major European defense contractors. As these companies prepare to deliver more advanced and diverse products and services, the demand for innovative IT solutions and digital transformation initiatives has surged. This effect spans not only traditional leaders such as Leonardo, Dassault, and Rheinmetall, but also extends to BAE Systems, SAAB, Indra, Thales, and Airbus, among others.
The current environment provides a strong opportunity for the European defense industry to enhance its position in the global market. By accelerating investments in areas such as digital platforms, cybersecurity, cloud infrastructure, and advanced analytics, the sector can differentiate itself while building greater resilience and competitive strength. Examples of current IT and digital transformation-related initiatives include:
- Development of secure, sovereign cloud platforms for defense applications and data management.
- Deployment of AI-driven command and control systems to improve operational decision-making and mission effectiveness.
- Launch of pan-European projects to promote interoperability, digital sovereignty, and cybersecurity across defense networks, often supported by the European Defence Fund and broader EU digital policy frameworks.
These initiatives foster a more interconnected and technologically advanced defense ecosystem, ensuring that European contractors can respond to evolving demands and capture new growth opportunities in a global context
NATO’s new 5% GDP spending target signals a major shift for Europe’s defense sector, promising record investment in military capabilities and key enabling technologies by 2035. However, long-term commitment is uncertain, as future governments may redefine priorities.
This shift opens the door for technology providers—whether established contractors or innovative startups—to play an essential role in shaping the continent’s security future.
For technology providers, the key imperatives are clear:
- Make the defense market a top priority. With traditional defense budgets swelling and new funding streams available, tech vendors – especially those historically focused on enterprise or civil solutions – should prioritize defense within their broader industry strategies. Consider how your technology – especially AI-driven solutions for logistics, scheduling, or intelligent automation – could be adapted for military use. With rising defense investment and a growing need for innovation, now is the time to explore how your products can address emerging defense challenges and open new markets.
- Embrace broader collaboration: Leverage increased funding and European Union support for joint ventures and R&D initiatives to accelerate adoption and scale innovation across national boundaries.
- Drive dual-use innovation: Develop technologies that bridge defense and civilian markets, maximizing addressable opportunity while supporting national security objectives. In doing so, it is essential also to consider the spillover effects beyond pure core defense spending in adjacent sectors.
The path forward demands agility, innovation, and collaboration, but the rewards – in terms of both market opportunity and societal impact – are substantial.
To learn more about how ongoing geopolitical dynamics are shaping IT spending strategies, visit IDC’s Digital Economy Strategies page.