Arctic security and defense spending: Economic implications
The desk anticipates a significant shift in European economic dynamics due to NATO's new defense spending targets, as outlined in the recent Nordea report. With defense budgets set to exceed 5% of GDP by 2035, this doubling of military expenditures will have far-reaching economic consequences for Europe. Per the full note, this policy shift is backed by the EU's ReArmEurope strategy, which aims to create a fiscal space of up to EUR 650 billion to fund these defense commitments. As European economies brace for this change, institutional traders should stay vigilant about the potential impacts on currency valuations, notably the EUR.
What the desk is arguing
The desk believes that the substantial increase in defense spending, which is projected to reshape European economies, may lead to currency depreciation in the short term. Per the full note, NATO's target will more than double European military budgets by 2035, with initial commitments already seen whereby EU defense spending reached EUR 380 billion in 2025.
Liselotte Odgaard, a Senior Fellow at the Hudson Institute, highlighted that this transition presents new opportunities amid great power competition for Arctic security, potentially affecting regional asset flows. This perspective indicates that capital may flow in reaction to heightened military assertiveness, which could influence EUR valuation in the coming years.
Where it sits in our coverage
Our consensus target for EUR/USD is 1.075, with a range spread of 1.04 to 1.12. Notable targets include:
This call aligns with jpmorgan, but is more optimistic compared to bofa, which predicts a downside scenario for the EUR.
How other firms see it
Firms like jpmorgan align with our view, betting on a slightly stronger EUR as defense spending ramps up and economic climates shift. In contrast, bofa takes a more cautious stance, anticipating stagnation or depreciation.
Watch EUR/USD for spillover effects from these military spending policies, as they relate to broader economic indicators and geopolitical tensions impacting currency flows.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01NATO's new defense spending target will exceed 5% of member GDP by 2035.
- 02EU's ReArmEurope strategy is set to create a fiscal space of EUR 650 billion for defense.
- 03This military spending doubling could reshape European economic landscapes significantly.
- 04Potential EUR depreciation may arise from the increased fiscal burden and geopolitical tensions.
Market implications
Traders should monitor the EUR/USD closely as the market digests these defense spending implications. A significant shift in military strategy may influence currency valuation trajectories, particularly as the EU consolidates its economic position ahead of NATO's deadlines.
Risks to this view
A reversal could be prompted by a significant shift in public sentiment regarding defense spending, or if EU nations face economic downturns that hinder their military commitments. Stalled or reduced spending could alleviate pressure on the EUR, counteracting the current bullish sentiment.
Economy Arctic security and defense spending: Economic implications 05-03-2026 NATO’s new defense spending target will more than double European military budgets by 2035, with significant economic implications, clients heard at a recent Nordea event on Arctic security policy. Europe is preparing for its largest peacetime defense spending in decades, and the economic implications will be significant, according to experts speaking at a Nordea event for institutional clients on Arctic security policy and the economic outlook. NATO’s defense spending target At the 2025 NATO summit, member countries committed to spending 5% of GDP annually on defense and security-related expenses by 2035 – more than doubling the previous 2% target.
The new structure includes 3.5% for core defense obligations and 1.5% for broader security measures. In 2025, EU defense spending reached just over EUR 380bn (2.1% of GDP), meaning the new target requires a substantial escalation that will fundamentally reshape European economies. EU’s ReArmEurope strategy The EU’s ReArmEurope plan , launched in March 2025, provides the economic framework for this buildup: Creating a fiscal space of up to EUR 650bn through stability pact exceptions EU financing of up to EUR 150bn from the European Investment Bank and other resources A coordinated approach to procurement Liselotte Odgaard, Senior Fellow at the Hudson Institute, speaking to institutional clients at Nordea's event on Arctic security and the economic implications on 3 March 2026.
Arctic security focus Liselotte Odgaard , Senior Fellow at the Hudson Institute , shared insights on how Arctic security has become a critical front in the great power competition, with significant implications for NATO strategy. Denmark is making substantial commitments to NATO’s new Arctic Sentry initiative: DKK 14.6bn allocated in January 2025 Additional DKK 27.4bn committed in October 2025 Four F-35 fighter jets deployed to Iceland as first concrete contribution These funds will primarily be allocated to new satellite, sensor and radar-based surveillance in East Greenland, ice-hardened patrol ships, drones, maritime patrol aircraft, and strengthened military and dual-use infrastructure. Economic implications for Denmark Nordea’s Group Chief Economist Helge Pedersen outlined how the defense buildup will affect the Danish economy.
After 35 years of “peace dividend” savings, Denmark must now dramatically increase spending while managing capacity pressures and inflation risks. Increased defense spending creates growth, but the economic “multiplier” effect depends on many factors, including funding and capacity pressures. Countries exporting military equipment will see higher economic multipliers than importers.
Denmark can handle the increased costs without additional debt, but fiscal space will shrink significantly, according to Pedersen. The “peace dividend” era is over, and the country faces difficult prioritisation choices ahead. Defense spending may become a new growth engine for the Danish economy, but success depends on managing capacity pressures and financing structures effectively.
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