Rebalancing the transatlantic relationship
U.S. impatience with NATO burden-sharing and its pivot to the Indo-Pacific is driving NATO 3.0.
In a nutshell
- NATO 3.0 is based on partnership, not dependency, for European defense
- U.S. pressure is prompting Europe to accelerate rearmament efforts
- The EU is aiming to raise defense spending toward 5% of GDP by 2030
- For comprehensive insights, tune into our AI-powered podcast here
The United States has grown impatient with its NATO allies for not contributing enough to the alliance. Its focus has shifted since the early 2000s toward the Indo-Pacific region, as highlighted in the 2025 National Security Strategy document. Beyond simply addressing burden-sharing, the alliance is rapidly moving toward a concept of burden-shifting.
At the NATO Defense Ministerial in February 2026, U.S. Under Secretary of War for Policy Elbridge Colby outlined a “NATO 3.0” approach based on “partnership, not dependency,” in which Europe takes responsibility for its conventional security while the U.S. continues to provide nuclear deterrence. The upcoming NATO summit in Turkiye in July offers a key moment to further clarify this concept. Europe already feels the pressure.
NATO 3.0
To some extent, Europe faces a choice between full strategic autonomy and strengthening NATO’s European pillar. Greater autonomy in arms production would bolster the alliance regardless.
Filling the capability gap requires a major boost in European conventional capabilities. Priorities include integrated air and missile defenses, larger munitions stockpiles, expanded industrial capacity and stronger protection of critical infrastructure (including cyber defenses). Europe would also have to accelerate innovation in artificial intelligence defense applications and unmanned/autonomous systems. It would need to close the gap in strategic enablers – such as space-based intelligence, reconnaissance and surveillance, air refueling and troop transport – that have long been dominated by the U.S.
Resilience sits at the center of the new NATO vision: combat-ready forces, rapid European defense production, faster decision-making systems, deeper military-political cooperation and the rapid implementation of plans to increase military mobility.
Funding the rebalancing
The 2022 European Strategic Compass, the 2025 White Paper on European Defense Readiness and the 2025 NATO planning process document collectively highlight the emerging defense imperatives. The Rearm Europe/Readiness 2030 plan marks a substantial shift in European defense financing, aiming to mobilize 800 billion euros. This involves activating the Stability and Growth Pact’s escape clause, which provides member states with additional fiscal flexibility to increase national defense spending by up to 650 billion euros. Additionally, the Security Action for Europe (SAFE) initiative can provide 150 billion euros by enabling the European Union to borrow from international markets and extend loans to member states. This funding is to be allocated to critical infrastructure, air defense and other key priorities.
Currently, most EU governments are meeting the 2 percent of gross domestic product (GDP) defense spending target set in 2014. Almost all of them pledged, at the NATO Summit in The Hague in 2025, to increase this to 5 percent of GDP. The Baltic states have boosted their defense budgets, while Germany has initiated its Sondervermogen (special investment) fund, allocating 500 billion euros to modernize the Bundeswehr. Poland’s defense spending has now surpassed the U.S. level relative to GDP, reaching 4.5 percent. By 2030, collective defense spending in Europe is expected to approach nearly a trillion euros.
On the private side, environmental, social and corporate governance (ESG) criteria that previously blacklisted investments in arms and defense were relaxed in 2025, encouraging banks and markets to lend again. However, lending to small and medium-sized defense enterprises and startups still depends heavily on procurement certainty and stability. Banks demand strong reassurances. Europe’s fragmented capital markets also limit funding, and venture capital for tech start-ups is still small.
Private funding ultimately rests on investor confidence in the end customer: European states. Given the fiscal vulnerabilities of many EU countries, a financial crisis could jeopardize defense efforts. Public finance reforms that allow more room for defense spending, combined with pro-market measures to restore productivity and growth, will determine whether defense investment proves sustainable.
A stronger European defense industrial base
Rebalancing NATO requires revitalizing the European defense technological and industrial base. Reliance on non-European suppliers creates geostrategic vulnerability. In 2024, 78 percent of European procurement came from outside the continent, mostly of American origin. Increased collaboration across Europe (now including Canada under SAFE) offers a more effective way forward for joint spending and production without requiring a federal structure.
Although some progress has been made since 2022, there remains a pressing need to increase production to meet the military’s operational demands and accommodate flexible strategic planning. This calls for speed and cost-efficiency wherever possible. The return of attritional warfare in Ukraine has underscored the need for large amounts of ammunition (shells, missiles and related systems) supported by secure manufacturing and stockpiles.
Nations would have to expand both conventional weapon systems (such as missiles) and low-cost, high-tech solutions (such as drones and counter-drone systems). These two categories follow distinct production logics: long-term planning for complex equipment versus short-term, adaptable, agile approaches suited to rapidly evolving low-cost drone technology.
Rapid advances in AI (critical for drone swarm data processing), cyber and digital capabilities now form the foundation of resilience. Incorporating Ukraine’s battle-tested industrial base can deliver immediate value.
The issue of scaling is partly connected to the fragmentation of the European defense market. The presence of numerous production facilities from different brands, while contributing to anti-fragility, limits the potential to achieve economies of scale and, consequently, reduce costs. This lack of consolidation also leads to a wide variety of standards across nations – such as 12 types of jets compared to just three in the U.S. – which creates interoperability problems. Adopting platforming strategies, like those used in the automobile industry, could help address these issues.
National procurements remain largely closed to cooperative European programs, with joint efforts accounting for less than 20 percent of procurement today. The 2023 EU Defense Industry Reinforcement Through Common Procurement Act (EDIRPA) has seen limited uptake so far.
Fragmentation extends to the bureaucratic procedures involved in procurements, authorizations and other related activities, which can differ considerably from one European country to another. This variation not only drives up production costs but also hampers competition and stifles innovation. ESG initiatives, though relaxed in 2025, have reduced private financing for defense. Additionally, some environmental regulations, such as requirements to conduct studies on a project’s impacts on protected species, tend to delay construction approvals and could be simplified.
The European Commission introduced the Defense Readiness Omnibus V in June 2025, and approximately a year later, the Council of the EU reached a political agreement on the initiative. This initiative aims to reduce red tape for project permits, simplify joint procurement processes and streamline the European Defense Fund’s funding procedures. Its impact will depend on implementation details.
More from Emmanuel Martin
- The French leadership paradox
- The intricacies of regulatory capture
- The prospects of an EU war economy
Securing supply chains
Reindustrialization also requires secure supply chains. Essential materials such as copper, aluminum, rare earth elements including gallium and germanium, sulfur, electronic components, semiconductors, AI chips and magnets, along with energy resources, play a crucial role. The production of a modern missile relies on thousands of individual components – if even one is missing due to supply chain disruptions, the entire defense strategy could fall apart.
Dependence on foreign suppliers from unfriendly nations creates major strategic risk. Foreign direct investment (FDI) can sometimes turn hostile, negatively affecting supply chains. Europe began addressing this issue back in 2020 and updated its stance in December 2025. Nevertheless, it will need to stay vigilant and update its FDI screening process again if the situation calls for it.
The securitization of supply chains also involves ensuring stability and visibility of orders, especially for smaller suppliers who often rank third or fourth behind prime contractors. While prime contractors benefit from solid contracts, smaller suppliers often face procurement challenges due to their inability to forecast demand. Additionally, procurement processes across EU countries can impose high bureaucratic costs on small foreign suppliers, contributing to a fragmented market.
Both issues lead to financing hurdles for small suppliers, leaving banks and investors uncertain. Existing bottom-up efforts through business associations – such as France’s GIFAS (aerospace) and GICAT (land and air-land security) – would have to be complemented by interstate coordination. The Omnibus V is expected to help facilitate this.
The human element
Factories require skilled workers. However, education and human capital have weakened in several countries. To address this, some defense companies, such as French aircraft engine maker Safran, have established their own professional “industrial schools” to ensure they can meet their staffing needs through proper training. They are also streamlining the recruitment process by forming partnerships with employment agencies. It is crucial to reverse the current downward trend in educational standards, particularly in subjects like math, in certain countries.
Better human capital also matters because Europe has to accelerate investment in research and development for disruptive technologies if it wants to lead – or at least avoid falling behind – in the sector.
To improve their effectiveness, troops will have to be better trained and motivated. Civic engagement in safeguarding the continent, along with a willingness to accept military drafts, varies significantly across nations. Replicating Finland’s model of societal resilience – embodied in the concept of sisu, or stoic courage and determination – could be difficult in democratic, pluralist (and consumerist/individualistic) societies, which no longer perceive a common threat.
A careful balance would have to be struck to ensure that civic engagement does not devolve into propaganda, which could alienate certain groups and lead to a fragmented European civil society. The trade-off between less welfare and more warfare spending might be politically difficult, although the anticipated positive economic benefits from the defense industry could offset this shift.
Scenarios
Most likely: Minilateral momentum drives European rebalancing
In the most likely scenario, the ongoing momentum of minilateral cooperation supports Europe’s shift in strategic balance. Achieving this requires a certain level of political and military cooperation, which can be described as a collective strategic purpose. Recent developments support an optimistic scenario. U.S. President Donald Trump’s statements regarding Greenland and Canada certainly jolted European leaders, prompting them to respond quickly.
New forms of minilateral collaboration among states have emerged, aimed at enhancing efficiency through a grassroots approach. The E3 group, consisting of the United Kingdom, France and Germany, along with the E5, which includes Italy and Poland, was established to streamline coordination and decision-making. Initiatives like the Coalition of the Willing between France and the UK, as well as the Nordic-Baltic Eight, serve as further examples of effective monitoring and decision-making. This cluster-based evolution works around traditional centralized processes while still ensuring that Europe’s voice is heard.
Less likely: European coordination fails and the pillar remains weak
The challenges Europeans face in coordinating efforts lead to a plausible pessimistic scenario. A prime example is the official failure of the Franco-German FCAS fighter jet project in June 2026, which came after nine years of Dassault and Airbus struggling to collaborate. The incentives for companies to join forces rather than compete often fall short.
Politicians may want to promote national champions that could, in turn, lobby for their interests. The delicate balance between national sovereignty (competition) and cooperation is left unaddressed, weakening the European pillar. With the U.S. departing as a stabilizing force, longstanding European rivalries, such as France versus Germany and Turkiye versus Greece, may reemerge. A lack of trust, varying ties to the U.S., which tend to be stronger in Eastern Europe, and potential American interference to safeguard its own procurement interests could undermine this initiative.
Contact us today for tailored geopolitical insights and industry-specific advisory services.
Sign up for our newsletter
Receive insights from our experts every week in your inbox.
