Moody’s Says a Smaller US Role and 5 Percent NATO Target Would Pressure Europe’s Ratings
A diminished US role in NATO would put downward pressure on European sovereign credit ratings, Moody’s has warned, as governments across the continent take on more of the cost of their own defence. In analysis published Monday, the rating agency called the shift credit negative for European sovereigns, while stressing that the eventual effect would depend on how governments manage the extra spending.
The note follows the NATO summit in Ankara on 7 and 8 July, whose declaration said European allies and Canada were taking on greater responsibility for the alliance’s defence while continuing to work with the United States. The declaration did not announce a phased US withdrawal; the scenario of a smaller US role is Moody’s own framing. Under the target set at the 2025 Hague summit, members are to spend 5 percent of economic output on defence and security by 2035, split between 3.5 percent on core defence and up to 1.5 percent on broader security and infrastructure. Meeting that would mean a large, sustained rise in outlays for most European states.
| Reference point | Figure |
|---|---|
| NATO spending target, Hague 2025 | 5 percent of GDP by 2035 |
| Core defence share | 3.5 percent of GDP |
| Broader security share | up to 1.5 percent of GDP |
| France rating, Moody’s | Aa3, negative outlook |
| Scheduled NATO review | 2029 |
| Greece government debt, end 2025 | about 146 percent of GDP |
| Italy government debt, end 2025 | about 137 percent of GDP |
| France government debt, end 2025 | about 116 percent of GDP |
| Belgium government debt, end 2025 | about 108 percent of GDP |
| Spain government debt, end 2025 | about 101 percent of GDP |
The mechanism is straightforward: higher defence spending generally means higher borrowing, and on current paths that worsens the debt-to-output trajectories that rating agencies watch most closely, our reading. The strain falls hardest on already high-debt sovereigns. Government debt at the end of 2025 stood near 146 percent of output in Greece, 137 percent in Italy and 116 percent in France, and above 100 percent in Belgium and Spain, according to official European data. Moody’s already has France on a negative outlook at its Aa3 rating, reaffirmed in April.
Crucially, Moody’s did not change any ratings, and it framed the pressure as manageable. The agency noted that governments could offset the added defence bill through spending cuts elsewhere, higher revenue, or joint European funding, any of which would soften the credit impact. The warning is about the direction of pressure, not an imminent wave of downgrades.
Why it matters: The episode shows how a security realignment feeds directly into public finances and borrowing costs. A sustained increase in European defence spending, if funded by borrowing, would add to the supply of government bonds and can lift term premia, competing for the same global capital that Gulf and emerging-market borrowers rely on. For oil-exporting economies weighing their own issuance, the cost of money set in the largest debt markets matters well beyond Europe.
Outlook: The key variable is how Europe pays for the increase. National borrowing would pressure the weakest balance sheets first, while joint European Union funding would spread the load and limit the rating damage. Watch for outlook moves by Moody’s and its peers on high-debt sovereigns, the design of any common defence-financing vehicle, and NATO’s own 2029 review of the spending path.
Sources: Moody’s; Reuters; NATO; Eurostat.
