The National Bank of Denmark has published an economic analysis assessing how higher Danish and European defence spending could affect growth and inflation, concluding that meeting the new NATO target of core defence spending at 3.5 per cent of GDP from 2026 onwards may add moderately to capacity pressures in Denmark over the coming years. In a scenario based on the Bank’s MONA model, defence spending rising permanently to 3.5 per cent of GDP from 2026 is estimated to lift real GDP by around 1 per cent in each year from 2025 to 2029 versus a baseline where defence spending stays at its 2022 share of GDP, implying a similarly larger output gap. The level of consumer prices increases by almost 1 per cent by 2029. Results are sensitive to how much of the additional spending leaks abroad through imports: under a higher import-content assumption, the peak GDP effect falls to around 0.7 per cent in 2028 and the price impact is smaller. The analysis also notes that the macro impact was limited in 2023-24 because much of the higher spending reflected transfers to Ukraine, and it highlights that Denmark’s fixed exchange rate to the euro could transmit any European Central Bank monetary policy response to euro area rearmament. On public finances, the analysis indicates that a move to 3.5 per cent of GDP in core defence spending can be financed within Denmark’s existing medium-term fiscal plans without materially increasing the debt ratio, but higher capacity pressures could still require prioritisation within overall fiscal spending even where fiscal space is available.
National Bank of Denmark 2025-09-24
National Bank of Denmark analysis projects NATO 3.5% core defence spending from 2026 could moderately increase Danish capacity pressures
The National Bank of Denmark's analysis suggests that increasing Danish defence spending to meet NATO's 3.5% GDP target from 2026 could moderately pressure capacity, lifting real GDP by about 1% annually from 2025 to 2029. Consumer prices may rise nearly 1% by 2029, with effects sensitive to import content. This spending can be financed within existing fiscal plans without significantly raising the debt ratio, though prioritisation may be needed due to capacity pressures.