NATO

NATO was front and centre last week as the annual NATO Summit was held in The Hague on Tuesday and Wednesday, making it an opportune time to take a quick look at this multi-country defence alliance.

In my opinion, President Trump was correct during Trump 1.0 – and again during his current term – to insist that other NATO members increase the amount they are spending on defence.  By under-spending for years, most NATO countries have benefited from the protection of Article 5 under the NATO Treaty without spending nearly as much (as a percent of GDP) as the U.S.   In other words, the U.S. has been providing a defence umbrella for NATO countries, mostly European, at a steep discount.  President Trump has thrown down the gauntlet even harder in Trump 2.0, insisting that if NATO countries want the benefit of U.S. defence protection, then they must agree to increase the amount they are spending for their own defence.

For those readers that aren’t familiar with government finance, no country can of course create money from thin air (unless the central bank prints it indiscriminately, a recipe for disaster).  Therefore, every NATO country that has been under-spending on its defence because of their view that America has its back will need to finance the increase in defence expenditures to meet the new 5% target, discussed below.  These countries will need to cut expenditures elsewhere in their budget, raise taxes, issue new debt, or undertake some combination of all three. 

None of the other NATO countries have the unique ability of the U.S. government to spend like a drunken sailor with no repercussions (although there are signs that this might be changing).  Fortunately though, most European NATO members have more sound government finances that the U.S., meaning they should be able to finance higher defence outlays by borrowing more money in the capital markets.  Every NATO country (except Spain) has just agreed to increase their defence spending to 5% of GDP by 2035, which should be manageable over a 10-year period.

This article will look at the following:

1.     History and purpose of NATO including member countries

2.     Article 5 – the “meat” of the North Atlantic Treaty

3.     NATO budget and contributions

4.     New spend recently agreed at the NATO Summit in The Hague

5.     Governance and operational commands of NATO

As an aside, NATO has a very informative website that you can access here.

1. History and purpose of NATO

The North Atlantic Treaty Organization (NATO) was established on April 4, 1949, with the signing of the North Atlantic Treaty (also known as the Washington Treaty).  Its founding purpose was to provide collective defence against the threat posed by the Soviet Union in the aftermath of World War II.  There were 12 founding members of NATO: Belgium, Canada, Denmark, France, Iceland, Italy, Luxembourg, Netherlands, Norway, Portugal, UK, and USA.  Over time as you can see in the table below, the membership has increased to 32 members:

The following extract from the website of the NATO office in Sweden summarises the purpose of NATO very concisely:

“NATO is an intergovernmental organisation with both a political and a military dimension. NATO’s core tasks consist of deterrence and collective defence, civilian and military crisis prevention and management and security cooperation.

NATO’s member countries have undertaken to cooperate on these three core tasks so as to resolve security challenges, build trust and prevent conflicts. If diplomatic efforts for peace are inadequate or fail to achieve the desired effect, NATO can carry out crisis management operations.

All decisions in NATO are taken by consensus, which means all NATO member countries must agree unanimously to take decisions.”

2. Article 5 – the “meat” of NATO

The foundation of NATO is the North Atlantic Treaty that was signed in 1949, consisting of 14 Articles. You can find the treaty on the NATO website here.   The Article that is most referenced is Article 5, which concisely states:

An attack against one Ally is considered an attack against all Allies.

In the history of NATO, Article 5 has only been invoked once, and that was after the 9/11 attacks on the United States in 2001.  When Article 5 is invoked, it triggers collective military response by the Alliance, though action varies based on national decisions.

I will discuss NATO governance in the last section of this article.

3. NATO budget and how NATO is funded

As we look at the costs of the NATO Alliance, keep in mind that NATO (as an organisation) does not have its own army, so each member of the alliance is required to commit troops and equipment on a voluntary basis.  These costs are borne entirely by each member country, essentially an indirect cost for NATO albeit the most relevant by far. 

However, NATO does have its own budget (direct costs) that is used to finance certain aspects of the alliance, including programmes and capabilities in support of objectives, priorities and activities that serve the interests of the Alliance as a whole, and that cannot reasonably be borne by any single member.  This amount was €4.6 billion in 2025.

Looking at the direct and indirect costs of NATO, the NATO website says:

“NATO is resourced through the direct and indirect contributions of its members. NATO’s common funds are composed of direct contributions to collective budgets and programmes. These funds (around EUR 4.6 billion for 2025) enable NATO to deliver capabilities and run the entirety of the Organization and its military commands.”

Direct costs

NATO has three principal common-funded budgets: the civil budget (funding NATO Headquarters), the military budget (funding the NATO Command Structure) and the NATO Security Investment Programme (funding military infrastructure and capabilities).  Funding NATO directly has not historically been an area of concern to the U.S. or other NATO members, and the funding (€4.6 billion in 2025 as mentioned above) is provided by member countries as follows:

Indirect costs, the basis of Mr Trump's ire

Although the direct funding of NATO and its various programmes has not been an issue for the U.S. or other member-states, the amount that each country spends on defence – de facto providing the collective defence that is enshrined in Article 5 of the NATO Treaty – has been an issue for decades.  The U.S. has traditionally looked the other way, but Mr Trump – both in Trump 1.0 and Trump 2.0 – has been vocal about the unfairness of the arrangement to the United States.

The graph below shows how the U.S. bears an unusually large part of the indirect costs of the NATO defence umbrella, and has for many years.

As the graph above illustrates, the U.S. spends nearly twice as much each year on defence as all other NATO members combined. However, this is not really a fair way to look at the issue, because the U.S. economy is so materially larger than that of all other NATO members. The GDP in the U.S. in 2024 was $28.7 trillion, and the next largest country in NATO is Germany, which had estimated GDP in 2024 of $4.6 trillion. The methodology generally accepted among NATO members is that they should spend in line with the size of their economy. However, even this approach shows that the U.S. is paying a disproportionately high amount vis-à-vis other NATO members, President Trump’s quite valid argument.

In 2006, there was an accord agreed among NATO members that they would spend at least 2% of their GDP on defence, a pledge that was reiterated in 2014 following Russia’s illegal annexation of Crimea. In 2014, non-US NATO members were collectively spending 1.43% of their combined GDP on defence; only three non-U.S. members met the 2% target. By 2024, the collective spend had increased to 2.02%, with all but three members meeting the 2% target. All NATO members are expected to be at 2% or more in 2025. Nonetheless, when considering the size of each country’s economy, non-U.S. NATO members still spend collectively less than the U.S. spends on defence as a percent of GDP (circa 3.38% in 2024).

As a percent of GDP, only Poland and Estonia spent more as a percent of GDP on defence than the U.S. in 2024.

4. NATO meeting June 2025; President Trump’s “requirements”

At the recent NATO Alliance meeting in The Hague, President Trump was emphatic – as he had been during Trump 1.0 – that NATO members needed to sharply increase their spending on defence.  My understanding is that the new target is divided into two components, the first of which is a 3.5% of GDP target to be spent on defence by 2035, analogous to the figures in the table in the previous section.  This amount is to be used to resource core defence requirements like ships, tanks, bullets, people and so on.  On top of this, there is an additional target of 1.5% of GDP to be spent on strategic reliance initiatives “to inter alia protect critical infrastructure, defend networks, ensure civil preparedness and resilience, innovate, and strengthen the defence industrial base”, as determined by each individual country.  This means that each NATO member must spend 5% of GDP on these two defence-focused areas by 2035.  Although Mr Trump was instrumental in convincing allies to increase their defence commitments, Europe was also no doubt reeling from Russia’s illegal invasion of Ukraine in February 2022, a conflict that is ongoing and is a stark reminder for European countries that they could be next on Russia’s list as it pursues its imperialistic agenda.

5. Governance and operational commands

NATO’s headquarters is in Brussels, which houses the North Atlantic Council, Military Committee, and International Staff.

NATO’s highest decision-making body is the North Atlantic Council.  Each member country appoints an Ambassador to the North Atlantic Council based in Brussels, which meets several times each year along with each member state’s defence ministers, foreign ministers, and heads of state.  The most important such meeting each year is the NATO Summit, which just occurred in The Hague. 

The Military Committee is the senior military authority in NATO, which is responsible for military planning.  This committee reports to NATO’s North Atlantic Counsel.

The current Secretary General of NATO is former Dutch Prime Minister Mark Rutte, who was elected and assumed his position in 2024.   The Secretary General is changed and chosen from time to time (usually every five or so years), but it appears to be diplomatic with no formal methodology.  The Secretary General is a political position. 

The defence role in NATO is headed by the Chief Military Officer, who is currently Guiseppe Cavo Dragone, former Chief of Defence of Italy.  The most powerful military position though is the Supreme Allied Commander Europe (SACE), a position normally held by an American.  The position, normally serving from one to eight years, is nominated by the President of the U.S., confirmed by Congress and approved by the North Atlantic Council.  Currently the position is held by General Christopher Cavoli (U.S. Army), but a new SACE is currently going through the confirmation process, Alexus G. Grynkewich (U.S. Air Force).

Conclusion

NATO remains a cornerstone of Euro-Atlantic security, adapting to evolving threats from traditional military aggression to cyber warfare and terrorism. Its strength lies in unity, shared values, and the principle of collective defence enshrined in Article 5.