Arctic security and defense spending: Economic implications

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

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.