Defense Spending: What the European Average Means for Greece’s Efforts

Last week, the Commission’s White Paper brought cautious optimism to Athens, partly validating Greece’s stance on fiscal flexibility for member states to avoid excessive deficit procedures when spending heavily on defense. However, the debate over increasing defense budgets is far from over, as crucial discussions loom at the European level and Greece continues to push its proposals. According to top sources at the Ministry of Finance, Greece’s primary proposal calls for the establishment of a European average spending benchmark as the basis for annual growth percentage comparisons. The Commission’s proposals are clear: it suggests excluding an annual increase in defense spending up to 1.5% of GDP from deficit calculations, with reference year 2021. This means starting the calculation from 2021 data, any additional expenses beyond that point up to 1.5% of GDP would be excluded. In this scenario, Greece faced challenges even in 2021—before the war in Ukraine—with high defense expenditures reaching €6 billion (NATO figures suggest even higher numbers). With the target set slightly above €6.3 billion for 2025, Greece will benefit but not as much as it could if the baseline were different. Meanwhile, countries that did not meet NATO obligations in 2021 and spent less will reap greater rewards, allowing them to exclude larger amounts from their deficits and create more fiscal space. Therefore, Greece’s new financial leadership continues to advocate for its original proposal, which calls for calculating increases based on a European average rather than individual national spending. The rationale is that if Greece spent €6 billion in 2021 and plans to spend €6.5 billion by 2025, under the Commission’s proposal, only half a billion euros can be excluded. However, setting a European average, potentially lower at around €4 billion due to Greece’s already high spending, would allow Greece to exclude and utilize significantly more funds. It remains unclear in the White Paper which year’s GDP will serve as the reference point, as Greece’s GDP growth rate has been three times faster than other European countries between 2021 and 2025.