Is NATO Still a Buy?
Yes, if Europe seizes the moment and America understands the risks.
The North Atlantic Treaty Organization opens a brief shareholder meeting tomorrow in the Netherlands. Management will present fresh strategic plans, the largest owners will welcome the vision, and the investor relations team will urge analysts to refresh their ‘buy’ recommendations for the stock. That, at least, is the plan.
With escalating wars in Iran and Ukraine this week, it may sound trivial to compare NATO to a publicly-traded company. But the rock-solid commitments of Western allies since World War II have probably done more to secure all stock returns over the last 75 years than any other international organization.
If NATO isn’t a ‘buy,’ then not much else will be in the decade ahead. All of us who depend on the Western alliance for peace and prosperity should be sure we buy the ‘buy’ that will likely echo from the World Forum in the Hague. I’m inclined to believe in the current plan that gradually shifts burdens from America to Europe, but only if management answers some important questions soon.
Ever since President Emmanuel Macron of France declared it “brain dead” in 2019, the alliance has been shaken from its torpor. Donald Trump gets some of the credit for his increasingly direct threats to withdraw U.S. support if Europeans don’t spend more. Vladimir Putin gets the rest for, well, invading his neighbor.
Amid fresh commitments to more defense spending, the European Union elevated a new Commissioner for Defence and Space last year to help coordinate the development of a continental defense industrial base. But the most concrete sign of change was Germany’s vote in March to exempt military spending from its strict budget rules and Chancellor Friedrich Merz’s commitment to build the continent’s “strongest conventional army.”
Politicians hailed a new era of European independence, economists revised growth rates higher and defense stocks soared.
Just as most NATO members now meet the longstanding target to spend 2% of GDP on defense, this summit will lock in even higher goals to spend 3.5% on defense plus another 1.5% on a loose category of defense resilience that might include infrastructure. Left somewhat vague for now are deadlines for these commitments, but the direction of travel is clear.
Still, this is a classic case of throwing money at a problem when you can’t just throw money at the problem.
First, NATO needs a much sharper understanding of the kind of threats Russia presents. Europe needs a strong conventional force and a much more resilient defense industrial base, especially as the United States pulls back. But it’s also important not to scare the children.
There is no realistic prospect of Russian tanks rolling into Warsaw, let alone Berlin. The real focus of the alliance should be on protecting against Russian sabotage of critical infrastructure, cyber attacks or disinformation campaigns that magnify the existing disagreements across European and U.S. electorates.
Second, European governments need to have an honest conversation with voters about the need to make more decisions on foreign policy in Brussels. Security threats require rapid responses that can’t always be approved by 27 capitals. Also, an integrated defense industry means more joint production of tanks and bombers and an equitable distribution of defense contracts across all member states.
It also means integration of financial and budget policy, so that Europe can issue more joint debt, integrate its capital markets and better enforce deficit discipline. Importantly, Europe cannot reliably defend itself without growth, and Europe will not grow without significant structural reforms to boost innovation and make the most of all this new spending.
Finally, NATO’s business plan will not work without a clear understanding of the new balance of power that will exist between Washington and Brussels. While America has long urged more European spending on defense, it has also worried about losing influence over a continent that has its own separate military capabilities.
If NATO isn’t a ‘buy,’ then not much else will be in the decade ahead.
Today’s most important questions are just how fast the Trump Administration plans to withdraw U.S. forces from Europe and what gaps it will leave behind. Will Washington continue to provide airlift, intelligence or anti-aircraft capacities while Europe fills the gap?
The longer-term questions include just how to manage emerging differences in American and European security priorities. Can we already imagine a day when Europe feels the need to reinforce the defense of Greenland against a U.S. threat? Could an American leader interested in a better relationship with Moscow actually intercept European missiles headed for Ukraine?
Direct military conflict between the U.S. and Europe may be difficult to imagine even amid today’s caustic exchanges about tariffs, data regulation, and whose democracy is more resilient. But as unprecedented rifts deepen among its largest shareholders, NATO’s evolving business case needs to acknowledge the risks ahead so that everyone can buy into the current plan.