The small country, one of NATO’s shyest spenders, has pledged to triple its current spending by 2035. Will its fragile economy hold?
Last June, NATO members convened at a summit to discuss defence commitments and agree on a new 5% of GDP minimum spending requirement by 2035.
Geopolitical developments in recent years have caused an upheaval in European defence forums and rhetoric. Trump’s re-election and his erratic foreign policy, the War in Ukraine, the conflicts in the Middle East and the ever-looming China threat over Taiwan have all contributed to this. It has become a politically accepted reality that NATO’s European members underspend on defence.
It was then a historic decision that set the threshold at more than double the original 2% required until now. This came as pressure from Europe’s Atlantic ally, the US, has been mounting to increase European defence autonomy. 
Some nations, such as Spain, reacted coolly to the summit’s decision, declining to commit to such a sharp increase in defence spending and calling instead for “flexibility” and an extended timeline.
Portugal, by contrast, embraced the new target with little apparent pushback.
Indeed, not only has the new Portuguese government headed by Luís Montenegro agreed to the 5% requirement, the Prime Minister even pledged to reach the 2% requirement this very year, and without compromising state finances.
This announcement caused surprise, notably because Montenegro himself had stated in November 2024, before his previous government collapsed earlier this year, that Portugal would aim for the 2% target until 2029.
What’s noteworthy is that, for at least two decades, Portugal has been one of the lowest military spenders in NATO, repeatedly missing the 2% mark required by the Alliance. According to the World Bank, the most it has spent on defence in the last 20 years was in 2006, reaching only 1,6%, and the last time it made the 2% requirement was in 1982, before joining the EU.
Portuguese Minister of Foreign Affairs Paulo Rangel has said the country would gradually increase defence spending further to meet the 5% of GDP in the coming years, with a yearly increase of the defence budget by 450 million euros. For reference, estimates put Portugal’s nominal GDP at around 310 billion euros until the end of 2025.
This new commitment comes as the ageing country is mired with economic issues since the start of the Covid-19 pandemic, one of the worst (if not the worst) housing crises in the OECD, an exodus of the most qualified youth and more.
How will Portugal manage to allocate such a large portion of its finances to defence? And what would be the effects of such a drastic increase on an already fragile economy?
To answer these questions, it is relevant to first contextualise what Portugal’s military philosophy has been during the five decades of democratic rule. Portugal has indeed had a distinct role in NATO and the Atlantic, though small it might be.
Second, we may analyse how similar countries have coped with increased defence spending. Denmark and Czechia provide some of the most similar examples in terms of nominal GDP and population, even though Portugal’s financial situation is in worse shape. Simulations and reports regarding the impacts of heightened defence spending also provide valuable insights into what the future holds.
Portuguese membership in NATO began in 1949, as a founding member. As strange as it seemed for Western democracies to want a hermit dictatorship as an ally, it was rather out of realist interests.
The strategic importance of Madeira and the Azores Islands made Portugal too valuable to be left to its own devices, as there was a fear from the US communism would spread in the country.
Decades later, when Portugal embraced democracy in 1974 following a non-violent coup, it had been fighting a bloody war against its former colonies for more than a decade. In little over a year, it turned from a war economy to a revolutionary society. Social instability and tensions remained high for more than a year, so that it nearly devolved into civil war.
A society used to authoritarianism, dictatorship and war now found itself free and open to the world. And just as the people were confused about their newfound identity, so too was the military.
From 1976 onwards, Portugal adopted “Atlanticism” as its foreign and security philosophy. This Atlanticism, Steven Robinson explains, is “deeply rooted in national identity,” and translates into a defensive dependence on the US and NATO, as well as a desire to maintain influence over the Lusophone world. This explains Portugal’s reluctance to fully commit to Europe’s defence, or in general, to European affairs.
In the 1990s, Maria do Céu Pinto says, Portugal found its purpose in International Relations as a major peace-keeping operations (PKO) contributor. Unlike major powers, which might have sought to project their influence for economic or political exploitation, Portugal committed to PKOs as a way of gaining soft power and clout in the international community.
Indeed, the country had a significant presence in PKOs, namely in the Balkans following the Yugoslav Wars, in Afghanistan, and a major contingent (UNTAET-PKF) in East Timor following Indonesia’s invasion.
After the end of dictator António de Salazar’s regime, Portugal aimed to distance itself from its colonial legacy and align with Western democratic and multilateralist norms. Peacekeeping became a key vehicle for this reinvention, reinforcing its commitment to international law, human rights and collective security.
As Maria do Céu points out, though, multiple financial crises, culminating with the 2008 EU Debt Crisis, dealt a death blow to Portuguese military capabilities.
General José Nunes da Fonseca reported in a 2023 press conference that the number of active personnel had been decreasing steadily since 2010 to the point where no branch of the Armed Forces met minimum manpower requirements. At the time, the Portuguese Army, the largest branch, registered a whoppingly low record of 10,969 men and women in active service.
Part of the reason the Armed Forces are so unpopular among recruits is simple: poor wages. General Isidro Morais, who has become well known to the Portuguese general public from his TV commentary on security affairs, said, “How can you convince youth to move hundreds of kilometres to a military base only to earn a cashier’s salary?”
He goes on to say, “They’re making slightly more than minimum wage. We simply must pay recruits better.”
Interestingly, PM Montenegro’s 2025 XXV Government Programme makes only a vague mention of this. Instead, the new investments will be made as a mix of infrastructure, conventional and unconventional arsenal improvements, as well as incentives for private investment in the Portuguese defence industry.
PM Montenegro mentioned in a press conference for NATO’s June Summit that the bulk of Portuguese defence investment would be going to equipment and infrastructure:
“Reaching a 2% spending target is not easy,” he stated, “not because there’s a lack of money or political will, but rather because of logistics. Acquiring equipment and military goods is not a simple process – it’s not like buying a car; there’s a much longer waiting period. We’re establishing commercial partnerships with providers, but the response time is not as immediate [as with civilian businesses.]”
But he also addressed the low financial attractiveness of the military:
“We’ve included a financial empowerment targeting our human resources in this year’s state budget, which we hope will endow the Armed Forces with a greater attraction and retention of people. (…) This is only possible thanks to balanced sheets that don’t require any additional measures this year.”
There is a clear focus from Montenegro and the Government Plan’s rhetoric on incentivising private investment in the military through attracting already existing industries to do so, or to promote the creation of defence startups.
Though specific defence aims have not been made public or overly clear, investment in the private sector and equipment upgrading might make the Portuguese military more “overwhelming firepower” focused. Small nations must focus on a niche and play to their strengths, as per the words of Slovenian ex-Defence Minister Anton Grizold.
As such, considering the Government’s new commitments to investing in military technology and industry, it is possible we will witness a major revamp of the Air Force, and its role as air superiority is the backbone of contemporary warfare. This can be observed in the several Made-in-Portugal drone and aircraft development companies already establishing themselves in the aerial warfare field, which are highly expectant about the country’s heightened defence spending. Additionally, the Prime Minister, in a visit to OGMA, a defence contractor focusing on the aerospace industry, envisioned that the formerly publicly-owned company would triple its income by 2030 as defence investment increased.
Ultimately, though, as 450 million euros are invested in defence yearly, the economy is bound to be affected significantly.
According to an EU Commission Finance Report, which simulated exactly this, the economy may grow slightly as state investment crowds out private demand in the short term, i.e. until 2029. However, debt is expected to rise after 2029 as a response to defence budget increases. Higher taxes and interest rates may help soften risk as well as mitigate inflation.
Additionally, while the increase in R&D and infrastructure investment might drive nominal GDP up, overall economic stimulus could stagnate. Another problem is that, especially in the beginning, while investment ramps up, demand will see a spike, but production, and therefore supply, will take years to adapt, which will drive prices up.
Finally, according to the literature cited in the report, economic activity estimates seem to point towards two main, contrasting consequences.
As per the Keynesian model, which favours investment and incentives to commerce during recessions, the drastic increase in defence spending would overall boost the economy by creating jobs and stimulating aggregate demand.
Neoclassical economics, though, suggests that eclipsing private investment through overwhelming public investment would cause fiscal deficits and a slowdown of the economy.
The report concludes by stating that cross-country studies do not give conclusive results, suggesting that data is highly dependent on specific circumstances.
Another report by the Kiel Institute for World Economy predicts that European economies will go into recession if increased defence expenditure is financed by taxes and targets foreign industries.
The Institute recommends resorting to debt mechanisms as a higher fiscal burden would slow down the economy while also appealing to “regional investment” in local, i.e. European industries and technology as opposed to American. If the EU does this, “the economic effects of additional defence spending could go far beyond short-term fiscal multiplier effects and boost growth in the medium term.”
Real-world examples of the economic effects of increased defence spending are rare, especially those in similar conditions to Portugal.
Czechia, which has a similar population and economy to Portugal, saw its defence budget grow by 50% from 2017 to 2023 and reportedly reached 2% as of 2025. A Czech National Bank report stated that increased defence spending as well as the Covid-19 recession had had a significantly negative impact on the Czech state budget, increasing deficit and also the difficulty of settling sovereign debt, which had reached 30% of GDP in 2019, but increased to 43.4% in 2024.
Fitch Ratings also puts higher debt and budget deficits in the short-to-medium term at the core issue of approaching the NATO spending requirements, but mentions that long-term growth is not significantly affected. Additionally, it states that energy price shocks and crises, such as the Covid-19 pandemic, have a much larger impact on state finances.
This could be a hint towards higher energy independence, crucial for any European looking to expand its military. It is vital for the EU to “wean” itself away from the Russian and Middle Eastern fossil fuel markets. In open conflict, where energy and fuel are crucial resources, depending on potentially hostile nations for them would be strategically fatal.
It is likely that if defence spending increases gradually along with energy investment in European industries, vulnerability to geopolitical ripples would significantly decrease. Data also indicates that renewable energies in Europe are linked to higher stability of energy prices when they make up a major share of the electricity market relative to fossil fuels. As wind power is one of the main energy sources in Portugal, sometimes surpassing 50% of the national energy supply, it is vital to keep up investment in the field.
In conclusion, higher defence spending does not typically translate directly into financial chaos or a path to collapse. However, for a nation on such a tight budget, Portugal must spend carefully. Minister of Defence Nuno Melo has repeatedly said a bigger investment in defence cannot compromise the welfare state, but also that it will be done “without creative accounting.”
Science seems to show that when small nations spend big on defence, debt grows. For Portugal, this would be a discouraging blow to political and economic morale, as the country broke the 100%-debt-to-GDP ratio in 2023 and its credit rating score increased to an A for the first time since the 2008 Crisis.
If Portugal finds its niche, buys European and develops its own in-house industries, there is a high chance the economy may actually benefit from the investment. If it stays conventional and unimaginative, buys American and does not endow its soldiers with better purchasing power, it is fated to more of the stagnation it has known well for decades.
