Goldman Sachs · France · European Union · Nation Thailand
Most eurozone states could face extra spending of at least 3% of GDP by 2040
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European governments face mounting pressure to fund defence, pensions and healthcare while meeting higher debt-servicing costs, with weak growth limiting their options, according to a Morgan Stanley analysis published on July 20, 2026. Without policy
Key facts
- Goldman Sachs Research, in an analysis published before the June 2025 summit, projected that annual European Union (EU) defence spending would be around €80 billion higher by 2027, equivalent to approximately 0.5% of GDP
- Members of the North Atlantic Treaty Organization (NATO) agreed at their June 2025 summit in The Hague, Netherlands, to raise their defence and security spending commitment to 5% of GDP by 2035, compared with the previous 2% defence
- That earlier scenario put eurozone defence expenditure at 2.4% of GDP in 2027, against 1.8% in 2024.
- The Fund forecasts eurozone economic growth of 1.1% in 2026 and 1.2% in 2027.
- By 2030, the cumulative gain would reach approximately 1.2% of GDP, covering roughly half the required improvement in government balances before interest payments under EU fiscal rules.
- With real GDP growth of 2% a year and the same spending restraint, Morgan Stanley projects that the available room could approach 2.3% of GDP by 2030
Summary
European governments face mounting pressure to fund defence, pensions and healthcare while meeting higher debt-servicing costs, with weak growth limiting their options, according to a Morgan Stanley analysis published on July 20, 2026. Without policy changes, those competing demands could raise public spending by at least three percentage points of gross domestic product (GDP) in most eurozone countries by 2040.
Morgan Stanley expects governments to face difficult budget choices over the coming decade as they try to sustain growth without adding to debt. For decades, falling defence expenditure and debt-servicing costs helped European countries expand welfare programmes. Ageing populations, higher interest costs and geopolitical tensions have reversed that advantage.