NATO by the Numbers

Europe needs to boost defense spending while managing stretched fiscal positions.

I’m writing from London this week, where Sherlock Holmes famously chased clues and criminals. There is a Sherlock Holmes museum here, and one can take a walking tour to visit sites that featured prominently in his adventures.

Believe it or not, Holmes used cocaine to focus his mind. The drug was commonly prescribed in Victorian England for a range of maladies; a seven percent solution was administered. That dosage became the title of a 1974 novel, an homage to Sir Arthur Conan Doyle in which Holmes and Watson foil a villain intent on inciting war in Europe.

In the modern era, a two percent solution has been used to avoid war in Europe. The two percent refers to the fraction of gross domestic product (GDP) that signatories to the North Atlantic Treaty Organization (NATO) are expected to spend on defense. Not all countries are in compliance with this expectation, which has become a sticking point between members and a risk to economic activity.

National security and prosperity are inextricably linked. Threats raise risk premia and divert resources from civilian to strategic applications. The potential for disruption can lead to outmigration of both people and capital. Investment horizons are curtailed amid the possibility of war, hindering long-term development.

NATO was formed in 1949 to coordinate defense among Western Allies. After collaborating during World War II, Western Europe and the Soviet Union found themselves in a Cold War. NATO was formed with twelve countries, whose union served as a counterweight to growing Soviet influence in Eastern Europe. With the continent rebuilding, the United States provided the lion’s share of defense spending for NATO in its early years.