NATO 3.0: The Turkey Summit and the Test of Defense Pledges Under Trump

Context

NATO summit in Turkey this week, first post-The Hague 2025 summit where the 32 allies committed to increasing defense spending to 5% of GDP (3.5% pure defense + 1.5% resilience/infrastructure) by 2035. Trump 2 makes this the cardinal test of his NATO commitment.

The Data

• 22 of the 32 allies above 2% GDP in 2025 (SIPRI Military Expenditure Database).
• US defense budget FY2026: ~$895 Bn (~3.4% GDP).
• Germany: Sondervermögen 100 Bn€ expected to be exhausted by the end of 2027, transition to regular budget ~3% GDP.
• France: LPM 2024-2030 = €413 Bn, trajectory 2% GDP in 2025, no commitment to 3%.
• Poland: 4.7% GDP 2025, leading the way.
• Spain, Italy, Canada: below 2%, likely exemptions.

Analysis

The "Trump test" boils down to two aspects. (i) Credible budgetary trajectory: allies must show a multi-year plan, not just announcements. (ii) Share of US industrial purchases (F-35, THAAD, Patriots, munitions) in the European pipeline - the White House wants to convert pledges into firm orders. Berlin, Paris, and Rome are pushing in the opposite direction via ReArm Europe, EDF, ASAP, and a preference for Rheinmetall, KNDS, Leonardo, Thales, and BAE. The final communiqué will calibrate the balance - arbitration between EU industrial autonomy and transatlantic cohesion.

Probabilized Scenarios

• (45%) Firm communiqué, 3% GDP timeline confirmed for the majority, flexibility on the 1.5% resilience component.
• (30%) Compromise with explicit exemptions (Spain, Italy, Canada), 3% commitment only for 2030.
• (25%) Crack - Trump threatens partial withdrawal, 10-year Bund risk premium +15-20 bps, EUR/USD -1%.

Portfolio Implications

EU Defense: Rheinmetall, BAE Systems, Leonardo, Thales, KNDS - structural support, premium in case of a firm communiqué. US Defense: Lockheed Martin, RTX, General Dynamics, Northrop Grumman - beneficiaries of conditional orders. Tactical segment: Kratos, AeroVironment, Rocket Lab. Space sovereignty: Rocket Lab/Iridium $8 Bn contract (rocket-lab-defense-space, pub #761). Sovereign: Bunds sensitive to the credibility of the US commitment.

Risks & Blind Spots

The "5% GDP" masks elastic definitions (cybersecurity, civil protection, dual-use satellites) - the real effect on industrial order books remains < 2027. Political risks: Bundestag and Italian elections 2027, UK budget under constraint, possible alternation in the Netherlands. Contrarian angle: Trump may give in if F-35 allocations progress - the "threat" is also an industrial negotiation lever.

To Watch

• Final communiqué of the summit (end of the week).
• Ratification of Germany's Sondervermögen 2, September.
• Industrial contracts announced on the sidelines (LMT, KNDS, Rheinmetall).
• Reaction of Bunds/OAT/Gilts during and after the summit.