Investing.com — Citi analyst Charles Armitage sees four possible scenarios for European defense spending following comments from President Trump that he is “strongly considering pulling the U.S. out of NATO.”
The Wall Street firm previously assumed the U.S. would remain in the alliance, partly because Europe had already begun increasing defense budgets, but the likelihood of this scenario is now declining, Armitage said in a note.
In the first scenario, Europe manages to placate Washington and NATO remains intact, supporting continued growth in European defense spending. This was Citi’s former base case, but Armitage said it is “looking less likely now.”
The second scenario, and the one the analyst now views as increasingly probable, sees the U.S. withdraw from NATO, forcing Europe to accelerate spending on its own to maintain a credible deterrent against Russia.
“Given Germany and Sweden are already ramping up to 3.5% of GDP by 2029/30, it is likely the other major European countries that will need to step up spending,” he wrote.
Armitage said a U.S. withdrawal under this scenario would likely trigger “an initial positive share price reaction” for European defense stocks.
The remaining two scenarios are less favorable for the sector. In the third, a U.S. exit leads not to a unified European response but to fragmentation — a lack of political cohesion and domestic pressures cause Europe to fall short of an integrated defense policy.
Finally, the fourth possible outcome that Citi outlines involves a major Russian information campaign following NATO’s collapse. Under this scenario, Russia reframes the Ukraine conflict as a domestic matter and portrays itself as having no further territorial ambitions in Europe.
Armitage argues this could allow a cash-strapped and politically weary Europe to accept that narrative, particularly if Russia sweetens it with offers of cheap oil and gas.
“We flag the remaining two scenarios would result in defense spending going down. HOWEVER: (1) we do not expect these to manifest over the short term and (2) we consider them (at the moment) as tail risk, but increasing with the decline of option (1),” he said.