All Three Baltic States Signal Intention to Increase Defense Spending to Up to 5% of GDP

On January 21, Estonian Prime Minister Kristen Michal unexpectedly surprised both his coalition partners and the general public by stating on live national radio that he supports Donald Trump’s proposal for NATO member states to increase defense spending to 5% of GDP. Michal also hinted that Estonia would adopt this as its own target. In his statement, he clarified that he does not support increasing defense spending through tax hikes, but rather advocates for initiating a broader EU debate on joint European funding for border-state defense, arguing that the security of these countries benefits the entire European Union.

Under Michal’s leadership, the Estonian government recently already introduced a security tax, a portion of which will be used to procure additional ammunition for the Estonian Defense Forces.

There has also been discussion among the Baltic states about excluding defense-related investments from the Maastricht criteria—which dictate that a country's government deficit must not exceed 3% of GDP. However, it remains unclear whether this idea has support in Brussels.

If the large-scale inclusion of EU funds in border-state defense turns out to be more than just wishful thinking, now would be an opportune moment to formally declare national funding ambitions—especially since there seems to be a deliberate effort to send a strong diplomatic security signal to Trump’s new administration from the outset.

Lithuania remains uncertain about the implications of breaching the Maastricht criteria and whether there is any hope of relaxing these rules after Germany’s elections. Time will tell, but Baltic defense diplomacy under Trump’s administration may indeed be more speculative than usual.

Within Estonia’s ruling coalition, Prime Minister Michal faced backlash from coalition partner Kristina Kallas, leader of Estonia 200, for keeping them in the dark about his defense spending proposal. Meanwhile, Lauri Läänemets, head of the Social Democratic Party (SDE)—another coalition partner—stated that he had spoken with Michal about the defense budget increase the day before the announcement.

Even several ministers from Michal’s own Reform Party were caught off guard by the prime minister’s 5% defense spending target, including Finance Minister Jürgen Ligi, who had previously dismissed such an increase as unrealistic.

Ligi, who had already stated last fall that raising defense spending to 5% of GDP was not feasible, reiterated that this goal remains "out of reach."

"Moving step by step in that direction is one thing, but the solution is certainly not to simply change budgetary rules and declare ourselves free from fiscal discipline. In reality, these rules serve a purpose. They have kept Europe from falling into a debt crisis—every country is making efforts, and all are working to avoid overspending. Budgetary rules remain as essential as ever," Ligi emphasized.

Regarding potential exemptions for defense spending, Ligi noted that such exceptions already exist within the current EU framework.

"But what exactly we can do, or what will ultimately be agreed upon, is an entirely different question. It’s no secret that much depends on the outcome of the German elections. Without Germany’s position, there’s little point in discussing exceptions to EU budget rules," he stated.

Ligi warned that loosening fiscal rules would pose a significant risk to national finances.

"Financial stability is also a matter of security, and in that sense, we must avoid swinging to the other extreme. That said, setting these rhetorical targets is inevitable. However, it cannot be done hastily—what does one percent of GDP actually mean? Roughly speaking, it equates to a three to four percentage point increase in either income tax or VAT. We have already stated that we will not take that route, and I believe the government will stand by that commitment," the finance minister concluded.

Why Prime Minister Michal decided to announce the 5% defense spending goal unilaterally, bypassing even members of his own party, remains unclear. According to the Estonian Foreign Ministry, the decision was influenced by the example set by the Lithuanian and Latvian earlier statements. However, within the Reform Party, defense issues have long been used as an instrument for managing the domestic political agenda.

Michal’s predecessor, Prime Minister Kaja Kallas, took a similarly unilateral approach in the spring of 2022 when drafting her first national defense reinforcement package. While she did inform her coalition partners, she did not consult all of her own party’s ministers. However, at that time, Finance Minister Keit Pentus-Rosimannus was fully on board, even publishing an article advocating for the necessity of increasing defense spending.

Whether all three Baltic states will truly commit to the 5% defense spending target will likely become clear by NATO’s June summit in The Hague, Netherlands. Estonian Prime Minister Michal has pledged to start promoting the idea of European central funding for Baltic defense at the February 3 informal meeting of EU leaders in Brussels, hosted at Palais d'Egmont, where European defense policy will be at the forefront of discussions.