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The U.S. has suspended assistance to Ukraine. Can Europe make up the difference?

S&P Global Ratings acknowledges that this is a fast-evolving situation, with a high degree of unpredictability. As events unfold, we will gauge the macro and credit materiality of potential and actual policy shifts accordingly.

What We're Watching

The abrupt ending to a meeting between U.S. President Donald Trump and Ukrainian President Volodymyr Zelenskyy, and the subsequent suspension of American assistance to Ukraine, has upended the Transatlantic Alliance. This raises questions about the new Trump administration's commitment to collective defense for Europe.

In the aftermath of the acrimonious White House get-together, the U.K. and France have vowed to assemble a "coalition of the willing" to try to broker a lasting peace—one that would include unspecified security guarantees. In response, the new U.S. administration has seemingly shown less of a commitment than its predecessors to "respect the independence and sovereignty of existing borders of Ukraine," as was stipulated in the Budapest Memorandum of 1994—an agreement signed by the U.K., U.S., Ukraine, and Russia.

Growing U.S. unilateralism is a particular concern for smaller nations, including those in Europe, which have benefited from the U.S.'s historical role as the security guarantor of a rules-based international system permitting (in the language of the 1941 Atlantic Charter) "all States, great or small … access, on equal terms, to the trade and to the raw materials of the world which are needed for economic prosperity." Indeed, Europe's reliance on the American security umbrella—along with historical European underspending on national defense—has long been a point of contention within the NATO alliance.

European leaders remain focused on winning the backing of President Trump as a guarantor of any ceasefire arrangement between Ukraine and Russia. S&P Global Ratings believes the risks to Ukraine and Europe from U.S. disengagement remain considerable, given potential triggers for a broader conflict.

From a credit conditions standpoint, the fallout could create investor risk aversion, a flight to quality, disruption to supply chains, and a shift in European governments' spending priorities. At the same time, it could galvanize European collective support to move one step closer to a fiscal and capital markets union—including a mandate to the EU to issue more common debt, potentially buoying the euro's role as a reserve currency.

The starting point is difficult: Even with European countries nearly doubling their defense spending in the past decade, they still spend on average below the NATO guideline of 2% of GDP, while the U.S. finances nearly two-thirds of NATO's military budget. Investing in sufficient artillery, missile, drone, aviation, and transport capacities to match Russia's war time footing could require five to 10 years of offsetting fiscal cuts.

While the logistics of Europe's defense build-up are at an early stage, the financing commitment is a rapidly emerging credit story. In a break from its past, Europe's largest and least indebted economy, Germany, announced that it would overhaul its debt rules to exempt defense and security expenditures from its constitutional debt brake and, subject to parliamentary approval, establish a €500 billion (11% of GDP) Special Defense Fund.

On the EU level, there's been agreement on establishing a new multilateral bank to bridge the defense-spending gap in western countries, and a commitment by the commission to launch a new EU instrument to borrow up to 150 billion euros ($159 billion) to lend to EU member states. These initiatives would finance joint defense investments in air and missile defense, artillery, missiles and ammunition, drones, and anti-drone systems. EU President Ursula Von der Leyen has also cited an additional 650 billion euros in lending capacity available for defense support in Europe.

What We Think And Why

The protracted Russia-Ukraine conflict underpins the stresses Europe's leaders face—particularly the need for increased security spending at a time when government budgets are already stretched. Germany's big announcement earlier this week to establish separate defense and infrastructure funds is, on the other hand, clear confirmation that Europe is taking the challenge seriously.

Given the risks, European states look set to shoulder a much heavier burden—but at the national level, fiscal constraints limit the capacity of the continent's sovereigns to boost military spending. As a percentage of GDP, average defense spending by Europe's NATO members is significantly less than that of the U.S.: just 1.9% of GDP, versus 3.3%. But that figure masks large differences in actual outlay—with frontline nations like Poland and the Baltic states, as well as Greece, spending more than 3.0% of GDP on defense.

The Trump administration has called for NATO members to increase spending to 5.0% of GDP. With the coalition's June 2025 summit approaching, even Western European states now seem more supportive of a European solution to increase defense spending. They may also hope such an overture will convince the U.S. government not to levy fresh tariffs on key European goods, which has become a distinct possibility.

What Could Change

We believe most European governments and citizens consider the war in Ukraine to be the biggest threat to regional peace and security. Article 5 of the NATO treaty commits countries to consider an attack against one member to be an attack against all and to take necessary actions to underpin the security of alliance members—a joint-security guarantee that has held since the organization's formation in 1949.

Any dent in the credibility of NATO Article 5—whether real or simply perceived—could embolden Russia to test new boundaries. We think the absence of a fair and durable peace agreement negotiated by all parties (the U.S., Europe, Ukraine, and Russia) could soon leave Ukraine totally reliant on European military and financial support, as the Trump administration's "America First" approach to foreign policy makes continued aid less likely.

However, while we believe NATO countries agree that for Article 5 to remain credible they need to find a way to coordinate and increase defense spending, we also note that European leaders haven't sufficiently prepared the region's citizens for the difficult trade-offs that may be necessary to address Russia's aggression in the medium term.

Defense spending isn't a one-off adjustment; it's an ongoing financial commitment that will weigh heaviest on the largest and most indebted European economies. To ensure the sustainability of higher expenditures, debt would have to be backed by new revenue sources, offsetting spending cuts, or additional capital transfers to EU supranational institutions. Against this backdrop, the litmus test will be whether Europe can establish a lasting financial framework to support its defense ambitions year after year.

Writers: Joe Maguire and Molly Mintz