Sword Instead of Shield: Sword 26 and NATO's Financial Strain

The largest military exercise of the year on the European continent is currently underway, and hardly anyone outside of the specialized press is taking notice. Sword 26, the large-scale exercise led by the US Army Europe and Africa (USAREUR-AF), began on April 27, 2026, and runs until the end of May across eight countries from the far north to Poland. Approximately 6,000 US soldiers and 9,500 allied forces are operating across Finland, Estonia, Lithuania, Poland, and other Baltic and Northern European locations. What at first glance appears to be a routine exercise in NATO's annual calendar reveals itself upon closer inspection as a milestone in alliance transformation — and as a stress test for the financial foundations of European defense.

Sword 26 is not an ordinary maneuver. It replaces the long-standing DEFENDER series, which has dominated the spring and summer months since 2020 as Dynamic Employment of Forces to Europe for NATO Deterrence and Enhanced Readiness. The renaming is intentional: where DEFENDER focused on deterrence, Sword emphasizes combat, modernization, and readiness dimensions. The exercise consists of three interconnected sub-exercises — Saber Strike, Immediate Response, and Swift Response — and is closely linked with Sweden's AURORA 26 LIVEX as well as the traditional BALTOPS 26 in the Baltic Sea. For the first time, NATO's regional defense plans, developed after the Vilnius 2023 summit and the Washington 2024 summit, are being operationally tested.

General Christopher Donahue, commanding general of USAREUR-AF, articulated the claim unequivocally: Sword 26 tests the lethality and the ability to conduct data-driven and AI-supported warfare on a large scale with NATO allies. At the center is the Eastern Flank Deterrence Initiative (EFDI) — a transformative warfare concept that connects unmanned and minimally manned systems with an integrated command and communication network to accelerate decision-making processes and counter an adversary's advantages in mass and momentum. AI-supported command and control, multi-domain near operations, and advanced drone defense systems are on the technological agenda.

That this exercise is taking place right now is no coincidence. July 2026 brings the next NATO summit — this time in Ankara — and the alliance has every reason to demonstrate unity. Transatlantic relations are strained by ongoing tensions between Washington and European capitals, particularly over disputes regarding Greenland and Iran policy. Yet behind the diplomatic facades, a military-economic transformation is taking place, the dimensions of which are hardly discussed adequately in public debate.

At the NATO defense ministers' meeting in February 2026 in Brussels, the alliance adopted a target of 5 percent of gross domestic product for defense spending by 2035. The previous 2 percent target, which many member states have struggled to meet, is thus not to be doubled but increased by 150 percent. This target, decided at the Hague summit in 2025, distinguishes between 3.5 percent for core defense capabilities — hardware, readiness, operations — and 1.5 percent for defense-relevant infrastructure such as cybersecurity, civil resilience, and dual-use transport infrastructure. The latter is a political concession: by allowing road construction and broadband expansion to be included in the target, the number becomes achievable on paper, but diluted in substance.

The bare numbers, however, paint a drastic picture. According to the Atlantic Council NATO Defense Spending Tracker from April 2026, European allies and Canada increased their defense spending in 2025 by 20 percent compared to the previous year. All 32 members now exceed the previous 2 percent threshold — a historic milestone considering that in 2014 only 9 members reached this mark. Norway has become the first European NATO member to surpass the US in per capita defense spending. However, the path from 2 to 5 percent is not a straight line on a graph but a structural strain test for European welfare states.

Germany currently spends about 2.1 percent of its gross domestic product, around 90 billion euros annually, on defense. The 5 percent target would require around 210 billion euros — an increase of 120 billion annually. For comparison: this corresponds to 30 percent of the entire German healthcare system. The suspension of the debt brake by the Bundestag in February 2025 to create a 500 billion euro special fund for defense and infrastructure was already the largest fiscal expansion in post-war history. A further, even larger exception for recurring defense spending would face constitutional and political resistance that seems nearly insurmountable. Additionally, there is the limited absorption capacity of the German defense industry: Rheinmetall plans to triple production capacities by 2027, but one does not grow into an adequate procurement structure from a low base. The billions would inevitably flow to US defense contractors like Raytheon, Lockheed Martin, and Northrop Grumman — with the paradoxical result that German defense spending would create proportionally fewer German jobs than the bare numbers suggest.

Italy faces an even more acute challenge. With a defense budget of 1.6 percent of GDP, around 35 billion euros, the country would need to rise to 105 billion annually — an increase of 70 billion. Italy's national debt stands at 137 percent of GDP, and the ten-year BTPs are yielding 3.8 percent. A purely debt-financed increase would burden interest payments by 2.7 billion euros in the first year, with a cumulative effect until 2035. Tax increases are hardly justifiable with a top tax rate of 43 percent and a VAT of 22 percent; the shadow economy is already estimated at 12 to 14 percent of GDP. The pension system consumes 15.4 percent of GDP — the highest level in the entire EU. Redirecting these funds in favor of defense would be government-toppling. Realistically, Rome will likely choose creative accounting maximalism and hope that no one scrutinizes the capability side of the balance sheet too closely.

France, the relative winner in comparison, still faces enormous hurdles. With 2.1 percent of GDP, about 55 billion euros in defense budget, it would need to reach 130 billion — an increase of 75 billion. France has a sovereign defense industry with Thales, Dassault, Naval Group, and MBDA, nuclear weapons, and a tradition of state-directed industrial policy that offers more tools for domestic procurement. However, France's deficit was 6.1 percent of GDP in 2024, well above the EU limit of 3 percent. An increase of 75 billion would push the deficit to around 9 percent — levels not seen since the financial crisis of 2008.

What these numbers illustrate is the fundamental tension between strategic necessity and fiscal reality. NATO has made a statement with the 5 percent target that underscores the urgency of the threat situation. Russia's ongoing war against Ukraine, the growing hybrid threats on the eastern flank — from drone incursions to sabotage acts to cyberattacks — and the erosion of the global arms control architecture following the expiration of the New START treaty in February 2026 militarily justify a massive capacity build-up. Sword 26 is the operational implementation of this realization: multi-domain, AI-supported, with unmanned systems and integrated command across eight nations.

Yet between strategic logic and budgetary feasibility lies a gap that no number of summit declarations can close. European governments face the choice of restructuring welfare states, raising taxes to record levels, or risking debt crises — all options with significant explosive potential for domestic political stability. The likelihood that Rome, Madrid, and Athens will actually invest 5 percent of their economic output in defense-related expenditures by 2035 tends toward zero. Conversely, the likelihood that Ankara, Washington, and The Hague will increasingly look at this gap with growing impatience rises with each quarter.

Sword 26 concludes in May. The question that remains is whether the alliance is capable of translating the operational capabilities demonstrated in the forests of the Baltics and the fjords of Norway into sustainable, long-term funded structures — or whether the exercises of the coming years will increasingly take on the character of demonstrations before empty coffers. The summit in Ankara in July will show whether NATO is ready to honestly address the gap between intention and budgetary reality.