Citi analyst Charles Armitage has sketched four possible trajectories for defense expenditure in Europe in light of recent comments from President Trump that he is "strongly considering pulling the U.S. out of NATO." The note frames how shifts in U.S. commitment to the alliance could alter both policy responses in Europe and market sentiment toward defense companies.
Armitage said Citi had previously treated continued U.S. membership of NATO as the baseline, in part because European governments had already begun lifting defense budgets. That baseline is now, he wrote, "looking less likely now."
The four scenarios
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Scenario 1 - NATO cohesion maintained: Europe soothes Washington and NATO remains intact, allowing the existing trend of rising European defense spending to continue. This outcome was Citi's former base case, but Armitage says its probability has declined.
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Scenario 2 - U.S. withdrawal spurs faster European spending: The outcome Armitage now places greater weight on. If the United States exits NATO, European countries would be compelled to boost their defense outlays to preserve a credible deterrent against Russia. He points out Germany and Sweden are already moving toward defense spending of 3.5% of GDP by 2029/30, and argues it is likely other major European states would have to follow.
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Scenario 3 - Fragmentation and underinvestment: A U.S. exit fails to produce a cohesive European policy response. Political divisions and domestic constraints prevent an integrated defense strategy, leaving overall spending below what would be needed for a unified deterrent.
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Scenario 4 - Information campaign reduces budgets: Following a collapse in NATO, a major Russian information operation reframes the conflict in Ukraine as a domestic issue and portrays Russia as lacking further territorial aims in Europe. If that narrative gained traction, particularly aided by offers of cheap oil and gas from Russia, cash-strapped and politically tired European populations could accept it, enabling lower defense spending.
On market reaction, Armitage expects different outcomes across the scenarios. He suggests that a U.S. withdrawal that forces Europe to accelerate its own defense spending would likely lead to "an initial positive share price reaction" for European defense stocks. By contrast, the two less constructive scenarios - fragmentation and a successful Russian information campaign - would lead to reduced defense budgets and would be negative for the sector.
"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.
Armitage's note highlights that Germany and Sweden's commitments to reach around 3.5% of GDP on defense by 2029/30 serve as benchmark moves that could compel other major European economies to increase spending if the United States withdraws from NATO. He frames the second scenario as increasingly probable, while describing the third and fourth outcomes as currently lower-probability, though rising as the likelihood of the first scenario fades.
Overall, the memo underscores how political developments at the alliance level could translate into measurable changes in defense budgets and stock market reactions, while noting that the more damaging outcomes for spending are considered tail risk for now.