NATO’s commitment for member countries to spend five percent of their Gross Domestic Product (GDP) on defense, a historic goal set at the June summit, faces significant challenges due to the complexities and inconsistencies in GDP calculations. While there is a strong drive among countries to meet this target to establish independent European defense against potential Russian aggression, the reliability and comparability of GDP figures across nations raise concerns.
The definition of defense expenditure is outlined in NATO documents, but the calculation of GDP is not standardized. GDP, a qualified estimate by statisticians, may not accurately represent economic activity in rapidly changing times. Different methodologies used by the EU, China, and the US, such as varying approaches to technological advancements, lead to comparing “apples and oranges.”
Economic activity within GDP is defined by monetary transactions, even those outside tax authorities’ reach. Statistics Denmark is responsible for calculating GDP, which is subject to revisions as more data becomes available. Major revisions can significantly alter the economic narrative, influencing economic policy and even parliamentary elections.
A 2016 revision in Denmark dramatically changed the economic picture by including trade in goods produced abroad by Danish companies, making the economy appear larger and growth rates higher. This revision had political implications, potentially affecting the outcome of the 2015 parliamentary elections. The inclusion of foreign-produced goods means that increased foreign production by Danish companies, like Novo Nordisk, could lead to higher defense spending at home.
Furthermore, there are challenges in accurately capturing all economic activity, particularly in the modern economy with bloggers, social media influencers, and “free” services. The current GDP calculation methods are based on traditional transactions involving goods and services, struggling to account for these new forms of economic activity. The next major revision by Statistics Denmark could significantly impact GDP figures, potentially requiring even greater defense spending.
Finally, increased defense spending itself can boost GDP if not offset by savings or displacement of other demand, paradoxically leading to further increases in required defense expenditure. This creates a risk of uncontrolled increases in defense budgets due to the lack of focus on the denominator (GDP) in the calculation.