Bargaining Over Burden-Sharing

The Perverse Incentives of Alliances and the Current Transatlantic Crisis

If you could not tell from my previous post, I am extremely angry at how badly the current U.S. administration has bungled its approach to Europe. I’m also very frustrated at European NATO allies’ chronic unwillingness to treat defense as a serious issue rather than an entitlement they are owed in perpetuity by the Americans. But I try to keep my posts above the political fray, and so having vented, I feel it is worth considering why resolving this burden-sharing impasse is so difficult. Perhaps if we understand why burden-sharing is so vexing, we can better appreciate why we are seeing such frictions in the current transatlantic relationship and the tradeoffs that must be navigated if we are to see this crisis resolved.

The core difficulty with burden-sharing is that alliances, especially ones in which there are significant power asymmetries, produce mixed incentives for the countries within them. The security patron, which is the United States in the case of NATO, faces two competing priorities. The first is to maximize its international influence and leverage, which are both enhanced by keeping its allies relatively weaker than they otherwise might be. After all, if allies are weak and dependent on the United States for their security, they are less likely to pursue competing policy goals that risk alienating Washington and are more likely to toe the preferred American line. But to achieve this outcome, the senior patron must provide security subsidies with which to create these dependencies.

This creates perverse incentives. Perhaps most obviously, it leads allies to spend less on their militaries than is optimal for the overall military capacity of the alliance. But it can also lead to allies underpricing risk, as the negative security consequences of their actions are borne disproportionately by the patron. In extreme cases, this can lead these countries to engage in reckless foreign policy adventures, such as war, because the insurance policy provided by the senior patron emboldens them. For example, Austria-Hungary embarked on its invasion of Serbia, precipitating the First World War, largely due to the blank check of support offered by Berlin. In practice, however, this is rare. More common, however, is the embrace of policies short of war that harm the security of the broader alliance. Perhaps the most famous example is the Kongsberg-Toshiba scandal, where Norwegian and Japanese companies skirted export controls to sell advanced lathes to the Soviet Union with which to machine quieter submarine propellers. This significantly enhanced Soviet naval capability, but Oslo and Tokyo did not much care, as that was the U.S. Navy’s problem to solve. Whereas Japan and Norway captured all the commercial benefits of these illicit trades, they only suffered a fraction of the security costs, which were spread throughout the alliance and concentrated disproportionately on the United States.

But this is where the tension creeps in for the patron, because its other priority is to avoid overstretching itself. By creating perverse incentives, the patron necessarily has to pay an extremely high price. And as other countries respond to the shifting incentives, cutting their own defense spending and adopting policies that underprice security externalities, that price grows ever higher. But the patron is generally poorly placed to renegotiate the deal, as doing so would require relinquishing its privileged leadership position in the international system. The only countries it can effectively target are medium powers. After all, smaller powers are too materially weak to contribute much to the alliance even if they wanted to, while major powers would usurp the security patron’s leadership position if they contributed at their maximum potential. Even pressuring medium powers is difficult, however, as the threat of abandonment generally lacks credibility. This is especially true in the case of NATO, where operational plans are premised on the participation of the full set of member states. You can hardly reinforce Poland if the Germans and the Czechs and the Danes do not cooperate, and as a result, you can hardly threaten to cease cooperation with these countries unless you also want to cease cooperation with the Poles. This, incidentally, is why Trump’s threat to only protect countries spending 2% of GDP on defense is so ridiculous. You just cannot effectively defend one member of NATO without defending other members of NATO.

But allies know this, and so they are incentivized to free-ride, both vis-a-vis the United States and each other. For example, Germany holds a trump card in that it is the logistical gateway to Eastern Europe. The U.S. can hardly kick Berlin out of NATO unless it wants to abandon allies, such as Poland and Lithuania, that meet their defense spending obligations. Germany is even less incentivized to spend on its defense knowing that the Poles, who significantly exceed NATO’s 2% target, will act as a buffer against any potential Russian attack. Doubly disincentivized, the Germans have allowed their military to hollow out to a simply appalling degree. But can you blame them? They rationally respond to the set of incentives confronting them. The problem for the United States is that this behavior harms the overall strength of the alliance, which imposes a greater burden on the U.S. But Washington, as much it wants to, cannot have it both ways. It cannot simultaneously sideline Berlin as a serious geopolitical power and compel Germany to spend so heavily on its defense that is not in any meaningful way dependent upon the United States.

The problem is the opposite for Washington’s European allies. They have an enviable position insofar as they receive significant security subsidies from the United States, which enables them to channel resources and efforts into other programs despite the large, revisionist, nuclear-armed power just to their east. But it also leaves them politically weaker than they might otherwise be, as any major deviation from American policy leaves them exposed to potential abandonment. And given how deeply reliant they have become on the United States, abandonment would be immensely costly. This has created significant frustration in recent weeks, as Europe has been completely sidelined from the primary negotiations between the U.S., Russia, and Ukraine. European leaders can still play the role of the spoiler, but they lack the military strength to seriously replace the United States as Ukraine’s security provider. Just like the Americans, the Europeans want it both ways. They want the Americans to continue heavily subsidizing their security while ceding to Europe the leading political role in shaping NATO’s approach to Russia. Also like the Americans, they cannot have it both ways.

But why the crisis now? After all, NATO has existed for nearly 76 years, so why are we only seeing transatlantic tensions percolate up in 2025? The short answer is that these tensions have reared their heads many times before. Senator Mike Mansfield spent much of his political career trying to drag the U.S. out of Europe. No less than Dwight Eisenhower, the first Supreme Allied Commander of NATO, stated in 1951 that “[w]e cannot be a modern Rome guarding the far frontiers with our legions if for no other reason that because these are not, politically, our frontiers. … If in ten years, all American troops stationed in Europe for national defense purposes have not been returned to the United States, then this whole [NATO] project will have failed.” By that standard, NATO has failed catastrophically. NATO experienced further strains in the 1960s, with the French complaining of Washington’s tendency to engage in bilateral arms control discussions with the Soviets above the heads of its European allies. Further tensions emerged in the 1970s, when Nixon ended the dollar’s convertibility to gold and sought to pursue limited retrenchment. Reagan, too, introduced strains through his push to station intermediate range missiles in Europe despite opposition from European publics and his authorization of what ultimately became the Sigonella Crisis, which saw U.S. and Italian troops in an armed standoff. Of course, George W. Bush’s invasion of Iraq produced an even more recent strain in the transatlantic relationship.

But this crisis is more intense that that of Iraq for three reasons. First, the proximate dispute is over an issue that European capitals view as potentially existential. While many European leaders opposed the U.S.-led invasion of Iraq, the consequences of American actions in that instance were relatively limited for Europe. Not so today. If Ukraine collapses due to a withdrawal of American support, many Europeans fear Russia will strike at an E.U. member state next. Perhaps in the Baltics, perhaps against Romania, perhaps somewhere in the Nordic. Whether this will in fact occur is less important than the fact that Europeans think it plausibly might. By breaking with Europe on an issue of extreme national security importance, the Trump administration risks overplaying its hand, leading to a permanent rupture in transatlantic amity.

Second, the Trump administration lacks a coherent strategy for extracting concessions from European NATO. In the past, U.S. administrations have sought to play European actors off each other to achieve policy aims. But the present crisis sees Trump attacking not just defense laggards such as Germany but also staunch partners such as Denmark and Poland. Thus, whereas previous instances of transatlantic tension have manifested as disagreements between different blocs within the alliance, today’s crisis pits the United States against essentially the entirety of Europe. That is a dangerous dynamic that risks breaking the spine of the entire alliance, a fact that Trump’s team seems glibly unbothered by for reasons that escape my comprehension. It also makes it difficult to see how this crisis ends, because it is not clear what concessions Trump wants.

Is he angry about trade? Is he angry about defense spending? Or is it something else? His inability to stick to firm talking points makes it nearly impossible for European allies to understand what it is they are meant to be doing to appease him, and thus they may decide it is not even worth trying. For example, Poland, a country that spends around 5% of GDP on defense (more than the U.S., by the way) is now being accosted on X by Elon Musk and Marco Rubio for “not saying thank you.” If a leading contributor to NATO security is being told off like a poorly-mannered preschooler by the American Secretary of State and an unelected tech executive despite spending a greater fraction of its economic strength on its military than even the United States, it is hard to see how this is really about defense spending, as Trump claims. The other problem is that Trump never acknowledges concessions. As Reid Pauly (and Schelling as well) puts it, successful threats contain two elements: “stop or I’ll shoot, comply and I won’t.” If a thief comes up to you and demands your wallet, saying he’ll stab you regardless of whether you’ll relinquish it, why on earth would you give him the wallet? But that is exactly the type of threat Trump makes. In the case of Canada, for example, he embarked on a trade war during his first term to extract concessions in the form of a renegotiation of NAFTA, now called USMCA. This is a deal that Trump himself negotiated, and yet he’s now attacking Canada again, even though Ottawa agreed to his deal. This kind of behavior is entirely counterproductive, and it will make it less likely that the U.S. is able to win concessions from allies who will now suspect Washington will simply pocket them and then come back for more.

While Trump as an individual is one of the main contributors to the crisis, there are broader structural changes afoot that would likely have driven us to this same point, albeit with less vitriol and fury. As Brian Blankenship points out in his excellent book, two factors strengthen senior allies’ negotiating positions: resource shortages and emerging threats to the alliance. The former makes the threat of abandonment more credible; the latter forces junior allies to take their security more seriously. Right now, we are experiencing both. Although the United States is still economically powerful, it now confronts two major security challengers in the form of Russia and China. This problem of two peer challengers never presented itself during the Cold War, but now it has. This places hard limits on what the U.S. can offer its European allies, and it shifts the incentive structure for Washington. Maintaining immense leverage over Europe is not worth it if it means losing to China, and thus lots of strategists in the U.S. (not just those aligned with Trump) have been urging a pivot away from Europe and toward Asia. Simultaneously, this threat of abandonment is more influential in European thinking, as Russia now poses a very real threat. Europe cannot take its security for granted any more, especially in light of an increasingly overstretched and erratic Washington.

Thus, for better or worse, we are likely to witness a gradual renegotiation of NATO burden-sharing, with the U.S. relinquishing some of its political influence within the alliance and Europe bearing a greater share of the cost. The danger comes from policymakers not realizing the inevitability of this tradeoff. If Trump seriously wants to see Europe spend more on defense, he needs to recognize that they will buy less American equipment and produce more of their own, hurting U.S. defense manufacturers and potentially exacerbating the trade deficit he so detests. He also needs to understand that a stronger Europe will have the strength to ignore Washington more often, and so he will need to get used to not simply dictating terms but negotiating on more equal terms. Similarly, Europeans need to appreciate that, if they truly decide to limit their exposure to the quixotic whims of America’s current president and properly defend themselves against Russia, they are going to need to spend a truly astronomical amount of money on their militaries. And they are going to need to sort out all the structural barriers to effective defense integration that have plagued the continent for decades.

If both sides of the Atlantic go into this reorientation with a goal of achieving mutual gains, a more equitable and sustainable NATO alliance system might emerge. But that requires both sides to understand that all actions will incur substantial tradeoffs. The United States cannot maintain its position as the unquestioned leader of NATO who all other actors defer to while simultaneously offloading most of the military burden onto partners. European NATO cannot be in the driver’s seat of Alliance policy toward Russia if it refuses to bear the primary burden of sustaining the European peace. This is the fundamental tradeoff that all leaders and electorates must face, and anyone saying otherwise is selling you a bill of goods.