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[LONDON] Nato's European allies and Canada increased defence spending by 3.8 per cent last year, or US$10 billion more than 2015, the alliance's head said on Tuesday, but a report said Britain missed a key Nato goal.
Russia's annexation of Crimea has given the alliance new momentum after years of cuts, but the International Institute for Strategic Studies, a global security think tank, said only Greece and Estonia met a target to spend two per cent of economic output on defence in 2016.
Europe's low expenditure has long been a sore point for the United States, which puts up 70 per cent of alliance funds, and US President Donald Trump has made change a priority, saying allies have "been very unfair to us" for not spending more.
Nato will tell new US Defence Secretary Jim Mattis on Wednesday in Brussels that Europe is responding.
"We are making a significant step forward but we have a long way to go ... it is not enough," Jens Stoltenberg told a news conference, saying Mr Trump had stressed the need for more defence spending in the two phone calls the two men have held.
However, Russia's 2014 annexation in Ukraine, failing states on Europe's borders and the rise of Islamic militancy - not US pressure - led to last year's increase in Europe defence spending, Nato diplomats and analysts said.
Mr Stoltenberg said the Baltic states of Latvia and Lithuania, once annexed into the Soviet Union and who fear a repeat of Crimea, were on course to meet the two percent goal, while Romania was also heading towards that level.
Germany is also increasing spending by two billion euros (S$3.023 billion) in this year's budget.
However, IISS's study said Britain's level fell slightly to 1.98 per cent in 2016 as the economy grew faster than defence outlays. Poland also slipped, the global think tank said.
The British government said IISS figures were incorrect, saying the think tank presented its figures in US dollars and so had been impacted by fluctuations in exchange rates.
"Nato's own figures clearly show that the UK spends over two per cent of its GDP on defence," a spokesman for the Ministry of Defence said in a statement.
Nato is expected to release its full 2016 figures next month.
"Our defence budget is the biggest in Europe, the second largest in Nato, and it is growing each year as we invest £178 billion (S$316.77 billion) in new equipment and the UK steps up globally, with new ships, submarines and aircraft over the next decade," the ministry said.
In 2015, only Greece, Estonia, Poland and Britain hit the two per cent Nato target, a point of pride for London. British Prime Minister Theresa May, who discussed the issue with Mr Trump last month, has warned EU leaders to raise their defence spending.
Mr Stoltenberg acknowledged difficulties.
"The picture is still mixed, some allies are still really struggling," Mr Stoltenberg said when asked about budget constraints in Italy, which is trying to reduce its budget deficit following the euro zone crisis.
Mr Stoltenberg, who will meet Russia's Foreign Minister Sergei Lavrov later this week at the Munich Security Conference, said he expected Europe's defence spending to be one of the main topics at a Nato summit in May in Brussels with Mr Trump.