The European Union is actively discussing ways to increase defense spending, with joint financing emerging as a viable option for a growing number of leaders, according to sources familiar with the matter. This comes as US decisions on Ukraine’s future raise concerns about Europe’s role in its own security architecture.
French President Emmanuel Macron recently hosted leaders in Paris, including UK Labour Party leader Keir Starmer and German Chancellor Olaf Scholz, to address Europe’s defense capabilities. While joint bonds weren’t explicitly on the agenda, Polish Prime Minister Donald Tusk indicated new funding measures would be presented by the upcoming March 20-21 summit. This follows recent signals from top US officials regarding decisions on Ukraine’s future that could significantly impact Europe’s security landscape – decisions made without direct input from European capitals. This has spurred European leaders to consider bolder actions, including the potentially controversial use of joint bonds, to ensure a stronger voice in their own defense.
French Minister for European Affairs Benjamin Haddad underscored the urgency of the situation, stating that “historic decisions” are necessary and that “the question of eurobonds, for instance, is one of the mechanisms that we should be talking about.” This sentiment reflects a growing recognition that significant financial commitments are required to bolster Europe’s defense capabilities.
Financial markets reacted to the news, with European bonds falling and defense company shares rallying on Monday. The prospect of increased military spending pushed 10-year bund yields, the benchmark borrowing rate for the euro area, to a two-week high. Conversely, the Stoxx 600 index saw a 0.4% rise, and a Goldman Sachs Group Inc. index tracking European defense shares reached a record high. These market movements reflect investor anticipation of significant shifts in defense spending and potential investment opportunities.
According to a Bloomberg Economics analysis, protecting Ukraine and expanding European militaries could require an additional $3.1 trillion over the next decade. NATO planners estimate that alliance members need to dedicate as much as 3.7% of GDP to defense spending. Currently, only 23 of the 32 NATO members meet the existing 2% target. This substantial funding gap highlights the financial challenges inherent in strengthening Europe’s defense posture.
Starmer emphasized the significance of the situation, calling it a “once-in-a-generation moment for the collective security for our own continent.” He described the informal meeting of European leaders as a “vital first step” in addressing the emerging security challenges. This underscores the sense of urgency and the importance of collective action in bolstering European defense.
Several funding options are under consideration. These include triggering an escape clause in the EU’s fiscal rules, allowing countries to increase defense spending without breaching existing regulations. European Commission President Ursula von der Leyen recently proposed activating this mechanism for defense investments at the Munich Security Conference. EU Economy Chief Valdis Dombrovskis reinforced this commitment, stating that the bloc is actively seeking flexibility within European fiscal rules for defense spending and exploring the application of the escape clause.
Other possibilities include repurposing existing funds, such as those allocated for pandemic recovery, towards defense. Discussions are also underway regarding a smaller group of countries moving forward with joint financing, bypassing potential delays associated with all 27 member states participating. This approach could provide greater agility in establishing instruments for issuing common debt. German Foreign Minister Annalena Baerbock hinted at a significant plan for strengthening defenses, referencing a forthcoming “financial package for security in Europe” akin to responses to the euro and corona crises.
While concrete details remain scarce, officials suggest new spending plans will likely be unveiled after the German election to avoid pre-election controversies. Historically, Germany and the Netherlands have opposed joint borrowing initiatives. Deutsche Bank economists estimate that the EU has roughly €400 billion ($419 billion) available for defense funding through national fiscal space, cohesion funds, and repurposing existing program funds. However, they acknowledge that if spending needs exceed this amount, “new EU solutions may be required.”
Polish Prime Minister Tusk confirmed receiving assurances that “many” billions of euros of existing European funds would be redirected towards defense, providing immediate mobilization of resources. Even European Central Bank President Christine Lagarde has expressed support for increasing the bloc’s fiscal capacity to finance common goods like security, advocating for “common financing” through increased fiscal capacity or joint debt.
Lithuanian Defense Minister Dovile Sakaliene noted a significant shift in perception among European allies regarding EU budget rules and joint borrowing. She emphasized the need for immediate establishment of “solidarity instruments” similar to those used during the pandemic and for green initiatives.
Traditionally cautious towards joint EU debt issuance, Denmark has shown increasing openness to such measures in light of the war in Ukraine. Danish Prime Minister Mette Frederiksen, present at the Paris meeting, highlighted a “new European determination” and the urgency to increase military support for Ukraine and accelerate production of defense equipment.
This evolving consensus towards collaborative defense financing signals a potential turning point in European security policy. The coming weeks will be crucial in determining the specific mechanisms and scope of this joint effort. The discussions and emerging consensus highlight a significant shift in Europe’s approach to defense funding, potentially paving the way for deeper integration and a more unified response to security challenges.
