The European Union is finalizing a plan to create a fund worth hundreds of billions to cover the bloc’s defense costs over the next ten years. It was at the European Council last June that the leaders of the 27 member states gave the Commission the task of studying hypotheses on how to find the money needed to support arms purchases in Europe.
“We estimate that additional defense investments of around 500 billion euros are needed over the next decade,” declared the president of the community executive, Ursula von der Leyen. The German MP had explained that there would be almost 11 billion euros available in the EU budget, which could be integrated with another 11 billion euros from the European Peace Fund. In short, pennies compared to the needs of the moment.
So Europe will increase defense spending to please Trump
“More needs to be done,” he said, explaining that there were several hypotheses on the table. These include an increase in national contributions and the issuance of common debt securities, but both hypotheses clash with the reluctance of frugal countries and those that are neutral or do not want to support this commitment.
The plan
According to the Financial Times, senior European officials are seeking a compromise solution, which could be the creation of a defense fund, which would issue bonds backed by national guarantees from participating countries rather than from the EU as a whole. The funding model, which would be open to non-bloc states such as the UK and Norway, is gaining traction among a key group of member countries.
As reported by the prestigious British financial newspaper, Brussels has explored a myriad of ways to finance further projects and the intergovernmental fund has emerged as the most ambitious option under consideration. Plans have been discussed with the UK, but London has not yet committed to taking part. A senior British official familiar with the initiative welcomed the idea as an “encouraging” sign of determination.
The operation
The European Investment Bank would be asked to play a technical role, helping to administer a project company (SPV) and manage treasury functions. The EIB would help manage national guarantees and play an administrative role in capital markets, but nothing more, because under its current lending policy the institution cannot directly finance arms investments.
Unlike past proposals to issue “Eurobonds” for defence, i.e. joint loans that the frugals have opposed, participation in the fund would be voluntary and open to non-EU states. Being the result of an intergovernmental agreement, the European restrictions on the use of common funds for military purposes would not apply to the plan and at the same time military neutral member states, such as Austria, Malta, Ireland and Cyprus, could choose not to participate without having to veto the idea.
The Netherlands, Finland and Denmark are said to be largely supportive of the idea while Germany’s position is uncertain and will depend on the federal elections in February. Greek Prime Minister Kyriakos Mitsotakis, who supported defense eurobonds earlier this year, told the FT there had been a change of heart among EU leaders.
The air is changing
If his proposals had initially been received in a “lukewarm” manner, Mitsotakis now perceived “a renewed sense of urgency” in light of European security challenges and Donald Trump’s return to power. “There is a growing consensus on the need to spend more on defense and perhaps the time has come to establish a joint European mechanism to finance projects of common interest,” he said.
“Germany and France would obviously benefit from increased European defense spending,” Mitsotakis said, adding that Italy and Spain are also “big players” in the sector who could benefit from this initiative. Polish Deputy Finance Minister Pawel Karbownik also told the newspaper that “Europe has no choice” but to increase defense investment. “We must be able to defend ourselves in the worst case scenario,” he told the FT.
