Europe’s Make-or-Break Military Decision

Jean Monnet, one of the founding fathers of the European Union, predicted that the continent’s union would develop through crises. “I’ve always thought that Europe would be made in crises, and what would be the sum of the solutions we would bring to these crises,” he famously said.

U.S. President Donald Trump’s foreign-policy revolution seems to have pushed the EU precisely toward a crisis from which it could emerge stronger and more integrated. The U.S. administration’s sharp turn away from Ukraine and toward Russia, coupled with the specter of Washington’s disengagement from NATO, has sent Europe into a frenzy of rearmament—and a scramble to finance it.

In early March, the European Commission—the EU’s executive arm—announced an 800 billion euro ($872 billion) plan to enhance its defense capabilities. The ambitious plan is based on two main planks: It would suspend some of the bloc’s stringent fiscal rules to allow for more investment in defense at national level. If member states were to increase their defense spending by 1.5 percent of their gross domestic product on average, it could create a collective firepower of roughly 650 billion euros ($708.6 billion) over four years, the commission said.

In addition, the EU executive said that it could lend 150 billion euros ($163.5 billion) to member states at low-interest rates and with long repayment terms. This part of the funding is meant to support pan-European military projects, such as air and missile defense, by using joint procurement to lower costs, reduce fragmentation, increase interoperability, and strengthen the continent’s industrial base. With this equipment, member states would also be able to step up their military support to Ukraine.

“We are in an era of rearmament,” said European Commission President Ursula von der Leyen in a speech on March 3 as she unveiled the defense plan. “And Europe is ready to massively boost its defense spending. Both to respond to the short-term urgency to act and to support Ukraine, but also to address the long-term need to take on much more responsibility for our own European security.”

EU member states have so far been reluctant to allow the commission to gain too much influence on defense, which they consider to be first and foremost a matter of national sovereignty. For several years, the bloc has developed new competencies to reinforce the European defense industrial base. To this end, it has introduced various programs aimed at funding common security projects among member states, such as the European Defense Fund and the upcoming European Defense Industrial Program.

Yet the programs, which are managed by the commission and financed through the EU’s budget, have had little impact. To live up to its new defense goals, the EU faces the challenge of “squaring the circle between integration and national sovereignty,” said Federico Santopinto, an analyst at the French Institute for International and Strategic Affairs.

According to the plan announced in early March, most of the money—650 billion euros ($708.6 billion)—will come from EU countries’ additional debt and will be spent at national level. Through the activation of the so-called escape clause of the latest version of the bloc’s Stability and Growth Pact, the additional deficit incurred by countries to spend on defense will not be counted when applying EU budgetary rules.

“It can represent a positive move for European integration, if the commission and the [European] Council will be able to impose a certain degree of coordination and of common vision at European level to member states when they activate the escape clause,” Santopinto said. “This initiative could allow the commission to have a role in coordinating member states’ defense policy, from an industrial point of view. Even if at the beginning, the commission doesn’t interfere [in the countries’ decisions], it has expanded its competencies. This is called ‘spillover effect,’ and the expansion of competencies is called ‘European integration,’” he said.

On the other hand, if European countries were to spend in isolation, creating additional duplication of military equipment that is not interoperable, this will create more fragmentation across the bloc. Even if countries avoid triggering excessive deficit procedures at European level by spending more on defense, they will still need to take on additional debt.

Fiscally sound countries, such as the Netherlands, may not need to invoke the escape clause for their additional military spending, while others may decide not to take on the additional debt needed and simply not implement the higher spending on defense.

Spain and Italy—which found that calling the plan “ReArm Europe” was too aggressive and successfully argued that it be rebranded as “Readiness 2030”—are harboring serious doubts, together with France and some other Southern European nations, about the feasibility of the plan, Politico reported on March 26.

Instead, these countries are reportedly ramping up their demands for so-called defense bonds, or grants financed through common EU borrowing in capital markets, which must be unanimously approved by the bloc’s 27 countries.

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Roel Beetsma, the dean of the faculty of economics and business of the University of Amsterdam, said that by urging countries to support the additional defense expenditure solely at national level—especially if they finance it through debt—the EU takes on the risk that security costs posed by the war in Ukraine could escalate into a fiscal crisis for countries with precarious finances.

To avoid inducing further fragmentation at EU level, Beetsma said that there needs to be more centralization on three fronts. First, he said, decisions on defense policies should be made centrally at EU level, at least in certain areas, to limit the risk that member states go on operating in a noncoordinated way.

“Most of them are part of NATO, so we could envisage that those EU countries take their own decisions collectively, in a coordinated way, as if they were a single country within the alliance,” he said. In this way, duplication of investments would be reduced.

The European defense industry suffers from a lack of standardization and interoperability of equipment, according to a major report on European competitiveness that was published last September by Mario Draghi—a former European Central Bank president and Italian prime minister . The study concluded that this has weakened Europe’s ability to act together as a cohesive power. For instance, 12 different types of battle tanks are operated in Europe, while the United States produces only one, the report noted.

Secondly, Beetsma said that there is a need for centralized financing of European spending on defense.

“If the decisions and financing are centralized, the externalities”—or the benefits to other European countries—“of national investments would be taken into account,” he said.

Thirdly, he argued that much more joint procurement of the defense equipment should be introduced to limit suboptimal choices of providers. Collaborative procurement accounted for less than a fifth of spending on defense procurement within the EU in 2022, according to the Draghi report.

The report also determined that the EU doesn’t favor European defense companies. Between mid-2022 and mid-2023, 78 percent of total procurement spending went to non-EU suppliers, out of which 63 percent went to the United States.

Max Bergmann, the director of the Europe, Russia, and Eurasia program at the Center for Strategic and International Studies, said that there needs to be a “real, dramatic shift” in how European defense is structured, which he doesn’t see in the plan.

“The solution is no longer spending enough so that the Americans are happy and engaged,” Bergmann said, adding that Readiness 2030 “isn’t trying to solve the problem of how you defend Europe.”

Bergmann argued that Europeans constantly talk about defense as a national responsibility but that the reality is that so far, it has been Washington’s responsibility.

“What I am sort of exasperated by is that we are now in a post-Jan. 20 environment where Trump is clearly signaling that he not only doesn’t care too much about European security, but he is actively taking steps to weaken European security, which means Europe needs to generate a collective military capacity to deter Russia,” he said.

In line with the views of many analysts, he said that he thinks the EU should avoid creating even more fragmentation of military systems by mandating that only the money spent on collective defense plans can be exempted from the calculations of budgetary parameters to meet the bloc’s fiscal rules.

Bergmann also argued that the EU defense plan should focus more on the need to support Ukraine militarily in its war against Russia.

“I think the EU should generate a common pot of money, probably most easily generated by issuing eurobonds, and expand the production of the systems the Ukrainians need,” he said. “They should then buy this equipment on a larger scale, because anything that Ukraine needs to fight against Russia likely is exactly what Europe would need to fight against the Russians.”

Reconciling the principle of national sovereignty in defense with the need to act collectively is set to be a major challenge for the EU. Having found the money to finance the additional spending needed is a first, important step. The challenge will be to build an integrated and truly European defense system that can represent a credible deterrent toward Russia.