Europe faces an urgent need to bolster its military defenses, a necessity underscored by Russia’s invasion of Ukraine and the looming threat posed by President Vladimir Putin’s regime. The challenge of financing this crucial military investment comes at a time when Europe’s economies are struggling, and many voters are opposed to the idea of sacrificing other essential public services.
The task is formidable. Russia’s economy is operating on a wartime footing, with a battle-hardened military and a large stockpile of nuclear weapons. Despite Europe’s far larger economy, a report from the International Institute for Strategic Studies revealed that Russia’s defense budget in 2024 ($462 billion) exceeded Europe’s combined spending ($457 billion) when adjusted for purchasing power. Major European powers like France, Germany, and the UK have struggled to meet NATO’s goal of spending at least 2% of their GDP on defense. In fact, France and Germany barely met that threshold last year, while the UK spent 2.3%. These figures are insufficient in light of the reemerging threat of war on the continent and Europe’s need to secure its own defense.
Former US President Donald Trump pushed for European NATO members to increase defense spending to 5% of GDP, a target echoed by NATO Secretary-General Mark Rutte, who acknowledges that a budget beyond 3% is necessary. Poland has already committed to spending over 4% of its GDP on defense and aims to reach 5%, with other frontline states like Estonia and Lithuania following suit. It is now time for the rest of Europe to take similar steps.
However, this increased defense spending comes at a time when European economies are weak, and many governments are wary of raising taxes or cutting welfare programs. The politically viable solution in the short term is borrowing. Governments may face domestic political resistance to such measures, but higher defense spending can be viewed as a strategic investment in Europe’s future stability.
There are three primary avenues for financing this military boost, despite the constraints of high government debt, EU fiscal rules, and the pressures of political opposition. The first is to exclude defense spending from the EU’s fiscal limits, which cap borrowing at 3% of GDP. This would allow for more flexibility in financing defense investments. Poland has already made the case for this adjustment, arguing that its increased borrowing was essential to its national security. European Commission President Ursula von der Leyen has shown support for this proposal, and after Germany’s recent election, it is possible that there will be greater support for relaxing fiscal constraints.
The second approach is for EU nations to borrow collectively to fund a one-time defense investment. This method was successfully used during the COVID-19 crisis with the creation of the €750 billion recovery fund. A new round of joint borrowing, possibly totaling €500 billion, could help increase European defense spending and streamline procurement efforts across member states. However, this proposal faces opposition from countries like Hungary, which has ties to Russia, and from fiscally conservative northern European nations. One potential solution is for a coalition of willing governments to establish a separate fund outside the EU framework, with joint bonds backed by the participating states. This approach could even allow for the inclusion of non-EU defense partners such as Norway and the UK.
The third financing option is expanding the role of the European Investment Bank (EIB) in funding military projects. Currently, the EIB supports dual-use projects that serve both civilian and military purposes, such as the production of drones and satellites. A recent proposal from 19 EU member states advocates for the EIB to also fund entirely military projects, such as the manufacturing of tanks and ammunition.
Regardless of the financing mechanism, Europe must act swiftly to rearm. Increasing defense spending to prevent the defeat of Ukraine and to deter Russian aggression is far less costly than engaging in an all-out war. If Europe fails to act, as Rutte warns, the continent could face a future where learning Russian or relocating to New Zealand might be the only viable options for survival.
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