The European Parliament is actively debating the inclusion of defence priorities in the EU’s next long-term budget. Centre-right and centre-left MEPs are embracing European Commission president ” approach. Her , aims to encourage national spending, pool investment and mobilise European funds.
However, some voices are questioning the EU’s financial capacity to achieve these ambitions, estimated at more than €800bn. This is the case of economist Zsolt Darvas, a specialist in budgetary issues at the Bruegel think tank in Brussels.
Guillaume Meyer: Can the Rearm Europe plan really release €800bn to strengthen member states’ defence capabilities?
Zsolt Darvas: The European Commission’s proposal is based mainly on two elements. First, a €150bn loan mechanism called Safe [Security Action for Europe], designed to support defence investment. However, this component will depend heavily on demand from the member states. I’m rather sceptical about this. Countries like Germany and France have no interest in borrowing from the EU. Germany already has better financing conditions on the markets. France, on the other hand, would probably never be able to use this mechanism for political reasons.
Some small eastern European countries, such as Poland or the Baltic States, could make use of it, but here again, membership is not guaranteed. Even for Italy, which would benefit from lower rates, the political context does not favour a massive increase in defence spending. So the real question is whether there will be enough demand for these loans. We will know more in the coming months.
What about the second part, the other €650bn mentioned by Ursula von der Leyen?
Her plan proposes a temporary clause that allows member states to deviate from the new budgetary rules. This means that they can increase their defence spending for a period of one to four years. This provision seems to me to be extremely useful. Even Germany, with its current budgetary constraints, would find it difficult to finance a significant increase in spending without this flexibility. It could also benefit other countries like France. But here again, everything will depend on political will: the countries of eastern Europe are much more motivated to invest in defence than those of western Europe.
Luxembourg is not currently considering using these tools. Should it reconsider its position?
Luxembourg is a special case. It is a very rich country and its public debt is very low. This means that it does not need European loans or tax exemptions to invest more. As of tomorrow, it could increase its defence spending by 2% of GDP without any constraints.
But therein lies the rub. As a small landlocked country, Luxembourg benefits indirectly from the protection offered by its neighbours, particularly Germany. Luxembourg is the perfect example of a stowaway. Policymakers don’t feel under any pressure to act. Why invest more if other countries, such as Poland or Germany, are already looking after collective protection?
This illustrates the nature of defence as a pan-European public good. Some states benefit from it without contributing enough. Countries must be forced to spend more. To do that, we need a political consensus between the heads of state and government. In my view, this would be the most effective option.
A temporary increase in debt is not a tragedy if it is well managed.
Can the EU really afford its military ambitions?
If we are talking about a one-off effort over four to five years--say, a 2% increase in GDP in each country--then yes, it is entirely feasible. Over such a period, this would lead to an increase in the debt/GDP ratio of around 10%. Even a highly indebted country like Italy could manage such an increase. All that is needed is for the country to return to a path that respects the budgetary rules afterwards.
The most important thing is to look at the fundamentals of sustainability: medium-to-long-term growth, inflation, interest rates and the primary balance. A temporary increase in debt is not a tragedy if it is well managed.
But not all countries perceive the risk in the same way. Poland and the Baltic countries, which are close to Russia and Belarus, feel the threat acutely. Poland, for example, is planning to increase its defence spending to almost 5% of GDP--a huge amount. By contrast, in Spain, Portugal and even Italy, the threat seems more remote. Popular support is also lower. As a result, the response will vary greatly from one member state to another.
What if this exceptional spending became the norm? Is a sustained increase of 1 to 2% of GDP over several decades sustainable?
This is where things get complicated. If the increase in defence spending becomes structural, governments will have to compensate elsewhere: either by cutting other budget items or by raising taxes. Yet many countries--such as France, Italy, Spain and Belgium--are already having to make major tax adjustments to comply with the new European rules.
It would be very difficult to raise taxes further, as many are already very high. There is not much room for manoeuvre, except to consider exceptional taxes such as a wealth tax. But these are politically sensitive decisions. The most realistic path would therefore be to cut other spending, which isn’t easy either.
French president Macron is calling for a new common European loan, along the lines of the post-covid plan. Do you think this is appropriate in the defence context?
Partially. For truly joint projects, such as the European missile defence shield, a fund inspired by the NGEU [Next Generation EU] recovery plan could be useful. It would allow the EU to borrow and buy collectively, generating economies of scale and better prices.
But the majority of military spending will remain national: fighter aircraft, tanks, specific equipment, etc. The justifications for pooling are therefore weaker than for climate change, for example. It would be difficult to convince Germany or the Netherlands to subsidise Italy to strengthen its own arsenals. For climate, on the other hand, a European fund makes more sense. The externalities are largely shared between states.
This article was originally published in .