European officials are racing to craft proposals for a special fund aimed at helping the region to boost defence investments after President Donald Trump threatened to curtail US support for the continent.
European finance ministers meeting in South Africa for a G20 gathering this week are discussing proposals including a European defence bank or a common fund with UK involvement, European officials said.
On Sunday, several EU leaders will join British Prime Minister Sir Keir Starmer for a meeting after his return from Washington and ahead of an emergency summit in Brussels next week — all dedicated to European defence.
“Things are moving fast,” said one official. Others recalled the diplomatic flurry that preceded the EU’s Covid-19 pandemic-era joint borrowing or the bailouts agreed during the Eurozone sovereign debt crisis.
What is the ‘rearmament bank’ proposed by European experts?
The UK and Poland are convening a meeting of European finance ministers to discuss several options on the sidelines of the G20 meetings in Cape Town. The British chancellor wants to discuss the possibilities for like-minded countries to “mobilise private finance” for defence, the Treasury said.
One proposal by a panel of experts including former UK general Sir Nick Carter is for a “rearmament bank”. The government-owned lender would be modelled on the European Bank for Reconstruction and Development, which was set up after the fall of the Iron Curtain to boost investment in eastern Europe.
The new vehicle could lend money for the purchase of military equipment as well as industrial projects in the defence sector, with the option of lending both to the private sector and to governments.
Only a share of the capital — a suggested €10bn — would be paid upfront, mitigating the short-term budgetary cost, and it could offer favourable rates thanks to a top-notch credit rating backed by state guarantees. Poland, which holds the rotating EU presidency, has backed this as an option.
Are there other ways to raise money for joint EU defence?
Another idea that has been circulating is to create a “special purpose vehicle” whereby governments would pool national guarantees and borrow capital on the markets to then loan money for defence goals. The instrument could be open to EU countries and others.
The limited scope of an SPV or ad hoc fund could allow it to be set up faster than a bank, analysts said, although participating countries would still need to provide paid-in capital. It would be “more light, administratively speaking”, said Luigi Scazzieri at the Centre for European Reform.
Either structure could help with quickly increasing defence spending, he added. “A big, co-ordinated injection of capital,” Scazzieri said, would signal “strong political will by European countries to step up for European defence”.
What are the main advantages for governments?
Europe’s push to increase defence budgets comes at a time when governments are struggling to rein in their public deficit and debt.
Starmer announced plans to raise defence spending to 2.5 per cent of GDP, a cost that is close to £6bn. He said this would be funded by cuts to overseas aid.
In Germany, where new public borrowing is strictly capped by a so-called “debt brake” enshrined in the constitution, the incoming leader Friedrich Merz is seeking to add as much as €200bn to an existing special fund, established by Chancellor Olaf Scholz in 2022 to buy weapons, according to two people with knowledge of the plans. Scholz’s €100bn fund has been almost fully committed to weapon purchases, with only €10bn left to spend.
Merz plans to push through the increase with the help of the outgoing parliament, where his centre-right CDU/CSU bloc has a two-thirds majority with other pro-European parties, before the new legislature takes office in March.
Using a jointly financed vehicle could mitigate some of the upfront costs of increasing defence investment, analysts said. The vehicle could potentially borrow at relatively low rates, if it gains the backing of triple-A rated participating countries like Germany and Norway.
But a critical, allied goal is streamlining large-scale procurement efforts by multiple governments. This could be achieved by making loans conditional on joint procurement, proponents of the model suggested.
If European governments act together as a powerful “buyers’ club”, it could drive more efficient defence procurement efforts, said Jeromin Zettelmeyer at the Bruegel think-tank.
Another advantage would be giving manufacturers long-term visibility on orders to incentivise investment in expanding production.
What other initiatives are out there?
The European Commission is exploring repurposing existing pots of money — such as €93bn in leftover Covid-19 pandemic loans, as well as dozens of billions from EU regional development funds.
Brussels has also pledged to exempt defence spending from the bloc’s deficit and debt rules.
However the continent’s overall defence needs, estimated by European Commission president Ursula von der Leyen at €500bn, would need a much wider investment push.
“We should enable more targeted and efficient defence spending through a designated European instrument,” von der Leyen said.
What would the fund be spent on?
The dedicated fund should be focused on “areas of European strategic interest like a European integrated air defence, deep- and precision strike capabilities, drone and UAVs, missiles and ammunition or of course the military use of AI”, von der Leyen said.
A “coalition of the willing” contributing into the fund would also solve the complications arising from the need for unanimity at EU level if the bloc were to raise more joint debt. This would allow circumventing the Russia-friendly governments of Hungary and Slovakia, as well as neutral countries like Austria and Ireland.
But none of this mitigates the long-term costs that will face taxpayers as Europe is forced to step up its efforts to defend itself.
“You can’t sustainably borrow for higher defence spending needs,” said Ben Zaranko of the Institute for Fiscal Studies.
“We will ultimately need to spend less on other things, or tax more.”
Additional reporting by George Parker in London