European leaders are confronting a pressing dilemma: how to fund a significant surge in defence spending amid rising security threats and waning U.S. military support. With the U.S. signalling potential cuts to aid for Ukraine and President Trump urging European nations to allocate 5% of their GDP to defence, the EU must find ways to mobilise an estimated €500 billion in additional defence investments over the next decade. Policymakers are now exploring options such as revising budgetary rules, issuing common debt, and reallocating existing funds to meet this challenge.
Revising budgetary rules
Speaking at the Munich Security Conference on Sunday (16 February), European Commission President Ursula von der Leyen proposed invoking an escape clause of the Stability and Growth Pact to exempt defence spending from the EU’s strict budget deficit limits. This idea has gained traction in high-debt countries like Italy, Greece, and Spain, which view it as essential for freeing up resources.
This approach has sparked disagreement. German Chancellor Olaf Scholz supports exempting defence spending above NATO’s 2% GDP target but has hesitated to endorse the emergency clause fully. His likely successor, Friedrich Merz, is expected to clarify Germany’s stance after the upcoming elections.
However, Polish Finance Minister Andrzej Domański stressed the importance of national control over defence budgets, cautioning against centralising power in the Commission. “We may not have precisely the same view [as the Commission] on how this [defence boost]” he said, advocating for adjustments to existing fiscal rules rather than new EU-wide measures.
Common borrowing
Issuing joint EU debt to fund defence has further divided member states. Spanish Finance Minister Carlos Cuerpo has championed the proposal, calling it a “no-brainer” and pointing to the success of the Next Generation EU fund. Greek Prime Minister Kyriakos Mitsotakis reinforced this view, stating that he anticipated a European joint borrowing facility “to pick up steam quickly”. However, fiscally conservative nations like the Netherlands remain sceptical. Dutch Finance Minister Eelco Heinen dismissed the idea, stating, “More common debt is not the way forward”. In his view, budget cuts in other areas should compensate for this defence spending.
Repurposing Funds
Moreover, the European Commission is considering reallocating unspent pandemic recovery funds to avoid resistance to joint borrowing. The Commission has suggested redirecting up to €93 billion from the Recovery and Resilience Facility (RRF) to defence, though this has sparked mixed reactions. While some see it as a practical short-term solution, others worry about the legal and political implications of altering the fund’s original purpose.
Cohesion funds, typically used for regional development, have also emerged as a potential source of defence financing. The Committee of the Regions is open to the idea if it can be considered a “regionally focused funding”. European Council President António Costa supported it arguing that military investments could spur local economic growth, saying: “New investments into defence can also create jobs and develop our regions, our cities, our communities. New investments into defence will mean more territorial integration, more regional development, more employment”.
Finally, EU High Representative Kaja Kallas highlighted the tough choices ahead, telling Bloomberg: “It requires still very painful decisions from member states. I think it’s an illusion if we think that we can just do this without reallocation of resources or reprioritising.” In addition, she affirmed that common borrowing was still “on the table” to be discussed among EU leaders.
Conclusions
As geopolitical tensions rise, the urgency for a unified defence financing strategy grows. However, internal divisions persist, particularly among Eastern European nations concerned about bearing additional financial burdens without immediate security guarantees. The path forward remains uncertain while EU finance ministers prepare for critical negotiations. Although there is general support for increasing defence spending, the methods are hotly contested. The coming months will be pivotal in determining whether Europe can overcome its differences and forge a unified strategy to meet its defence ambitions.
