Europe races to establish a 500 billion euro defense fund

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EU countries are discussing a 500 billion euro common fund for joint defense projects and arms purchases, tapping the bond market to boost spending ahead of Donald Trump’s return to the White House.

Trump’s threat to withdraw US security guarantees from low-spending NATO allies has prompted European capitals to explore more radical defense funding options, including regular pooled borrowing. excluded by hawkish fiscal policies in Germany, the Netherlands and Denmark.

Senior European officials discussing the plan are currently focused on establishing a defense financing vehicle, which would issue bonds backed by national guarantees from participating countries instead. for the whole EU.

The funding model will be open to NGOsEU Six people involved in the talks told the Financial Times that countries such as the UK and Norway are attracting the attention of a core group of EU member states. Although the exact borrowing target has not yet been agreed, those involved in the negotiations said the amount would need to be more than 500 billion euros.

Europe has long grappled with how to boost defense spending to both maintain support for Ukraine and prepare for US President-elect Trump, who earlier this year warned “we I won’t defend “NATO allies” if they don’t go. must pay”.

The EU has explored countless ways to fund additional projects, and the intergovernmental fund has emerged as the most ambitious option under consideration.

Plans have been raised with Britain but London has not yet committed to any involvement, according to European officials involved in the discussions. A senior British official familiar with the initiative welcomed the ambition as an “encouraging” sign of determination.

The European Investment Bank will be asked to play a technical role, helping to manage special purpose vehicles (SPVs) and manage treasury functions.

Unlike previous proposals to issue “Eurobonds” for defense – collective borrowing that fiscally conservative EU countries opposed – participation in the fund would be voluntary and open to countries outside the EU.

As a result, EU restrictions on the use of common funds for military purposes will not apply and militarily neutral member states such as ShirtMalta, Ireland and Cyprus will be able to refuse without vetoing the plan.

Prime Minister of Greece Kyriakos Mitsotakiswho backed the Eurobond for defense earlier this year, told the FT there was a change in stance among EU leaders. While his proposals were initially met with a “lukewarm response,” Mitsotakis now feels a “new sense of urgency” in light of Europe’s security challenges and Trump’s return to power.

“There is a growing consensus that we need to spend more on defense and perhaps it is time to establish a common European mechanism to finance projects of common interest,” he said.

“Germany and France will clearly benefit from more European spending on defense,” Mitsotakis said, adding that Italy and Spain are also “big players” in the industry that enjoy benefit from this initiative.

Polish Deputy Finance Minister Pawel Karbownik also said “Europe has no other choice” but to increase defense investment. “We need to be able to protect ourselves in the worst case scenario,” he told the FT.

“Trump 2.0 could serve as a catalyst for the EU to do more for Ukraine, as well as for its own security and defense,” said Mujtaba Rahman of Eurasia Group.

Under the new plan, the EIB will help manage the sovereign guarantees that underpin the SPV and play an administrative role in the capital markets, people involved in the talks said. Under current lending policy, the EIB is prohibited from directly financing arms investments. “We are not aware of any such plans,” an EIB spokesman said.

People familiar with the discussions said the Netherlands, Finland and Denmark all support the idea. Germany’s position is uncertain and will depend on the federal election in February.

“We are discussing very thoroughly,” said a senior EU diplomat involved in the negotiations. “But it’s unclear exactly how Berlin sees it.”

Discussions are continuing on the size of the fund but the aim is to raise at least 500 billion euros, a figure that European Commission President Ursula von der Leyen has told leaders will be the target. minimum required over the next decade to meet the continent’s security needs. the people said.

According to EU defense commissioner Andrius Kubilius, this money could be used to support common defense projects, such as the joint air defense system that Poland and Greece have proposed and this project alone will cost 500 billion euros.

Brussels hopes funding for joint arms sales will spur defense contractors to make long-term investments. But there’s still work to be done about how the money will be used.

“We are not opposed to providing more money for defense,” said a senior official involved in the discussion. “[But] The priority needs to be determining exactly what this money will be spent on.”

Additional reporting by Lucy Fisher in London