BRUSSELS ― Europe is gearing up for war. That much is obvious.
Whispered conversations among the EU’s most influential decisionmakers reveal a disturbing new truth: Gone are the days when the bloc had the luxury of prioritizing the green agenda or improving competitiveness. Now it’s all about coping with possible military conflict that looms over the horizon.
A raft of senior European officials, speaking to POLITICO on condition we don’t identify them, have outlined how preparing the Continent for future armed disputes is top of the agenda in a year when the presidents of the EU’s top bodies change or are reappointed, and as the European Parliament is reconstituted. According to these conversations, the bloc’s top brass are coalescing around five radical policy or spending shifts that could transform Europe by putting it on the kind of war footing it hasn’t seen for generations.
“The financial conditions in some European countries are dire and the [European] Union is in danger,” said Francesco Nicoli, a political economist who has writtenabout EU defense spending for Brussels think tank Bruegel. “We need to get this done or we risk a much larger war directly within the Union. Only a collective solution can really provide an answer.”
The worst-case scenarios turn the blood cold, but weren’t even on the radar when Ursula von der Leyen became European Commission president and Charles Michel was named European Council chief half a decade ago. The prospects of Ukraine’s army being overrun by Russia ― which could allow Vladimir Putin to switch his sights toward the EU’s ex-Soviet Baltic states ― of Israel’s war with Hamas becoming a wider Middle East conflict that pulls in Iran ― possibly with its own nuclear weapons ― and of China attacking Taiwan, are no longer merely the stuff of nightmares.
Over the Channel, the U.K. is facing up to the same reality, with General Patrick Sanders, the head of the army, last month calling on the government to “mobilize the nation” to prepare for a war with Russia. Saturday’s outburst by Donald Trump, the frontrunner to be the Republican nominee for the White House, suggests he’ll double down on European defense-spending rhetoric he employed during his first presidency if he gets elected in November. (Trump said he would “encourage” Russia to attack any NATO member that didn’t pay enough.)
Once unthinkable
Historically, defense policy and investment have been a national concern. While these days there’s some coordination through the European Defence Agency, it’s very much still subordinate.
But the imbalance in security expenditures is there for all to see. The U.S. spent close to $880 billion on defense in 2022, more than China, Germany, France, India, Japan, Russia, Saudi Arabia and the U.K. combined.
In the corridors of power in Brussels and national capitals, Europe’s precarious situation has sharpened minds as officials begin to hone policy wish lists for the Commission’s next five-year term, including what changes should be made to the bloc’s €1 trillion long-term budget.
According to the eight officials POLITICO consulted, among the ideas being brainstormed at the top table is EU countries jointly raising money on debt markets to pay for defense. This way of generating funds ― for anything, let alone for common defense ― would once have been unthinkable, in particular because governments like Germany fear being on the hook for countries who spend more recklessly. But that taboo was broken when the EU financed multiple such initiatives to aid national post-pandemic economic recoveries.
Officials confirmed that the Russia-Ukraine conflict might well be the next catalyst for common debt to fund a temporary cash pot designed for a specific outcome.It could be similar to the €100 billion jobless reinsurance scheme, SURE, that Brussels’ legislators established to boost unemployment benefits during the pandemic.
“War is back in Europe and the security guarantee of the U.S. in Europe [are] not indefinite, whether [U.S. President Joe] Biden is re-elected or Trump comes back,” said Manfred Weber, leader of the center-right European People’s Party and its leading candidate in the 2019 EU election. “If we want to be in control of Europe’s security agenda in the decades to come, our ambition will need to be exponentially bigger than is now the case.”
Stocks and bonds
With politicians scrabbling for cash they can funnel toward keeping Europe safe, a second idea raised with POLITICO was to repurpose the loans that remain unused from the EU’s €800 billion post-pandemic recovery fund. The initiative expires in 2026.
Another idea, more radical still, is to use so-called Cohesion Funds, money from the EU budget that is traditionally spent on modernizing rural areas, such as by developing energy grids and railways. With a bit of legal creativity, some of this money could also be used bolster the defense capabilities of countries bordering Russia, such as Poland and Finland.
A further potential scheme would create an investment label for defense-focused funds that hold portfolios of stocks, bonds and other financial securities that big asset managers and private equity giants can invest in.
In this way, pension funds and wealth managers could invest money in projects that finance “EU common policy goals,” as one official put it, such as defense. The label would give money managers legal certainty and would flag priority investments within the defense industry.
Members of the Commission’s departments of financial and defense policy are exploring whether such a label is feasible. One possibility is creating a “positive list” of where investments are needed most within the defense industry. That could boost cross-border cooperation in Europe, a Commission official said.
A final option is to give the European Investment Bank, the bloc’s lender which pumps money into infrastructure projects, the power to use its financial muscle to spend on defense.
Nuclear deterrence
The main questions are how fast Brussels should, and indeed could, act after the U.S. elections — and what the EU should spend its money on. With a sluggish post-Covid economic recovery and the battle with inflation not yet over, finance ministries are more preoccupied with finding ways to raise money rather than deciding what to spend it on.
What’s clear, however, is that joint financing will probably focus on general procurement and not on armies themselves. For Weber, that means investing in defense technologies together and thinking about nuclear deterrence.
The speed at which these legislative proposals will come depends on who wins the White House, officials said. Joe Biden’s re-election would ease pressure on the new Commission, which could then propose individual bills at a steady rate over the next few years. Trump’s return to the White House, meanwhile, would likely see a grand package of initiatives arrive in one go, officials said.
While military policy is considered strictly a national competence, hawkish foreign policies are likely to find sympathetic ears if, as polls suggest, the European Parliament becomes more right-wing.
“We shouldn’t be ashamed that we’re increasing defense spending because we’re defending what is so precious to us,” said Karel Lannoo, chief executive of the Centre for European Policy Studies, another Brussels think tank. “Investors and Europeans need to adapt their mindset to this.”
