EU plans debt revolution to finance protection – DW – 03/12/2025 | EUROtoday

At a particular EU summit in Brussels on March 6, the bloc’s 26 member states determined to mobilize about €800 billion ($867 billion) for what the leaders described as obligatory for the “rearmament of Europe.” European Commission President Ursula von der Leyen,  was tasked with figuring out the small print quickly on how members may very well be helped to finance their share within the effort.

At the second, it seems that EU nations are in a position to finance some €650 billion of the €800 billion package deal by means of their very own sovereign debt issuing, somewhat than by means of joint EU borrowing.

The remaining €150 billion is anticipated to be mortgage help secured by the EU finances which might deliver the bloc a step nearer to the idea of shared debt.

Unlimited debt

In Germany, chancellor-in-waiting Friedrich Merz has already discarded his no-new-debt mantra from the election marketing campaign and is now advocating unrestricted borrowing to finance nationwide protection efforts, with the brand new mantra being “whatever it takes,” as he lately stated.

To encourage different EU nations to comply with an analogous strategy, von der Leyen needs to activate what she referred to as an “escape clause.”

“This will allow member states to significantly increase their defense spending,” she stated on the Munich Security Conference in February.

Jürgen Matthes, who heads the analysis unit International Economics and Economic Outlook on the Cologne, Germany-based Institute for Economic Research (IW), thinks von der Leyen’s escape clause may assist EU member states make their protection expenditures suitable with the bloc’s so-called Stability and Growth Pact.

In drive since 1998, the pact units a public-debt restrict of 60% of GDP and a finances deficit restrict of three% for the 20 nations that at the moment use the euro. However, initially supposed to forestall extreme nationwide borrowing, many eurozone nations have repeatedly damaged the precept.

If these nations have to tackle extra debt to finance their navy wants, Brussels will seemingly flip a blind eye somewhat than imposing penalties, because it has finished prior to now.

Interest charge spreads as a warning sign

Within the EU, softer implementation could give governments extra fiscal room to maneuver, however whether or not monetary markets might be satisfied stays to be seen. Financial market traders primarily deal with a rustic’s creditworthiness, which is mirrored in rankings assigned by specialised businesses. A poor score makes borrowing dearer.

Among eurozone nations, Germany pays the bottom rates of interest on its debt. The distinction between German rates of interest and people of different nations is known as the “spread.” Italy, for instance, should pay a so-called threat premium of 1.2 proportion factors in comparison with Germany, which means it has to pay extra for its debt.

At the beginning of the EU sovereign debt disaster in 2010, the hole was even smaller however quickly surged to almost 5 proportion factors. For Portugal and Greece, the premium was even larger.

The larger the rate of interest, the much less monetary flexibility a rustic has for different priorities, similar to investments, training, or pensions. These imbalances pushed the eurozone to the brink of collapse throughout the debt disaster.

The influence of latest defense-related debt on spreads is “not yet clear,” Matthes informed DW. He would not rule out the danger of particular person eurozone nations taking over extra debt than they’ll shoulder beneath rearmament efforts.

Has the time come for Eurobonds?

Large expenditures include massive dangers — so, is that this the second for joint borrowing by means of so-called Eurobonds?

The idea is straightforward: If European nations tackle debt collectively, borrowing situations can be extra favorable for many nations than in the event that they issued debt individually. They would profit from the sturdy credit score rankings of wealthier member states. Rich nations, like Germany, nevertheless, would then be accountable for the full debt raised by means of joint EU debt.

The difficulty has divided the EU for a few years, with the fault line operating roughly alongside a north-south axis. Northern nations — together with Germany, Austria, the Netherlands, and Finland — accuse southern nations similar to France, Italy, Spain, Portugal, and Greece of fiscal irresponsibility and have refused to again their debt.

EU legislation additionally prohibits one nation from assuming the debt of one other. Article 125 of the Treaty on the Functioning of the European Union explicitly states this restriction.

To use Eurobonds for protection financing, an modification to EU treaties can be obligatory. Such a change wouldn’t solely be time-consuming but in addition require unanimous approval, elevating doubts about its feasibility.

However, the EU has already experimented with collective borrowing, albeit with restricted legal responsibility.

For instance, the €750 billion restoration fund established throughout the COVID-19 pandemic in 2021 marked the primary time the EU collectively took on debt. In this case, legal responsibility was restricted to every nation’s share of the EU finances — which means Germany was accountable for a few quarter of the full quantity.

Similarly, the so-called European Stability Mechanism (ESM) and its predecessor, the European Financial Stability Facility (EFSF) — each bailout funds to assist struggling eurozone nations throughout the 2010 sovereign debt disaster — have been types of joint debt.

Necessary, unlikely, or sensible?

“Whether joint borrowing will be necessary remains to be seen,” stated Matthes from the IW.

Clemens Fuest, president of the Munich-based ifo Institute, considers it “very unlikely” that protection spending might be financed by means of shared debt.

“This instrument is unsuitable because defense expenditures are national expenses, and the EU would first need to develop a defense policy concept. But right now, urgency is the priority,” Fuest informed DW through electronic mail.

But Jens Boysen-Hogrefe from the Kiel Institute for the World Economy (IfW), sees joint debt as “practical” when financing shared navy initiatives. In an interview with DW, he questioned, nevertheless, whether or not “all EU countries would fulfill their commitments to common defense in the coming years.”

Boysen-Hogrefe thinks joint borrowing for Europe’s protection must also contain non-EU nations like Britain and Norway to make sure that selections aren’t topic to the EU precept of unanimity. That would forestall nations like Hungary from utilizing a veto to dam progress. Additionally, the European Investment Bank (EIB), which is collectively owned by EU member states, may play “a key role,” he stated.

For now, the small print of how Europe will fund its rearmament stay unclear — similar to whether or not Friedrich Merz will rethink his agency opposition to joint debt.

In September final 12 months, Merz stated he would “do everything in my power” to forestall the EU from “entering such a debt spiral.” He didn’t reply to DW’s request for touch upon whether or not his place has modified.

This article was initially written in German.