Unlike most European countries, Germany remains one of the few countries that still has significant fiscal room for manoeuvre. Meanwhile, other European countries are more constrained from a budgetary point of view. It is hard to imagine France and Italy, which are already subject to the European Commission’s excessive deficit procedure, spending like crazy without reducing other types of public spending. Some European countries will therefore have to make difficult budgetary compromises if they want to invest in defence. The first and most direct source of funding is through state budgets. Given that some states are already exceeding the budget deficit limits set by the European treaties (as is the case with France, Belgium and Italy), Europe could once again make an exception to the maximum authorised budget deficit rule of 3% (as it did during the covid and the energy crisis). This is what was proposed by the president of the European Commission, who announced in March that the escape clause in the European treaties would be activated. However, this does not mean that countries will make use of this flexibility, as some will fear that any fiscal slippage will weigh on public finances a posteriori through an increase in the debt burden.
Why not a European defence bank?
A second financing possibility is the creation of an entity common to different countries--like the European Investment Bank or the European Stability Mechanism--which would be dedicated to financing defence projects. Such a structure would be capitalised by the states wishing to participate in the rearmament project and would issue bonds that would be guaranteed by these countries.
Then Europe could resort to the direct issue of common debt, as was the case during the health crisis. The European Recovery Fund has raised capital on the financial markets to enable countries to finance recovery projects. The European Commission’s Action for Security in Europe (Safe) proposal will mobilise €150bn on the capital markets to support defence investment in line with member states’ needs. It should be noted that this initiative increases--admittedly at the margin--the attractiveness of the euro as a global reserve currency, as it gives international investors access to a pan-European asset pool that has been sorely lacking to date.
Finally, Europe could redirect unused European funds, such as the covid stimulus fund, of which just over half of the €750bn or so has been allocated so far due to a lack of investment projects. This possibility is under consideration.
At present, it would appear that new defence spending will be mainly through the budgets of individual states. The constraints weighing on the public finances of the major European countries (excluding Germany) mean that only Germany has the financial capacity to significantly increase its military spending.
This article was originally published in French.
