What do we know about how Europe's rearmament will be paid for?

BrusselsThe European Union has fully entered into an arms race in the wake of expansionism of Vladimir Putin and the abandonment of Donald Trump. The clamor is almost unanimous to increase military spending at forced marches in the bloc and European leaders have already given the go-ahead in the plan of the European Commission of Ursula von der Leyen to rearm. But what do we know about how Brussels and the Member States intend to finance the huge increase in the European Union's military capacity and arms industry?

New avenues of financing

The European Commission is proposing the creation of Eurobonds in the form of a loan worth 150 billion euros and the relaxation of fiscal rules, which could mobilise an additional 650 billion euros over four years. However, the debate on how to finance rearmament has only just begun and the Member States have asked the European Commission to The last European summit "explored new avenues" of financing that are added to those proposed by Von der Leyen, who has already responded that "there is nothing off the table" and that she is "open to whatever is necessary." "There is no taboo in the debate," added the president of the European Council, António Costa, last Thursday.

It is in this context that the Spanish Minister of Economy Carlos Cuerpo, has defended at the entrance to the Eurogroup, which takes place this Monday in Brussels, the creation of new Eurobonds in the form of aid and not only in the form of loans. That is, going a step further than Von der Leyen and deploying new European funds such as those for covid recovery but for defense, as also promulgated by France. On the contrary, his German counterpart, Jörg Kukies, was "quite skeptical" about this possibility and the Dutch finance minister, Eelco Heinen, completely rejected it.

However, Germany has already asked for flexibility in fiscal rules to be long-term and not a temporary measure. This demand represents a complete change of position for the country, one of the states that has always pushed for stricter EU deficit limits and is historically one of the great standard-bearers of austerity. So it remains to be seen whether the new German government remains "sceptical" or ends up clearly opting for one of the two options, which could be decisive.

In fact, the German caretaker government and the future chancellor, Friedrich Merz, have already jointly announced constitutional reforms to give more fiscal space to finance the increase in military spending and a plan to boost German industry, which is in crisis. At the state level, France has also presented a rearmament plan and several countries have already announced that they intend to accelerate the pace of military spending increases, such as Spain, Portugal and Belgium, which are among the European partners that allocate a lower rate of their gross domestic product.

Eurobonds for defense

Beyond the discussions, one of the main measures that Von der Leyen has put on the table is the creation of Eurobonds worth around 150 billion euros. It should be noted that these would be in the form of loans and, therefore, the member states would have to repay this money. Thus, this would be financing that would be the responsibility of the state governments and not of the EU as a whole.

The aim of this new instrument is to finance military projects at European level, such as the reinforcement of an air shield, transport capabilities and technology, ammunition and missiles. In addition, Member States could use it to continue providing arms support to Ukraine.

Relaxation of fiscal rules

Von der Leyen has also proposed relaxing fiscal rules and not counting military spending in Brussels' calculation of each member state's deficit for at least four years, which should now be a maximum of 3% of gross domestic product (GDP). This is an exceptional measure that the EU did not take even when the euro was in danger during the 2008 economic crisis and was implemented for the first time during the pandemic to facilitate economic recovery.

Brussels proposes that each member state can increase military spending by 1.5 percentage points of GDP and calculates that this could mean mobilizing an extra 650 billion euros of financing. In any case, as the European Commission itself admits, this is a hypothetical sum of financing that should be assumed by the states individually. It is also not clear that all countries want to take advantage of this flexibility in fiscal rules to rearm.

With all this, Cuerpo has confirmed that Spain plans to take advantage of this measure so that the increase in military spending does not "affect the social shield" of the State and has also advocated a "broad definition" of what should be included in this exceptional clause of fiscal rules. Thus, it has opted not only to include expenses that have to do strictly with defense, but also with security, such as cybersecurity, border control and, among others, the fight against terrorism.

More pressure on Calviño

European leaders agreed at the European summit last Thursday to change the treaties of the European Investment Bank (EIB) so that it can finance projects that are eminently military and do not have to also have a civilian aspect, as is the case until now. In this way, the organisation headed by the former Spanish vice-president Nadia Calviño would have free rein to allocate a large part of its budget to the rearmament of the blog. In turn, the EIB, which is the financing arm of community projects, has already shown itself open to accepting this change of priorities to contribute to achieving the objective of gaining military capacity, although Calviño has so far avoided doing so. inject as much money as they wanted a large majority of Member States.

Misappropriation of cohesion funds

Brussels wants member states to have access to fresh money as soon as possible and has therefore proposed that they be able to divert some of the main European funds that are already being deployed, such as cohesion funds. In this way, there would be no need to wait for the approval of the new EU budgets, which are expected in 2028. However, several governments, such as those of Italy and Spain, have already ruled out this possibility because cohesion funds largely go directly to regional administrations and they fear that their withdrawal would raise a storm.