Where can the EU find funds to defend against Russia?
Europe urgently needs to rearm. Russia’s invasion of Ukraine, and the broader threat that President Vladimir Putin’s regime poses to Europe, requires nothing less.
US President Donald Trump’s administration has also now made clear that neither Ukraine nor America’s NATO allies can count on continued US support.
Read more in the column by Philippe Legrain, former economic adviser to the President of the European Commission - Rearmament without the US: three mechanisms to secure additional defense funding for Europe.
The author reminds us that Trump wants NATO’s European members to raise their defense spending to 5% of GDP, while NATO Secretary General Mark Rutte acknowledges the need for "considerably more than 3%."
According to Philippe Legrain, it is real.
Poland has already upped its military spending to over 4% of GDP, with the aim of reaching 5%, and other frontline states such as Estonia and Lithuania are not far behind it.
"Now the rest of Europe must follow suit. But how should they finance the effort? With European economies stagnant and many Europeans struggling, governments are not keen to raise taxes or slash welfare spending," questions former economic adviser to the President of the European Commission.
He believes that the politically obvious solution for now is to borrow.
As he acknowledges, high government debts, EU fiscal rules, and domestic political constraints make increased borrowing tricky for many countries.
He suggests three options for mitigating these factors.
The first is to exclude investment in defense from the bloc’s fiscal rules, which broadly limit government borrowing to 3% of GDP.
Last year, the European Commission launched an "excessive deficit procedure" against Poland, which rightly argued that its increased borrowing was necessary to protect the country – and the rest of Europe – from the heightened Russian threat.
Fortunately, European Commission President Ursula von der Leyen seems to have come around to the Polish position.
She is proposing to activate the Stability and Growth Pact’s escape clause (which allows higher borrowing during crises) to permit increased defense investment.
A second option, then, is for European governments to borrow collectively to finance a one-off investment in defense capacity, as French President Emmanuel Macron has suggested.
There is a precedent for this: the EU’s €750 billion ($782 billion) COVID-19 recovery fund.
The hitch is that Hungarian Prime Minister Viktor Orbán is openly pro-Putin, while four other EU countries (Austria, Ireland, Cyprus, and Malta) have maintained their official neutrality vis-à-vis Russia.
One potential workaround is for a coalition of willing governments to set up a special purpose vehicle separate from the EU, which could issue joint bonds backed by guarantees from participating governments.
This would not only bypass recalcitrant EU members; it would also allow for participation by non-EU defense partners such as Norway and the UK.
Finally, the third option is to expand the scope of European Investment Bank lending.
While the EIB can already finance dual-use (civilian/military) projects, such as those producing drones and satellites, 19 EU governments recently suggested that it should also be permitted to finance wholly military spending, such as investments in tank and ammunition manufacturing.
"Upping defense spending to avert Ukraine’s defeat and deter broader Russian aggression is much less costly than fighting an all-out war. Otherwise, as Rutte warns, Europeans will need either to learn Russian or to move to New Zealand," Legrain concludes.