EU leaders to consider ‘all options’ to boost defence finance

“We must increase our defence readiness and put economies on a war footing to match the urgency of the threat,” said EU Council president Charles Michel on Thursday evening.

The EU-27 agreed to use the windfall profits from Russia’s frozen assets to purchase weapons for Ukraine, with the European Commission estimating that the first €1bn would be disbursed by 1 July.

But there are disagreements over how to increase investments in defence, with proposals ranging from issuing new EU debt to enhancing access to private financing for the defence sector.

EU member states including France, Greece and the Baltics pushed the council to support fresh joint debt, potentially worth €100bn, but frugal states such as the Netherlands or Germany and Hungary, resisted such a fund.

“We are against it … it would be a Hamilton moment,” Dutch prime minister Mark Rutte told the press, meaning that it would irrevocably shift responsibility for defence spending away from sovereign states towards the EU.

“Defence bonds can work but we believe it is only suitable for research projects and for investments in innovation, where there is a payoff,” said Belgian prime minister Alexander de Croo. “But it is not a magic solution to solve all our problems.”

“Much of our defence spending is just expenditure,” he said, and does not offer a financial return.

‘Humiliating’

Defence spending in Europe rose to €356bn last year, levels not seen since the Cold War, according to the International Institute for Strategic Studies.

However, Nato’s European members still need to find an extra €56bn a year to meet the alliance’s defence spending target of two percent of GDP invested in defence.

And the EU has failed to meet the promise it made one year ago to deliver one million artillery shells to Ukraine.

“The use of artillery at the frontline by our soldiers is humiliating for Europe in the sense that Europe can provide more,” Ukrainian president Volodymyr Zelensky told EU leaders via videolink during the summit.

Joint procurement

One way of speeding up is enhancing joining procurement of weapons and ammunition through long-term fixed contracts.

Most EU member states are in favour of such a plan to reduce reliance on the US, and in part driven by fears over the potential return of Donald Trump to the White House.

However, the role of the commission in supporting joint procurement as it did for the purchases of vaccines during the pandemic has also been questioned, according to an EU official.

Germany has argued that an intermediary between defence companies and governments would hinder the process, making it slower.

“The organisation of the troops is absolutely a responsibility of the member states,” said EU Commission president Ursula von der Leyen, in an effort to placate critics.

But she also noted that the defence industrial strategy falls under the single market and commission’s competence.

Frustration has been mounting over the last months as the proposal to inject an extra €5bn under the European Peace Facility took longer than many expected to be agreed upon.

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This delay also prompted the Czech Republic to come forward with an initiative to provide ammunition to Ukraine quickly, with over half of member states pledging financial support.

In the summit’s final conclusions, EU member states also have invited the European Investment Bank (EIB) to change their lending policy and current definition of dual-use.

But some member states, like Spain, are concerned about “transforming the nature of Europe’s economy” since this approach could create a credit risk for other projects, according to a diplomat.

The French way

Ahead of the European Council, a group of leaders led by French president Emmanuel Macron and Estonia’ prime minister Kaja Kallas have pushed for joint debt for EU-wide weapons and ammunition procurement.

But the idea of joint debt was rebuffed by others.

“Countries should just all increase their defence spending to the Nato norm of two percent of GDP,” Rutte said, referring to the commitment Nato countries made in Wales in 2014.

Explaining his position, he said that issuing joint debt would constitute a point of no return. “We live in a union of sovereign countries with full control over budgetary policy. [Joint debt] would create a federation and I do not support that” said Rutte.

Momentum is building for Rutte to be Nato’s next boss after the US and UK threw in their backing. But in recent weeks the experienced Dutch prime minister has faced criticism due to the Netherlands also failing to meet the two-percent norm during his eleven-year term.

But on Thursday Rutte pointed out that the country has significantly increased military spending, from €15.2bn in 2023 to €21.4bn in 2024, which brings defence spending close to the two percent target.

The Netherlands allocated just 1.7 percent of its GDP to defence last year, according to Nato estimates.

Pension funds

Instead of relying on joint debt, certain countries such as Germany and the Netherlands propose that institutional investors like pension funds or insurers should shoulder some of the expenses by increasing their investments in the defence sector, which includes weapon systems and ammunition.

“The goal is to incentivise investment in defence so that governments are not the only ones footing the bill,” a diplomat speaking on condition of anonymity told EUobserver.

A spokesperson from the Dutch ministry of defence, explaining the rationale, told EUobserver that “various options are being considered to increase investments in the defence sector” in order to “rapidly scale up production across the supply chain.”

But pension funds however say it isn’t clear to them what they should be investing in.

“We don’t buy guns and ammunition, nor do we order tanks,” a spokesperson for ABP, a pension fund which manages €500bn told EUobserver. “The ball is in the government’s court.”

“The question really is whether and when the government will come up with an investment option like bonds or a fund that is suitable for us to invest in,” she added. “But so far this hasn’t happened yet.”