ReArm Europe: How member states can spend more on defense

"Europe is ready to massively increase its defense spending," said Ursula von der Leyen in Brussels on Tuesday. She presented her ReArm Europe plan, which is to be discussed at the special summit on Thursday. The Commission President wants to boost defense spending in Europe with subsidized loans, a relaxation of EU debt rules and a reallocation of cohesion funds. The majority of the rearmament should continue to be funded by the member states.

First and foremost, the Commission wants to support the member states with a total of EUR 150 billion in subsidized loans. A new instrument – similar to the SURE program at the beginning of the Covid pandemic – is to be created for this purpose. The Commission would borrow money on the capital markets on behalf of the EU and lend it to the member states. These EU bonds would be backed by member state guarantees. The advantage of the instrument is that only a qualified majority of member states would be required for a decision. Hungary and Slovakia would therefore have no veto power.

However, the instrument would only be attractive for those countries that have to pay higher interest rates on the capital market than for EU bonds. According to the Commission, these are around 20 countries. They currently include Spain, France, Italy, Poland and the Baltic states. But even for them, the savings potential is limited. If, for example, the member states were able to save 0.5 percentage points on their debt interest thanks to the instrument and utilize the entire EUR 150 billion, this would lead to an additional annual financial leeway of EUR 750 million across the EU – the price of almost thirty modern Leopard tanks. It is also about sending a political signal, said an EU official.

Discussions about a "Made in Europe" clause similar to the European Defense Industry Program (EDIP) could delay the deliberations. Von der Leyen will discuss the issue of the clause with the member states at the special summit, said an EU official. The aim is to promote joint procurements and strengthen the European defense industry. At least two or three member states would have to submit plans for joint procurements in the areas of missile defense, artillery systems, deep strike weapons as well as drones and anti-drone systems. The Commission would then decide on the allocation of credits.

The Commission also wants to activate the national escape clause of the EU debt rules. The escape clause is to be limited to four years and only apply to additional defense spending and investments of up to 1.5 percent of GDP. The Commission calculates that member states could theoretically spend up to an additional EUR 650 billion on defense under the EU debt rules. This would bring the total to EUR 800 billion which Ursula von der Leyen mentioned as a possible target on Tuesday morning.

However, the escape clause only increases the legal leeway for member states. Due to the market situation, highly indebted EU countries cannot incur much more debt than they already have. It is therefore still unclear to what extent additional expenditure will be made possible through the use of the escape clause. The Commission encourages all member states to apply for the national escape clause.

However, some member states still have reservations about this approach. The Commission is also aware that the additional defense spending cannot be financed by debt forever. "The peace dividend that we have enjoyed for many years simply no longer exists," said a senior EU official on Tuesday. Over time, the additional spending would have to be financed through higher taxes or reduced spending.

Cohesion funds are also to be used for defense efforts. The EU Commission wants to encourage member states to use cohesion funds for defense-related investments, for example in the area of military mobility. Specifically, restrictions on support for large companies, pre-financing and co-financing could be eased. The reallocation of unused funds from the Corona Fund or the inclusion of the ESM is explicitly not planned. According to EU officials, there are legal concerns about this. Next Generation EU and the ESM were created for specific purposes and the funds cannot simply be used for other purposes.

"Europe must be responsible for its own deterrence and defense," wrote the Commission President in a letter to the heads of state and government. The EU has the choice between a step-by-step approach or an approach that is equal to the moment. Europe must mobilize its "immense resources" and "summon the collective spirit to defend democracy," she appealed to the heads of state, who will discuss the issue in Brussels on Thursday.

Germany's role is currently being complicated by the change of government. Today, Wednesday, Chancellor Olaf Scholz will receive his designated successor Friedrich Merz in the Chancellery to coordinate the positioning at the special summit on Thursday. CSU regional group leader Alexander Dobrindt will also attend the meeting. Merz will take part in the preliminary meeting of the Christian Democratic heads of state and government on Thursday morning, but not in the summit itself. Each country only has one representative at the table in the European Council.

Berlin will probably not stand in the way of the decision to rearm Europe. In the evening, the exploratory parties of the CDU/CSU and SPD announced that they had agreed on a massive spending program. Defense spending in excess of one percent of the gross domestic product is to be exempted from the debt brake in the Basic Law. Last year, this would have amounted to around EUR 43 billion. In addition, both sides want to introduce a law to speed up the procurement process for the Bundeswehr as soon as the new government has been formed.

"In view of the threats to our freedom and peace on our continent, whatever it takes must now also apply to our defense," said Merz after the agreement. Both sides also want to decide on a special fund. This provides for spending EUR 500 billion over ten years to modernize schools and universities, hospitals, roads and networks. A commission of experts will later present proposals for a reform of the debt brake.

However, Merz needs the votes of the Greens or FDP for a two-thirds majority. The bill could then be introduced into the Bundestag next week. The new Bundestag will convene on March 24 at the latest, by which time there will no longer be a two-thirds majority without the Left and AfD.