The next EU budget: increasing defence resources for strategic autonomy

This article is part of a series putting forward bold ideas for how the EU’s next Multiannual Financial Framework (MFF) could look. In this piece, Daniel Dăianu explores the practical challenges and opportunities in increasing defence resources within the EU budget, outlining proposals to fund and structure this priority sustainably. It is part of a two-part contribution on building a more strategic, resilient and fiscally empowered EU budget to face today’s economic and security challenges. Find the second part here.

A superior and effective defence capacity requires considerably more resources allocated to the military domain within the EU member states, along with a deeper military cooperation between them in arms production and procurement. The pandemic was somewhat like a war, but now the focus is on real military strength and the ability to respond to cyber and hybrid attacks.

The European Commission has announced a plan of nearly €800bn for defence, seeking ways to finance it through both public and private funding. The ‘escape clause’ from fiscal rules has been activated for a four-year period, but its impact on public debt and deficits cannot be avoided. There is a divergence of views on this: the “frugal” countries are in disagreement with Italy, Spain and France, which advocate the issuing of collective debt. Italy and Spain have also opposed the name “ReArm Europe” for the aforementioned programme, suggesting a less aggressive name. The European Commission now refers to it as “Readiness 2030”.

National budgets and the EU budget will likely undergo restructuring, with new resources allocated to defence; we will likely witness trends leading toward “defence-ready economies”. European financial institutions, especially the European Investment Bank, are expected to play a major role, as mentioned in European Commission documents. State guarantees to mobilise private sector resources, such as those proposed by the Italian government[1], may also be considered. The forthcoming proposal for the 2028–2034 Multiannual Financial Framework (MFF) by the European Commission will be a crucial framework for enabling this restructuring, balancing the need for increased defence funding with broader fiscal priorities.

The increased defence resources must be evaluated in relation to the EU’s competitiveness enhancement programme (e.g., Draghi Report, Letta Report). For a stronger defence industry in the EU countries does not automatically translate into higher competitiveness in key domains.

Currently, the average defence spending in the EU is about 2% of GDP. To reach 5% of GDP, as the US demands, would imply more than a doubling of these expenses, on average, in EU countries. This would be a huge burden for public budgets, although it can be argued that one should not procrastinate when it comes to matters of defence and security[2]. Far more realistic would be to expect that the EU will reach an average of about 3.5% of GDP for defence over a period of time, but with significant differences between states.

The renewed suspension of fiscal rules cannot hide the shock caused by the defence needs and its impact on the difficult budgetary situations of the EU member states. It is important to note that the aforementioned suspension would not apply to the total defence spending, but only to the increase in such spending for a four-year period. In other words, after four years, fiscal consolidation would have to be implemented, but from a higher baseline.

The European Commission’s plan for an additional €800bn in spending over the next four years includes €150bn for a defence fund (to be financed through the issuance of collective bonds), which will provide loans to member states and €650bn mobilised through national budgets. Additional resources might be obtained from national recovery and resilience plans (NRRPs) and from restructuring the use of structural and cohesion funds. These financing mechanisms will be central pillars of the upcoming MFF, which must carefully calibrate support for defence priorities while safeguarding economic stability.

Mobilising such a large amount of resources is a complicated process. Moreover, it is necessary to harmonise the positions of EU member states regarding the development of the defence industry in Europe and the issue of common procurement (how much from Europe, how much from outside). The Union is also counting on military cooperation with the UK, Norway, Canada, Turkey and possibly other countries. The €150bn defence fund is primarily aimed at financing the defence industry in Europe.

The development of the defence industry in the EU could be a major common project – much like Airbus was – and would imply the adaptation of the European industrial policy to the new geopolitical reality. The question is whether such a programme (assuming it could be realised within the imagined parameters) can lead to intense innovation, and thereby, help Europe close the technological gap with the US and other countries (China) in strategic domains. Furthermore, this programme would require close, systematic collaboration between the countries involved. Ensuring that the next MFF accommodates such a strategic industrial endeavour will be essential to Europe’s ambition to foster technological sovereignty anddefence resilience.

The views expressed in this #CriticalThinking article reflect those of the author(s) and not of Friends of Europe.