European defence: finally some money, but what comes next?

In the 1996 Hollywood movie “Jerry Maguire”, Tom Cruise plays a sports agent who is frantically trying to secure a final playing contract for an ageing (and fading) football star, played by Cuba Gooding Jr. Every time that Cruise comes up with a new scheme, he receives the same curt retort from the prickly Gooding: “show me the money”.

This slogan has certainly been echoed in recent weeks by EU observers who have seen a number of EU and wider European emergency summit meetings come and go, all bemoaning the perilous state of the transatlantic relationship and calling for more European efforts on defence, but failing to take specific measures or to come up with a concrete plan of action. In this context, the special Summit of the European Union on 6 March in Brussels was an important moment in producing an agreement by the 27 EU member states to reduce their military dependence on the US and start building their own capabilities for defence. After 12 hours of talks, the EU leaders finally started moving from declarations about “wake up calls” or “Europe standing alone”, as the US withdraws its support for Ukraine and European security, to actual decisions on how to fund new military capabilities and which strategic enablers to prioritise. Although the details on specific initiatives still have to be worked out and formal decisions taken, the broad parameters of how the EU will shift funds toward defence production and incentivise its member states to move from 2% to 3% of GDP as a defence spending target are now much clearer. Not all member states like Commission President Ursula von der Leyen’s proposal to call this programme ReArm Europe, judging it a tad too militaristic, but this is undoubtedly what the intention is.

First is the Commission proposal to raise €150bn on the markets to establish a defence fund that will offer member states loans for military purchases. The Commission was tasked with investigating on an urgent basis the feasibility of setting up such a fund. Not all member states are yet fully on board. France thinks that the fund should be larger and Spain would like the fund to be in the form of grants rather than loans. As always in EU politics, when the Commission comes up with an initiative on common funding (as with the loans for the post-COVID-19 Next Generation EU recovery programme) some member states fear that the Commission, representing the supranational arm of the EU institutions, will gain more power and crimp their national room for manoeuvre. The European Parliament, which has recently set up its own full committee on defence, is apparently also not happy on not being consulted on these big Commission schemes. Yet there was no disagreement among member states with the military priorities that the Commission has proposed for the EU defence loans: air and missile defence, long-range artillery systems, drones, air transport, cyber, AI and electronic warfare. These priorities all draw on the lessons from the fighting in Ukraine. Europe’s vulnerability in ISTAR (intelligence, surveillance, target acquisition and reconnaissance) was made manifest by the US withdrawal of satellite imagery from Ukraine this past week. The EU funds will therefore go to multinational EU projects in these areas that obviously will mean hard choices regarding which European military systems are chosen for investment. There will obviously be winners and losers among defence companies and consortiums, making member states with their own programmes to protect nervous.

The second financial instrument would be to relax the rules on member states deficits, which the Commission has the task of monitoring. This would allow member states to spend on defence up to 3% of GDP without being subject to EU censure and fines. The Commission estimates that €650bn for investment could be freed up in this way, and that 20 member states would be in a position to benefit from this instrument. It does, however, carry the consequence that without major spending cuts or tighter fiscal controls to other state budgets (health, education, pensions etc.) or new taxes member state budgets could spiral out of control. France, Italy, Belgium, Portugal and some other EU members would face some difficult political choices in this regard and parties of the left and far right would undoubtedly lobby against more spending on weapons at the cost of welfare and social security programmes. In the UK, for instance, an increase in defence spending to 2.5% of GDP by 2026 has had to be financed by a 40% cut in the foreign aid budget, reduced already by 0.2% of GDP during the previous Conservative government to finance Covid recovery. This has been unpopular among many Labour MPs and supporters, and led to resignations from the government. Soft power is being sacrificed for hard power. So political leadership in explaining the need for massive resource shifts to defence will be harder in some EU countries than in others, and will put ruling governments to the test.

The third financial instrument is to move unused funds from other EU budgets, such as the regional cohesion funds, into defence production. This should free up another €60bn to kickstart new contracts with industry. Cohesion funds and agricultural subsidies take up the lion’s share of the EU budget and they have powerful lobbies and constituencies in the member states as frequent noisy protests by farmers in Brussels remind us. So as the Commission looks to start negotiations on the next seven-year EU financial framework due to come into force in 2028 it will probably prove difficult for the EU to restructure its budget on a permanent basis to reduce the scale of these other big spending areas. Unless member states agree to pay significantly more than the current 1.2% of national GDP into the EU budget as well as a greater proportion of their national VAT receipts. Hence, the debate on whether defence should be handled off-budget and on a more voluntary basis by a ‘committee of contributors’, as has been the case with the €11.5bn European Peace Facility, which has financed the training of 40,000 Ukrainian soldiers in EU member states and reimbursed the member states 50% of their weapons transfers to Kyiv. This has the advantage of getting around national vetoes and the rule of unanimity in foreign and defence policy. However, Hungary went along with the Council conclusions on defence spending as, despite its scepticism regarding the need to deter Russia, it likes to benefit from any EU financial largesse.

Finally, in the area of defence finance, the EU called on the European Investment Bank in Luxembourg to review its financing criteria to facilitate more investment in defence. The EIB has recently agreed that dual capable technologies (civil and military) can receive EIB funding but not wholly military systems. Moreover, it is currently devoting only €2bn of its €98bn capital to these dual capable projects. A move by the EIB could encourage other banks, pension funds, sovereign wealth funds and private venture capital houses to similarly review their lending and investment criteria and to loosen ESG rules, which do not consider armaments as essential public goods.

President Zelensky attended the summit dinner and looked visibly far more comfortable than in his meeting in the Oval Office with President Trump and Vice President Vance the previous week. The EU called for a “just, comprehensive and lasting peace” for Ukraine and for both Ukraine and Europe to participate in the peace talks. It added that a ceasefire should not be a standalone affair, but lead to this lasting peace agreement and that Ukraine needed effective security guarantees. However there was not much discussion of the European military force to go to Ukraine to implement the peace agreement as many European countries, such as Italy and Spain, believe this debate is premature and the UK, which is leading the effort, was not at the table in Brussels. Zelensky asked for some of the new EU defence money to be invested in the Ukrainian defence industry along the lines of what Denmark has been doing. He pointed out that Ukraine is currently producing drones and 155mm shells more cheaply and nearer to the battlefield than the EU, so Ukraine could produce both for Europe and for its own defence requirements with EU investment in machinery, technology and skills. There was a reconfirmation of the EU’s commitment to Ukraine in military and financial terms. However, there was no new EU aid package for Ukraine announced at the summit nor any new weapons deliveries or aid packages from the member states. These will take more time to prepare. Not good news for Zelensky especially at a time when the Russians have intensified their attacks in the Kursk salient in response to the cut off in US military aid, intelligence and satellite imagery provided by Maxar Technologies to Kyiv, and when it is still not clear whether Moscow will accept the proposal for a one month ceasefire proposed by the US and Ukraine at their recent meeting in Jeddah. Clearly, Europe is not yet ready to fill the gap left by the US. Yet, the direction of the summit was to increasingly integrate aid to Ukraine with Europe’s own rearmament programme. This will anchor Ukraine permanently in the EU’s future defence structures and military contracts. Hungary vetoed the Council conclusions on Ukraine as it objected to the language on “peace through strength” in the text, arguing that this would only delay agreement on a ceasefire that the US is urgently trying to negotiate with Russia having now brought Ukraine on board following the meeting in Jeddah and now to be taken to Moscow by Trump’s special envoy, Steve Witkoff. But the other 26 member states went ahead without Hungary and approved their own text on Ukraine. It helped that the other Russia-friendly EU country, Slovakia, broke ranks with Budapest and went along with the consensus at 26 as it received assurances that the EU would work on a solution for its gas supply after Ukraine closed its transit pipeline from Russia to Hungary and Slovakia at the beginning of the year.

Also, there was no discussion at the summit on the Russian Central Bank assets currently deposited with Euroclear in Brussels. These are currently estimated at €183bn. Some EU politicians have called for these funds to be confiscated to be used to finance military aid to Ukraine and for rebuilding and recovery. But most EU leaders want to stick with the current consensus in the G7 and EU to use only the interest on this money as collateral to reimburse loans to Kyiv. This was already a long process to reach an agreement and they are wary of the legal complexities involved in confiscating another country’s assets, the precedent it would set for the global financial system and the possibility that confiscation would undermine confidence in the euro.

Of course, this being the EU, there will no doubt be further wrangling on these financial issues and questions of EU collective and national authority. Particularly when it comes to defence, which has traditionally been a national prerogative in the EU and where member states have their own national defence industries and labour markets to protect. Germany, for instance, has been opposed to EU grants and to EU collective financing and debt. But now Germany, if the statements of its incoming Chancellor, Friedrich Merz, are to be believed, is no longer going to be the “frugal nation”. Given the size and weight of Germany in the EU, its active involvement in the new EU funding schemes will be crucial for their success. Without German funding, there can be no European defence. Merz has supported fiscal loosening in the EU and also of the German fiscal debt brake, which keeps German deficits to a low level. He has spoken of a special fund of €200bn to modernise the Bundeswehr (German armed forces) and of reaching a 3% of GDP defence spending target, of cooperation with France on a European nuclear deterrent and of a European defence organisation outside NATO. It helps that Merz has linked extra defence spending with a plan to upgrade national infrastructure, which might help to bring his future SPD coalition partners from the left on board. But whether he can secure a majority in the Bundestag and Bundesrat for constitutional change on the fiscal debt brake, particularly in a Bundestag where the far-right AfD and far-left Die Linke will hold many more seats is far from clear. Yet, what is encouraging is that Merz has been able to reach a rapid agreement with the SPD on fiscal loosening as part of the coalition negotiations. Moreover, many of the EU’s military ambitions in the high technology field depend on close cooperation between Germany and France, especially the SCAF 6th generation fighter aircraft and drone programme. Airbus this week called for the new EU defence funds to be spent in Europe not the US, arguing that with the new US approach to Europe, the continent needed to reduce its reliance on US capabilities such as the F35.

The other question is: will all this still be enough for Europe to defend itself without the US? The Estonian Prime Minister asked at the summit: “can we go it alone without the US?” The summit revealed a gap between those EU leaders who hope that the US will not abandon Europe and that all this extra defence spending will somehow persuade the volatile US President to remain engaged in NATO; and those who believe that Europe has arrived at a true inflexion point and that the EU can no longer presume that the US will be a friend, let alone a reliable ally. The optimism in this regard of a Meloni in Italy contrasted with the darker mood of the Baltic states. There is clearly a big difference between what Europe will need to spend to replace some US troops and assets being withdrawn from Europe (with some such as air and missile defence, nuclear weapons, logistics and bases remaining), and what Europe would need to spend to replace the US entirely. NATO has currently about two-thirds of the critical enablers that it needs to implement the alliance’s regional defence plans drawn up by the Supreme Allied Commander, Europe, General Cavoli. If the US pulled out, this would drop to half. Europe would need to have an operational rapid reaction force of at least 120,000 well trained, equipped and fully interoperable soldiers and be able to replace the US commanders and specialist personnel in the NATO command structure. This extensive command structure developed and reorganised over seven decades does not need to be abandoned but operated by Europeans (and Canadians) instead. The uncertainty about Trump’s long-term intentions makes European planning a matter of guesswork or of how much risk Europe can live with. Yet, what is clear is that Europeans now realise that they have to spend much more and much faster than they originally expected. The current EU spending surge is planned for a four-year timeframe up to the negotiation on the next EU financial framework in 2028. But this is not a surge but a marathon during which the member states will need to maintain their enhanced levels of investment for years to be able to deter and defend against Russia, as well as increase their resilience to hybrid warfare attacks and other types of threat such as terrorism or missile and critical infrastructure attacks. Getting everyone on board behind this effort will be difficult too. Immediately after the summit, Poland announced that it will aim to reach 4.7% of GDP for defence spending this year. But seven EU member states still have not reached the current NATO 2% target. Poland has called for a new NATO target of 3% – to be agreed at the NATO summit in the Hague in June). In a speech to the Polish Parliament, Prime Minister Tusk announced a new national registration plan for military training (initially voluntary) and that Poland would withdraw from international conventions on anti-personnel land mines and cluster bombs to have more flexibility in a conflict with the Russian army. The country is also building air raid shelters. Yet, elsewhere in Europe, particularly in the south, threat perceptions and the sense of urgency are very different. Italy was one of the most vociferous critics of the EU fiscal rules limiting defence spending. Now that these are being lifted, it will no longer have an excuse not to make a bigger effort.

Finally, the summit stressed the need to work in complementarity with “like-minded” partner countries and with NATO. Von der Leyen stated that EU industrial policy must be aligned with NATO’s capability targets and requirements. This is a helpful nod to those non-EU allies, such as the UK, Norway, Canada and Türkiye who were involved in the emergency European meeting in London just a few days prior to the Brussels summit, including the NATO Secretary General, Mark Rutte. Von der Leyen and Council President, António Costa, organised a debrief the day after the summit with these partner countries to fill them in. The advantage of an intergovernmental approach to EU defence spending is that it will potentially be open to other countries to participate. The UK, Norway, Canada and Türkiye all have advanced defence industries and technology bases and so the mutual benefits of working together on rearmament and specific capabilities programmes are obvious. Naturally, EU enthusiasts would wish that all 27 EU member states would work together on creating a genuine EU Defence Union. But given past differences on collective borrowing, disputes over budget priorities and attitudes towards Russia, this sense of common purpose is likely to be lacking. Creating new treaties in the current polarised political landscape and requiring referendums in some of the member states is not appealing to an EU leadership that needs to move fast. So an avant-garde of the willing working alongside the EU institutions is the most realistic second-best option. Yet, given that Donald Trump clearly despises the EU and puts no value on the historic process of European integration, and will link EU defence efforts to trade policy and his culture war against EU regulation, it is probably a good thing that this defence effort is ‘European’ in the broad sense (including the UK, Türkiye and Norway) and not solely ‘EU’ and therefore more difficult for Trump to attack. This is at least worth the try.

Coming out of the European summit last Thursday, it is clear that the future of European defence and above all Europe’s future ability, to defend itself by itself will depend on the skilful management of a triangular relationship of NATO, the EU and, bridging them in the middle, the emerging coalition of the willing representing the wider Europe plus Canada. Getting the best synergy and results out of this triangle and making them mutually reinforcing is the new great challenge for Europe’s diplomats and all those trying to preserve the concept of the liberal, rules-based West.

Of course, money may be the sinew of warfare but it is only half the story. Now that the money will be forthcoming, the other vital pieces of the jigsaw need to be put in place. Extra cash by itself will produce little. EU member states still spend 80% of their defence budgets nationally and multinational programmes are the exception rather than the rule. Working with NATO planners, EU officials will need to define the best way forward to fill the crucial capability gaps and secure buy-in from a critical mass of participants in research and development (R&D), testing, contracting and production. Building on existing initiatives like the German-led Sky Shield missile defence initiative or the joint missile systems produced by the pan-European company, MBDA (jointly owned by Airbus, BAE and Leonardo) may be more practical than starting new high-tech projects from scratch, as these can take 20 to 30 years to move from drawing board to the military front line. Joint ventures with US defence contractors can help to access important US technology and components quickly, and help to build support for the European defence efforts within US industry, which otherwise would probably complain to the administration about European protectionism. European publics are being asked to make economic sacrifices for national security, but their forbearance will be short-lived if the extra money is wasted (as is easily done in high performance weapons systems), or if the EU is unable to reduce its current 170-odd different major weapons programmes or induce its 2,500 defence companies to consolidate and pool R&D, specialist design and production skills and raw materials. Moreover, the EU will need an intensified dialogue with its defence companies to see to what extent they are capable of absorbing all this new investment money. It may be good for their soaring share prices but do they have the capacity to increase production quickly? The lessons of the Ukraine war thus far, where the EU has had to go onto global markets to source shells and ammunition for Kyiv because of supply and production bottlenecks at home, have not been encouraging. So far, the industry has been quick to receive new orders but within its current production cycle, which means delays and a drip feed of new weapons and military equipment. The EU has to work with industry and incentivise it to retool and expand production lines now. Finally, as armies are embedded in national culture and civil society, increased defence production has to go hand-in-hand with more public participation in national defence and security activities. Poland, as mentioned already, is leading the way here, and other EU member states may want to look at national military or civil defence service training programmes. It would be ironic if Germany became the largest EU military spender but retained a post-1989 strategic culture with no National Security Council and a distrust of hard power and military service, favouring diplomacy and humanitarian aid. Fostering a strategic culture within German society will be a task for the new Merz-led coalition almost as important as knocking the Bundeswehr into combat-ready shape.

After the British victory at El Alamein in 1942, Churchill proclaimed that this “was not the end (of the Second World War). It’s not even the beginning of the end. But it is perhaps the end of the beginning”. That seems to be where we are now at with European defence. A long and painful winding road lies ahead of us. But the route cannot be avoided.

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