If there’s one thing humanity and life on earth really can’t afford at this point, it’s another major military industrial complex (MIC). But that’s what’s coming. Or at least the financing is getting worked out as Europe deals with its latest emergency following President Trump’s high profile attacks on the Transatlantic alliance. Attacks that aren’t limited to his historically undiplomatic televised meeting in the White House with Ukrainian president Volodymyr Zelenskyy. A televised humiliation of Zelenskyy that made clear the post WWII Transatlantic alliance was under reconsideration by the Trump administration. An EU debate over how to build a MIC of their own is now taking place at an emergency pace. A new era of security independence has begun for the European community and there’s no time to spare in getting started on building it. Or at least that’s the narrative that has emerged as the EU once again deals with a percieved existential crisis. A new ‘defense’ crisis but also the same old debt and austerity crisis that never seems to end.
That is the incredible story suddenly unfolding following the televised humiliation Ukrainian president Volodymyr Zelenskyy along with Trump’s growing threats to ignore NATO obligations for NATO members that aren’t spending enough on their militaries. Trump’s message has been received and now the EU has decided to build a MIC of its own. And not just some sort of of short-term emergency military spending over the course of a few years. We are talking about much higher military spending for potentially decades into the future. That’s the significance of the big EU-level negotiations underway: decisions are being right now that could dramatically expand EU military spending for decades to come. This really is a very big deal.
And, of course, this isn’t just a story about the financing of a new continental military industrial complex. The EU is a political and monetary union that has been going through some pretty intense growing pains in recent decades, after all. Growing pains centered around debts and deficits and the overarching question of just how deep of a union is the EU, ultimately. Is the EU primarily a union of close trading partners, where each member state retains a high degree of fiscal independence? Or is the EU going to ultimately resemble something closer to the United States of Europe, with not just a close trading union but jointly shared budgets and fiscal liabilities? It’s a set of questions that was at the core of much of the debate that defined the EU’s response to the post-2008 eurozone crisis, with the answer seemingly being closer to a vision of separate independent member states with as little joint pooling of fiscal responsibilities and liabilities as possible. Germany’s Ordoliberal economic theories — theories that mandate strict budget constraints and austerity as the recipe for long-term economic success — won the day, with proposals like the joint financing of emergency financial funds consistently batted down and rejected. The EU has, until now, been union of financially independent member states, albeit one where most of the members share as common currency. That’s the New Normal that emerged from the crises of a decade ago.
It’s that model of strict budget constraints paired with only partially-shared liabilities that is being turned on its head. Sort of. Old habits die hard. As we’re going to see, the strict budget limits are going away, selectively, with the goal of raising deficits for the expressed purpose of increasing defense spending. Forget about increasing those deficits for more healthcare or education. The additional debt is to be spent on missiles and artillery. The proposals already put on the table by EU Commission President Ursula von der Leyen include 650 billion euros in new defense spending through the loosening of fiscal restraints over the next four years. That part of the proposal appears to have unanimous support of the heads of EU governments so far.
It’s the other big proposal — 150 billion euros in loans to EU members for defense spending — that is proving to be more controversial thanks to the fact that these loans would be financed at the EU level and, therefore, would provide cheaper borrowing rates for the countries that partake in the loans than they would have received on their own. Which is a form of jointly issued debt, but really a rather tepid form. These loans will still need to be paid by exclusively by the member states that accept them. Still, it’s somewhat remarkable that even that is under serious consideration. We are told this part of the plan has been tabled for further consideration.
What’s even more historic about the proposed 150 billion euros in defense loans is the fact that Germany’s leadership appears to be very much behind the proposal. As we’ve seen, jointly issued debt is one of those red lines Germany’s establishment has long resisted. And successfully resisted. That’s part of what makes this historic defense spending proposal such a potentially big deal.
But the German plans for these loans become even more surprising when we learn about a dispute between France and Germany that has already emerged over the proposal: the loans wouldn’t just be blank checks for defense spending. Instead, the loans are to be used for specific procurements which will require EU approval. In fact, EU members are to be given a list of sophisticated and expensive military hardware drawn up by the EU Commission of what is deemed acceptable purchases for the loans. But while France’s Emmanuel Macron is insisting that the loans be used for the purchasing of military hardware built by EU member states, outgoing German Chancellor Olaf Scholz recently argued that non-EU member like the UK, Norway, Switzerland, or Turkey should be potential recipients of the loans too.
And as we’re going to see, it appears Scholz’s views are largely aligned on this matter with incoming Chancellor Friedrich Merz. The German establishment is remarkably open to the EU Commission becoming a kind of NATO-wide defense financier. But the German ambitions don’t stop there. Because it at the same time this emergency rushed EU-level debate has ensued, Germany has been engaged in a parallel rushed emergency dialogue of its own. A dialogue that would effectively lift Germany’s own internal budget constraints completely for defense spending. Indefinitely. Yes, Germany wants to permanently remove its own debt and deficit caps for military spending forever. At least that’s the talk at the moment. The specific numbers getting thrown around by German politicians at that point include a proposal for 800 billion euros in new German military spending over the next decade. The spending would be in special funds and therefore ‘off the books’ when it comes to Germany’s strict budget constraints. Keep in mind that Germany passed a constitutional ‘balanced budget amendment’ in 2009 that imposes extra internal budget rules that other EU members don’t have to deal with. That’s part of the historic nature of Germany’s stance on these matters. Germany’s establishment is on the cusp of creating a giant defense-spending loophole. Merz and Scholz appear to be intent on using the SPD’s outgoing parliamentary super-majority — which expires on March 25 — to put these views into law, which is a recipe for very rapid negotiations, and probably some giant concessions.
But Germany’s big plans aren’t limited to its own defense spending. The German government is also now pushing to make the big EU-level plans even bigger. Because the proposed lifting of the budget rules to allow for an additional 650 billion in additional defense spending is just a four year proposal. In other words, those nasty budget rules are going to kick back in. Rules that will apply to the now-higher debt-to-GDP ratios the EU members will have acquired. Which is a key detail to keep in mind here: there is a built in ‘rug pulling’ mechanism to this entire plan. The debt rules are only temporarily lifted. And that’s where Germany’s proposal comes in because Germany is calling for a much longer period than just four years. How long? That’s unclear. But Germany is now calling for a “long term” exemption of military spending from the EU’s debt rules.
Other proposals include all sorts of modifications to existing EU structures to reorient for defense spending. For example the EU’s regional cohesion funds — special funds set up to deal with the inequality in the EU and that invest more heavily in the poorer EU members — are being discussed as a possible source of defense funds. Redirecting the remaining unspent COVID relief founds are also under discussion. In fact, it’s important to realize that the EU was just in the process of returning to an era of harsh austerity mandates after several years of reprieve due to the COVID pandemic. As we’re going to see in the first article except below, it was just June of 2024 when the EU sent out warnings to seven EU members that disciplinary actions were going to be taken if they didn’t reduce their deficits soon, the first time such threats had been made since 2020.
Additional ideas include creating a European Savings and Investment Union that would serve as a reservoir for excess EU private savings that could be directed for defense-related financing. And then we get to a proposal that is under discussion although it wasn’t part of EU Commission Von der Leyen’s recently endorse plan: the creation of a “rearmament bank”. It’s part of a larger plan to create a financial/credit environment that is friendlier towards the defense sector and able to provide financing to companies investing in new defense products. The idea is to create a bank that has EU member states as shareholders will issue AAA-rated bonds that can be used for quickly raising cheap capital that can be lent out to the defense sector. Remarkably, such a bank was just days before Von der Leyen made her big proposal: the Defence, Security and Resilience Bank (DSR Bank) was just formed, with plans to raise 100 billion pounds in capital and to eventually issue AAA-rated bonds to raise capital for defense-related lending. Importantly, the DSR Bank isn’t just planning on focusing on the EU. It’s open to lending to firms across NATO and even allied nations in the Indo-Pacific. Which, along with the German ambitions to make loans to non-EU countries, is hint that we aren’t just looking at the creation of a new EU-Military Industrial Complex. This is bigger than the EU. And potentially includes a much larger role for the euro in the global financial and debt markets.
But this proposed new MIC isn’t an unprecedented EU project. It’s also arguably going to be the biggest debt trap yet faced by EU members. Especially those already struggling with high debts and facing possible punishment. After all, no one is proposing a permanent suspension of the EU’s strict debt and deficit rules. The default eventual outcome is going to be austerity unlike anything the EU has imposed before. Extra high debt calls for extra high austerity. Those are the rules. Maybe that extra austerity will come in four years. Maybe a decade. Maybe longer. But it’s coming. And if you’re assuming that these rules will somehow be fixed in the interim to account for the new reality, don’t forget that one of the big features of the EU is how hard it is to make big changes like this happen. In other words, any plans that are predicated on ‘fixes’ many years later are highly delicate plans. Which just might be the plan.
Also keep in mind one of the other historic stories looming over all of this: the longstanding EU debate over the creation of a formally integrate EU Army. And it just so happens that EU President Ursula von der Leyen has long been a big champion of the idea. Which is all the more significant since she was Germany’s Defense Minister while she was doing so much of that championing. Recall how, back in 2015, then-Defense Minister Von der Leyen issued the statement that “our future as Europeans will one day be a European army”, although she added “not in the short term”, in response to then-EU Commission President Jean-Claude Juncker’s calls for the formation of an EU Army. By March of 2017, France was talking about extending its nuclear umbrella to the rest of the continent while Defense Minister Von der Leyen was calling for a major German military build up in response to both then-President Trump’s demands for higher spending from NATO members but also his public questioning of the need for NATO. And in September 2021, Von der Leyen, now serving as EU Commission President, included a call for the formation of EU military battlegroups in her State of the Union address. Some sort of EU-level integrated military has been openly pondered by Von der Leyen going back at least a decade now. And here we are, with the EU Council having just unanimously backed Von der Leyen’s 800 billion euro four year package and Germany seemingly lobbying for something much bigger.
And on some level, this really is all thanks Donald Trump’s insane antics. He truly has shocked and awed the world. And keeps on shocking. Day after day. Pathologically and without any clear ability to stop the shocking. Leaving a giant global leadership vacuum waiting to be filled. This ‘Trump untethered’ experience has the world now openly wondering if the US is going to remain in the leadership role, and as we can see, one direct result of that giant leadership vacuum has been turning what would have been politically untenable military spending suddenly very tenable in the EU. And presumably not just the EU. All sorts of military alliances are going to be in question in coming years. Again, Trump doesn’t actually appear to be capable of stable leadership at this point. We’re entering a kind of Caligula period for the United States and it’s very unclear how long this is going to last. And that’s all why one possibility to keep in mind is the role the US dollar plays as the default currency for international commerce. Blowing up global alliances at the same time he blows up the US deficits with more giant tax cuts and guts the IRS could have unexpected consequences on the role of the dollar. And that where something like the significant growth of EU euro-based debt markets could become a potentially significant development with respect to the dollar’s role in the world. Because while there’s little immediate risk to the dollar’s role — it’s just too dominant — the explosion of EU sovereign debt as Europe builds a military industrial complex of its own is one of those things that could open up new opportunities for the euro’s role in international trade. Part of the dollar’s strength as the dominant global reserve currency comes from the sheer volume of dollars and dollar-based debt instruments floating around the globe. That’s part of why it’s so widely used. World is flooded with dollars used all over the place outside the US economy and yet the dollar remains relatively stable and has a rock solid credit rating. It’s all part of the US’s ‘magic’ that Trump is squandering so rapidly. What’s going to happen if the US goes into an extended period of moral and fiscal profligacy? The dollar can’t really be dethroned in the short-term. How about a really wild medium-term?
Big questions like that are part of the context of this broader story of the EU’s big military ambitions. The euro is the second most popular reserve asset after the dollar. Or was, before gold overtook the euro as the second most held reserve asset some time in 2024. The euro is well positioned to benefit as an alternative reserve asset if international taste for the dollar sours. But the more popular the euro gets, the more euro-denominated debt instruments and euros you’re going to want floating around to satisfy that growing global demand. More euro debt is needed if the euro’s role is going to grow. So of course it’s military debt. But keep in mind that role both more euros and more euro debt play as in the euro’s role as a reserve currency when taking in the sudden political appetite for much higher deficit spending. Something totally anathema previously. All that new debt will serve another purpose on the global stage should the US not be capable of righting itself after this second round of Trump’s madness. With a shiny new military industrial complex to project onto the world stage.
So are we looking at the latest EU debt trap waiting for countries like Spain and Italy to fall into? Short-term military stimulus spending followed by years of brutal social austerity? Or are we looking at the opening stages of a much long-term military stimulus that doesn’t result in brutal austerity and perhaps even serves as the kind of major sustained economic stimulus many EU members have long been clamoring for? Time will tell. It would be quite a statement about priorities if defense spending is the only allowable form of sustained stimulus for the EU but it’s possible that’s what we’re looking at. If past is prologue it doesn’t bode well. A past filled with harsh austerity mandates but also a past filled with war and all the other consequences of massive military spending. The world doesn’t need a new major military industrial complex. But it just might get it anyway, with Germany at the lead.
Ok, here’s a summary of the article excerpts we’re going to cover:
1. June 19, 2024 France and six other countries face EU budget discipline measures:
A quick look back at the EU debate that was taking place before Donald Trump shock and awed the EU into emergency plans for an independent future. It was more or less the same debate we’ve seen for years in the EU. A debate over when and how much punishment to impose on France and six other EU members for excessive deficits. As the article notes, the penalties were being deployed for the first time since 2020, when the COVID pandemic triggered their suspension. That four year suspension was over and the austerity punishment regime was turning back on.
2. January 10, 2025 How Europe’s fiscal rules are strangling growth:
And as we can see in this January 2025 piece by economist Paul De Grauwe, the resumption of the austerity as mandated by the EU’s Stability and Growth Pact (SGP) was already looking like a serious new drain in the EU economy. Part of the gross absurdity of the situation is that Europe had already gathered more than enough evidence from its past experiences with austerity to soundly conclude that austerity isn’t a recipe of short-term pain for long-term gain. It’s a recipe for short-term pain that only exacerbates long-term pain and hampers overall long-term economic growth. And, in fact, when you look at the relatively low interest rates being offered to EU government’s, the economic rationale for public debt to make long-term public investments was overwhelming. And yet, despite austerity’s awful track record, the EU was ready to impose another round of it.
3. February 17, 2025 EU-wide borrowing for defense a ‘no-brainer,’ says Spain’s finance minister:
Jump forward into February, weeks into Donald Trump’s second term, and all of the sudden the resumption of austerity has been replaced by ramping up defense spending as the EU’s top priorities. And this was even before the televised humiliation of Volodymyr Zelensky. But the EU wasn’t just looking for ways to dramatically increase its defense spending. It needed to find a way to increase that spending without breaking its strict budget rules. A plan to do just that was already under discussion with two key components: 1. Removing defense spending and debt from the formulas that determine EU penalties for elevated debt and deficits. And 2. Generating loans to EU members for military purchases that can be considered ‘off the books’ and therefore also not applicable to the EU’s harsh rules. There are other proposals but those are the two big plans. And as we’re going to see, it’s a plan that had EU’s more heavily indebted members somewhat underwhelmed. Spanish finance minister Carlos Cuerpo expressed only lukewarm enthusiasm towards the first plan of just lifting the punishing budget rules for defense spending. But that second proposal — direct ‘off the books’ loans to EU members for defense purchases — was a clear ‘no brainer’ according to Cuerpo. In part because these proposed direct loans to individual EU members would be be jointly financed at the EU-level, promising extra low interest rates. The loans would still have to be paid back, but even their joint-financing was too much for the finance minister of the Netherlands, who instead called for cuts in other areas of spending to free up more money for defense “because the money is not free,” as he put it. In other words, the Netherlands wants more austerity to pay for the military. Remarkably, Germany — the one EU member that has, until now, been a guaranteed backer of austerity — has come out surprisingly in favor of the entire plan, including jointly-financed loans.
4. February 28, 2025 Italy says defence spending hikes should also aim to boost growth:
And as this piece from Feb 28 — the day of the televised humiliation of Zelensky — makes clear, for the EU member states like Italy that has already been put on notice over their elevates debt levels, the prospects of higher defense spending mandates represented an opportunity but also a risk. An opportunity to stimulate their economies in ways that simply aren’t normally available in the austerity-centric EU. But also a risk that not enough help will be provided. Help like financing all this new defense spending through commonly issued debt.
5. March 7, 2025 Takeaways from the EU’s landmark security summit after Trump said Europe must fend for itself:
It truly was a landmark summit. The EU Council of all 27 heads of state unanimously backed EU Commission President Ursula von dey Leyen’s grand proposal. A proposal with two key pieces: 650 billion euros in additional defense spending that wouldn’t trigger the EU’s deficit rules along with 150 billion euro in loans. Although, as we’ll see, the loans part of the proposal was tabled for further discussion, with France calling for a larger loan package and Spain calling to make the loans grants instead. What isn’t stated is the opposition from members who would prefer to see no loans at all, but we can be confident that opposition is present.
6. March 4, 2025 EU ponders 800 billion euro plan to beef up defenses to counter possible US disengagement:
Another quick look at Ursula von der Leyen’s big 800 billion euro proposal, including important details like the fact that the 150 billion euro loans would be controversially backed by the common EU budget. Which is another way of saying jointly-backed loans. And as we can see, this plan isn’t simply designed to free up money for extra defense spending if EU members choose to do so. The plan is to effectively force all EU members to hit at least a 3% GDP target for defense spending, well above the 2% NATO minimum and far above the sub‑2% GDP levels many EU members are currently at. This is effectively a plan to mandate massive new deficit spending without triggering the EU’s notoriously strict deficit rules. Budget rule gimmickry must be deployed, hence the plan.
7. March 8, 2025 France and Germany clash over ‘buy EU’ weapons:
And as we’re going to see, the disputes over the 150 billion euro loan package isn’t limited to the size of the package or whether or not it involves jointly-backed debt. Germany and France are in disagreement over not just whether or not the purchases need to be made inside the EU but whether or not non-EU states can participant directly in the loan program. While France is demanding that the loans be used to exclusively procure military hardware built in the EU, Germany doesn’t want those constraints. Beyond that, outgoing German Chancellor Olaf Scholz has already argued that the loans should be open to non-EU partners like Britain, Norway, Switzerland, or even Turkey. And while Scholz might be the outgoing Chancellor, that shouldn’t be interpreted as an indication that he doesn’t have a lot of pull inside the German establishment in these discussions. As we’re going to see, the incoming CDU-led German government is planning on partnering with Scholz’s SPD and passing major overhauls to Germany’s own deficit rules using the SPD’s outgoing parliamentary supermajority before the new German parliamentary session begins on March 25. This is very much a joint CDU/SPD effort inside Germany right now.
8. March 5, 2025 How can the EU unlock up to €800bn for its ‘rearmament plan’?:
A look at a some of the other parts of the big new defense package beyond the headline 800 billion euros in new spending. Proposals like expanding the European Defence Industry Programme (EDIP), an entity that doles on direct grants for military spending. Or the creation of a kind of EU-wide defense savings union designed to ensure more of the EU’s private savings are channeled back into the EU financial sector and made available for defense-related commercial activity. And then there’s an idea under discussion that didn’t make it into Von der Leyen’s proposal but appear to actively moving forward: the creation of a “rearmament” bank, which will be backed by nation state shareholders and set up to provide cheap finance for the EU defense companies. Although, as we’ll see, this new rearmament bank might not just be an EU-centric entity.
9. March 3, 2025 New defence bank launched to attract capital and fix ‘disastrous’ European procurement:
A closer look at the newly formed entity that sounds exactly like the “rearmament bank” under consideration: the Defence, Security and Resilience (DSR) Bank, which was formed days before the EU Council unanimously backed Ursula von der Leyen’s. Interestingly, while this new DSR Bank is focused on EU defense financing, it has ambitions that go far beyond the EU including the US, UK, and Indo-pacific allied nations.
10. March 5, 2025 Von der Leyen’s ‘Rearm Europe’ plan and the holes in it:
A more critical look at Von dey Leyen’s big proposal and some of the ‘holes’ in the plan. Holes that look more like traps when you look closely. Because as the piece reminds us, while the proposed initiative will make it easier for EU members to rapidly accrue more debt, that debt will have to be paid back eventually. And with Von der Leyen’s 800 billion euro plan only being a four year plan, it’s possible the EU could be returning to even more intense austerity measures sooner rather than later. Are we looking at the start of a new era in EU defense spending? Or the start of the biggest EU austerity trap yet to be deployed? Time will tell...
11. March 4, 2025 Germany’s Friedrich Merz plans ‘double bazooka’ for defence and infrastructure:
Big plans are under debate. Hurried debate. But these debates aren’t just happening at the EU-level. Germany is undergoing an emergency debate over defense spending of its own, with plans for 800 billion euros in additional German defense spending over the next decade. How will Germany manage this spending without violating its own constitutionally mandated debt brakes? By allocating this spending in special “off the books” funds that won’t count towards Germany’s strict budget rules. It’s pretty remarkable just how ‘flexible’ these strict rules can become when military spending is on the table. But that’s what’s happening. The catch is that the reform of Germany’s budget rules to allow for all these changes will require the support of the outgoing SPD-led parliamentary supermajority, which goes away on March 25. So the outgoing and incoming German administrations have less than two weeks to hammer out the details of this historic shift in not just German defense spending but a fundamental shift in Germany’s relationship with debt and deficits. Also keep in mind that Germany is committing to a decade of extra defense spending at the same time the EU is deliberating over Von der Leyen’s four year plan. Which is hint that this four year plans is probably going to have a number of extensions. With more and more debt accrued in the process...debt that will eventually have to be paid back.
12. March 5, 2025 Germany seeks ‘long-term’ EU exemption for defence spending:
Finally, we’re going to take a look at the remarkable German proposal made to the EU: don’t just lift the budget constraints for defense spending for four years. Do for the ‘medium- or long-term’. In other words, make defense spending effectively permanently exempt from the EU’s strict budget rules. Well, maybe not permanently. The debt will have to be paid back eventually. But Germany is now backing a much bigger EU-wide defense splurge that could go on for the foreseeable future. Which is a recipe for A LOT more euro-denominated sovereign debt, marking a fundamental flip flop from Germany’s longstanding debt aversion.
That’s the historic story we’re going to exploring in this post. A political and economic union that has long been defined by the prevailing Ordoliberal economic orthodoxy and the brutal austerity that orthodoxy demands has apparently just flipped that orthodoxy on its head. Maybe. We still don’t know what’s going to happen when all this defense-related extra debt is accrued. We know what would have happened in the past: brutal austerity. But we don’t know if that’s what the future holds. Just as we don’t know what the future holds for the role the United States will be playing on the global stage. Is the US entering an extended ‘go it alone’ phase? Will new wars erupt that involve the EU? Will Donald Trump even complete his current term in office? And what will a post-Trump political environment for the US entail? Major questions loom over this story. But there’s one thing becoming increasingly clear: all the claims about the dire need to slash deficits and impose austerity were bullshit. When the EU wants to dramatic expand its deficits, it’s able to do so and has been able all along. We already knew that. It’s just more ‘in your face’ now.
The EU in 2024: The Pandemic is Over. It is Time for Austerity Again
Ok, first, here’s a look at the EU’s mood when it came to budgets and deficits back in June of 2024, when the austerity rules that had been temporarily suspended during the COVID-emergency were set to come back into force. And as seven EU members were warned — France, Belgium, Italy, Hungary, Malta, Poland and Slovakia — they had better get their deficits under control or austerity was going to be imposed. This was despite the fact that the EU authorities issuing these warnings acknowledge that the deficits were mainly a legacy of the pandemic plus skyrocketing energy prices as a result of the war in Ukraine. It was a return to the Old Normal, with debts, deficits, and austerity mandates operating as the EU’s top priorities:
Reuters
France and six other countries face EU budget discipline measures
By Jan Strupczewski
June 19, 2024 12:44 PM UTC
UpdatedBRUSSELS, June 19 (Reuters) — The European Commission said on Wednesday that France and six other countries should be disciplined for running budget deficits in excess of EU limits, with deadlines for reducing the gaps to be set in November.
The move by the European Union’s executive arm is likely to constrain any plans for extra spending by the French government that emerges from a June 30-July 7 election.
...
The other countries singled out by the EU executive arm, which is the enforcer of EU laws, are Belgium, Italy, Hungary, Malta, Poland and Slovakia. Their deficits are mainly a legacy of the COVID pandemic and the energy price crisis that followed Russia’s invasion of Ukraine in 2022.
Markets closely watch Italy, the 27-member EU’s third-biggest economy, because of its very high debt of around 138% of GDP and slow growth of less than 1%, and Rome was quick to reassure markets it would do the right thing.
“We are aware that, given the context we find ourselves in, it is necessary to maintain a responsible approach in planning and managing budget policy,” Economy Minister Giancarlo Giorgetti said.
The European Union will use its excessive deficit procedure for the first time since it suspended its fiscal rules, aimed at preventing excessive borrowing, in 2020 as governments struggled with the impacts of COVID-19. It has since reformed the framework to take into account the new economic realities of high post-pandemic debt.
France had a budget gap of 5.5% of gross domestic product in 2023, forecast to narrow only slightly to 5.3% this year — still well above the EU deficit limit of 3% of GDP.
French public debt was 110.6% of GDP in 2023 and the Commission expects it to increase to 112.4% this year and 113.8% in 2025. That is almost twice the EU limit of 60%.
Talks between Paris and the Commission on how quickly to reduce France’s deficit and debt will take place in the coming months after the EU executive proposes to Paris a seven-year programme to put debt on a downward path.
PROPOSALS
The Commission will kick off discussions this Friday by sending its own proposals for possible fiscal consolidation to governments, which will each respond with their own scenarios until a deal is reached.
“Whatever government is formed after the election on July 7 will face the obligation to work with the Commission to define a medium term strategy,” a French finance ministry official said.
“Eventually it will have to produce a strategy coherent with the new Stability and Growth Pact,” the official, who asked not to be named, said.
...
In theory, if a government does not consolidate its finances as agreed, the Commission could move to cut it off from EU post-pandemic funds and money to equalise standards of living in the bloc, which could mean billions of euros.
But EU officials said that because the deficits and high debt were all a result of external shocks to the whole EU, not individual policy mistakes, the possibility of fining any government did not apply.
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“The European Union will use its excessive deficit procedure for the first time since it suspended its fiscal rules, aimed at preventing excessive borrowing, in 2020 as governments struggled with the impacts of COVID-19. It has since reformed the framework to take into account the new economic realities of high post-pandemic debt.”
Austerity is back! That was the ominous news for EU capitals back in June of 2024. The COVID pandemic economic emergency had passed and a resumption of strict budget discipline was set to resume. That the deficits were, themselves, largely a consequence of the pandemic and rising energy prices that resulted from the cutoff of Russian natural gas was seen as beside the point. More austerity was on the agenda for countries like France, Belgium, Italy, Hungary, Malta, Poland and Slovakia. France was even in talks with the EU Commission over a seven-year debt reduction program:
...
The other countries singled out by the EU executive arm, which is the enforcer of EU laws, are Belgium, Italy, Hungary, Malta, Poland and Slovakia. Their deficits are mainly a legacy of the COVID pandemic and the energy price crisis that followed Russia’s invasion of Ukraine in 2022.Markets closely watch Italy, the 27-member EU’s third-biggest economy, because of its very high debt of around 138% of GDP and slow growth of less than 1%, and Rome was quick to reassure markets it would do the right thing.
...
France had a budget gap of 5.5% of gross domestic product in 2023, forecast to narrow only slightly to 5.3% this year — still well above the EU deficit limit of 3% of GDP.
French public debt was 110.6% of GDP in 2023 and the Commission expects it to increase to 112.4% this year and 113.8% in 2025. That is almost twice the EU limit of 60%.
Talks between Paris and the Commission on how quickly to reduce France’s deficit and debt will take place in the coming months after the EU executive proposes to Paris a seven-year programme to put debt on a downward path.
...
Flash forward to January of 2025 — just weeks before President Trump’s humiliation of Ukraine that kickstarted all of this emergency defense spending talk — and we can see how the resumption of the austerity as mandated by the EU’s Stability and Growth Pact (SGP) was already looking like a serious new drain in the EU economy. But as the following column by economist Paul De Grauwe points out, part of the gross absurdity of the situation is that Europe had already gathered more than enough evidence from its past experiences with austerity to soundly conclude that austerity isn’t a recipe of short-term pain for long-term gain. It’s a recipe for short- that only exacerbates long-term pain and hampers overall long-term economic growth. And, in fact, when you look at the relatively low interest rates being offered to EU government’s, the economic rationale for public debt to make long-term public investments was overwhelming. And yet, despite austerity’s awful track record, the EU was ready to impose another round of it:
Social Europe
How Europe’s fiscal rules are strangling growth
The 2024 Stability and Growth Pact reforms entrench austerity and stifle investment—challenging the new EU Commission to reverse Europe’s economic decline.
Paul De Grauwe
10th January 2025Fiscal policies in Eurozone countries have long been shaped by the Stability and Growth Pact (SGP). This framework was conceived as a means to enforce orthodox fiscal rules designed to steer member states towards balanced budgets. Although the SGP was temporarily suspended during the pandemic, it was reintroduced in 2024 with minor, largely superficial, revisions. The recent reforms for instance introduced individualised debt reduction paths with high-debt countries facing debt-to-GDP reductions of at least one percentage point annually on average during the adjustment period.
The core principles of the SGP therefore remain unchanged. The European Commission retains the authority to initiate so-called “excessive deficit procedures” against countries with budget deficits exceeding three percent of GDP. These procedures compel governments to implement austerity measures aimed at gradually reducing deficits, with the ultimate objective of achieving balanced budgets and debt-to-GDP ratios approaching 60 percent.
The effects are harmful. It is increasingly evident that this approach to fiscal policymaking is a significant factor in Europe’s low-growth environment and the widening productivity gap with the United States. The reasons for this are manifold.
First, the SGP is inherently biased against public investment. While the revised SGP permits some public investments to be excluded from regular budget calculations, the bulk of these expenditures must still adhere to the rule that additional public investment should be funded through higher taxes or cuts to other spending. In effect, most public spending cannot be financed through public debt issuance.
This rule contradicts basic economic logic. In the private sector, when a company invests in a productive asset that is expected to generate future revenue, it can finance the investment by issuing debt, provided the anticipated returns exceed the cost of borrowing (including any risk premium). Similarly, when a government invests in public assets—such as infrastructure—that will yield future benefits, it is economically sensible to fund such investments through the issuance of government bonds, as long as the expected returns exceed the borrowing costs.
With government bond yields for most Eurozone countries currently between two and three percent, there is ample scope for public investments to generate returns far exceeding these rates. This is especially critical in today’s context, where the need to build collective energy infrastructure and other public goods essential for a green transition has become urgent.
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Second, the persistent application of the SGP has entrenched a climate of austerity, which has stifled growth and productivity. Although member states were temporarily freed from fiscal constraints during the pandemic, enabling them to increase deficits and debt levels and avert a deflationary spiral, austerity measures were reinstated soon after.
This return to fiscal rigidity has had deleterious effects on both public and private investment. Since the global financial crisis, total investment in the EU has declined by roughly two percentage points of GDP, from 23 percent in 2007 to 21 percent today. This decline not only hampers current economic activity but also diminishes the economy’s long-term growth potential, as new capital investments often embody advanced technologies that drive productivity improvements. The Draghi Report has vividly illustrated how Europe’s productivity growth has lagged behind other industrialised nations, particularly the United States.
The implications are clear: austerity policies have long-term consequences for the supply side of the economy. By reducing investment, they constrain potential output and curtail productivity growth. Much of Europe’s fiscal strategy has been dominated by the belief—or ideology—that growth can only be achieved through structural reforms aimed at making the supply side of the economy more flexible and efficient. Yet, there is scant evidence to support the notion that such policies significantly enhance long-term growth. At the same time, the crucial role of demand-side policies in fostering sustained growth has been largely disregarded.
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This article is part of the Project“EU Forward”Social Europe runs in cooperation with the Friedrich-Ebert-Stiftung.
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“How Europe’s fiscal rules are strangling growth” by Paul De Grauwe; Social Europe; 01/10/2025
“Fiscal policies in Eurozone countries have long been shaped by the Stability and Growth Pact (SGP). This framework was conceived as a means to enforce orthodox fiscal rules designed to steer member states towards balanced budgets. Although the SGP was temporarily suspended during the pandemic, it was reintroduced in 2024 with minor, largely superficial, revisions. The recent reforms for instance introduced individualised debt reduction paths with high-debt countries facing debt-to-GDP reductions of at least one percentage point annually on average during the adjustment period.”
As we can see, the EU entered 2025 having resumed the same old ‘strategy’ of systematically strangling its weakest economies. Economies with debt-to-GDP ratios above 60 percent were facing growing pressure from the European Commission to shift that ratio back in line...without additional public spending and despite the fact that the low interest on public debt make public borrowing and investments an obvious approach. Improving debt-to-GDP ratios can involving growing the GDP too, after all. And yet that public investment strategy is taken off the table with the reimposition of the SGP. It’s once again time for austerity, despite the now established economic damage that will follow:
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The core principles of the SGP therefore remain unchanged. The European Commission retains the authority to initiate so-called “excessive deficit procedures” against countries with budget deficits exceeding three percent of GDP. These procedures compel governments to implement austerity measures aimed at gradually reducing deficits, with the ultimate objective of achieving balanced budgets and debt-to-GDP ratios approaching 60 percent.The effects are harmful. It is increasingly evident that this approach to fiscal policymaking is a significant factor in Europe’s low-growth environment and the widening productivity gap with the United States. The reasons for this are manifold.
First, the SGP is inherently biased against public investment. While the revised SGP permits some public investments to be excluded from regular budget calculations, the bulk of these expenditures must still adhere to the rule that additional public investment should be funded through higher taxes or cuts to other spending. In effect, most public spending cannot be financed through public debt issuance.
This rule contradicts basic economic logic. In the private sector, when a company invests in a productive asset that is expected to generate future revenue, it can finance the investment by issuing debt, provided the anticipated returns exceed the cost of borrowing (including any risk premium). Similarly, when a government invests in public assets—such as infrastructure—that will yield future benefits, it is economically sensible to fund such investments through the issuance of government bonds, as long as the expected returns exceed the borrowing costs.
With government bond yields for most Eurozone countries currently between two and three percent, there is ample scope for public investments to generate returns far exceeding these rates. This is especially critical in today’s context, where the need to build collective energy infrastructure and other public goods essential for a green transition has become urgent.
...
And as economist Paul De Grauwe reminds us, we now have the data we need to conclude that the austerity that has been imposed on the EU since the financial crisis of 2008 and the ensuing eurozone crisis really has been a long-term drain, with total investment in the EU having declined by roughly two percentage points of GDP since 2007. That’s the opposite of what austerity was supposed to do. Oh well:
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Second, the persistent application of the SGP has entrenched a climate of austerity, which has stifled growth and productivity. Although member states were temporarily freed from fiscal constraints during the pandemic, enabling them to increase deficits and debt levels and avert a deflationary spiral, austerity measures were reinstated soon after.This return to fiscal rigidity has had deleterious effects on both public and private investment. Since the global financial crisis, total investment in the EU has declined by roughly two percentage points of GDP, from 23 percent in 2007 to 21 percent today. This decline not only hampers current economic activity but also diminishes the economy’s long-term growth potential, as new capital investments often embody advanced technologies that drive productivity improvements. The Draghi Report has vividly illustrated how Europe’s productivity growth has lagged behind other industrialised nations, particularly the United States.
The implications are clear: austerity policies have long-term consequences for the supply side of the economy. By reducing investment, they constrain potential output and curtail productivity growth. Much of Europe’s fiscal strategy has been dominated by the belief—or ideology—that growth can only be achieved through structural reforms aimed at making the supply side of the economy more flexible and efficient. Yet, there is scant evidence to support the notion that such policies significantly enhance long-term growth. At the same time, the crucial role of demand-side policies in fostering sustained growth has been largely disregarded.
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And just a quick note: keep in mind that Paul De Grauwe isn’t some far left economist. This column was written as part of the Friedrich-Ebert-Stiftung is a German foundation associated with the SPD. In other words, the about critique is a pretty mainstream critique from a German perspective:
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This article is part of the Project“EU Forward”Social Europe runs in cooperation with the Friedrich-Ebert-Stiftung.
...
. That’s a key part of the context of this overall situation: the austerity regime that was just getting underway again in early 2025 was already thoroughly discredited to mainstream economists...but it was still the plan...until it wasn’t...
EU-wide Barrowing for EU-wide Defense: the kind of Plan Spain and Italy can Get Behind. And Germany too?! There Must Be a Catch
Yes, the EU’s priorities have experienced quite the shuffle in recent weeks. The resumption of an austerity-focused agenda ran into a hiccup: President Trump’s high-profile rupturing of the Transatlantic alliance. A rupture that eventually came in form of a televised humiliation of Ukrainian President Volodymyr Zelensky and along with Trump’s repeated threats to ignore the US’s NATO obligations for NATO members that aren’t spending. But even before that televised humiliation, the EU was looking for ways to dramatically increase its defense spending...without breaking its strict budget rules, of course. And as we’re going to see, the EU already has a plan. A plan based on two key components: 1. Removing defense spending and debt from the formulas that determine EU penalties for elevated debt and deficits. And 2. Generating loans to EU members for military purchases that can be considered ‘off the books’ and therefore also not applicable to the EU’s harsh rules. There are other proposals but those are the two big plans.
And as the following article describes, it’s kind of plan that the EU’s more heavily indebted members might not be super enthusiastic about. And, in fact, the finance minister of Spain, Carlos Cuerpo, expressed only lukewarm enthusiasm towards the first plan of just lifting the punishing budget rules for defense spending. But it’s that second proposal — direct ‘off the books’ loans to EU members for defense purchases — that Cuerpo was already calling an obviously ‘no brainer’ to pursue. With on aspect of the direct loan proposal that had him particularly excited: the direct loans would be jointly financed.
Now, it’s important to keep in mind that the ‘joint financing’ of these leans doesn’t mean that all of the EU members will help pay for them. Instead, the ‘joint financing’ comes from the fact that the loans would come from a pool of money that the EU Commission itself would raise from the financial markets and then directly lend to EU member states. In other words, the ‘joint financing’ really just applies to the initial fund-raising, with the presumption that the interest rates on the loans would likely be much better than the rates an individual EU member would get if they were to borrowing the money directly from the markets. But individual EU members will still be responsible for paying the loans back. Still, given the incredible reticence towards pooled debt that we have seen from EU members in the past — e.g. Germany and the Netherlands — it’s pretty notable that any form of jointly-issued debt is being proposed at all.
Now, as we’re going to see, Dutch Finance Minister Eelco Heinen told reporters that the only way to finance higher defense spending would be for politically unpopular budget cuts to take place “because the money is not free.” It’s the kind of response from a Dutch finance minister that we should expect by now. Which is why it’s even more notable that it turns out Germany’s incoming-Chancellor, Friedrich Merz, made his own signals last month that he too was open to jointly issued debt for defense-spending purposes:
Politico
EU-wide borrowing for defense a ‘no-brainer,’ says Spain’s finance minister
The bloc is grappling with a need to increase defense spending, amid U.S. President Donald Trump’s sudden move to end the war in Ukraine.
February 17, 2025 6:44 pm CET
By Gregorio Sorgi, Carlo Martuscelli and Giovanna FaggionatoBRUSSELS — The European Union must explore issuing common debt to finance increasing defense spending, Spanish Finance Minister Carlos Cuerpo told POLITICO.
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Speaking on the sidelines of a gathering of eurozone finance ministers on Monday, Cuerpo said a proposal from the EU’s executive to bend the fiscal rules to allow more spending leeway is not enough to meet Europe’s defense challenges.
He argued instead that issuing common debt to finance “public goods” such as defense and electricity interconnectors is a “no-brainer.”
“There is a clear case there to give continuity to what we’ve been doing with Next Generation EU,” he said referring to the bloc’s €650 billion post-Covid recovery scheme that was financed through common borrowing.
Madrid’s calls for joint debt come as the bloc grapples with U.S. President Donald Trump’s sudden move to end the war in Ukraine — and potentially reduce the American military presence in Europe in the years to come.
In June last year, the European Commission estimated additional defense investment of around €500 billion is needed in the EU over the next decade.
Despite the urgency, the idea of joint debt is still politically toxic for more fiscally conservative states in Northern Europe.
“More common debt is not the way forward,” Dutch Finance Minister Eelco Heinen told reporters on his way into the meeting of finance ministers, known as the Eurogroup, on Monday. In his view, politically unpopular budget cuts must compensate for more defense spending “because the money is not free.”
On the other hand, countries with high debt and overstretched budgets, such as Italy and France, view common borrowing as the only way to increase defense spending without falling foul of the EU’s budget police.
And over the weekend, Friedrich Merz, who is the front-runner to be the next German chancellor after an election on Feb. 23 according to polls, opened the door to joint borrowing.
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Last week Commission President Ursula von der Leyen proposed triggering an emergency clause that would allow military spending to be exempted from the EU’s tightly controlled budget deficit limits.
Cuerpo issued a lukewarm response to this idea. He argued that stretching existing rules, which already grant preferential treatment to defense spending, would equally free up room for investment.
“The end point would be the same. And, therefore, the space would be there for those countries to actually implement those investments,” he said.
However, Cuerpo admitted that “EU fiscal rules in isolation” will do little to address the bloc’s underspending on defense.
He suggested instead expanding the European Investment Bank’s defense-related investments, channeling more private capital and tapping into the European Stability Mechanism that was created to rescue bankrupt countries during the eurozone crisis.
With 1.28 percent of its gross domestic product going toward defense, Spain is the NATO country with the lowest ratio of military spending.
Madrid plans to hit the alliance’s 2 percent target ratio between GDP and defense spending by 2029.
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“Speaking on the sidelines of a gathering of eurozone finance ministers on Monday, Cuerpo said a proposal from the EU’s executive to bend the fiscal rules to allow more spending leeway is not enough to meet Europe’s defense challenges.”
It’s not hard to see why Spanish Finance Minister Carlos Cuerpo felt the need to call for higher EU-wide spending to be financed with jointly-issued debt. With demands for both reigning in deficits AND raising defense spending, EU members don’t have a lot of options. And with the 650 billion euro COVID recovery fund having already established the precedent of commonly issued debt, proposing a similar approach to the sudden calls for much high defense spending only makes sense. It really is a “no-brainer”. But also note the “lukewarm” response of Cuerpo to the idea that had been recently floated by EU President Ursula von der Leyen about exempting military spending the EU’s debt limits. That lukewarm response is going to be important to keep in mind. Because as we’re going to see, the exempting of military spending from the EU’s debt limits is overwhelmingly the plan that was ultimately agreed to:
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He argued instead that issuing common debt to finance “public goods” such as defense and electricity interconnectors is a “no-brainer.”“There is a clear case there to give continuity to what we’ve been doing with Next Generation EU,” he said referring to the bloc’s €650 billion post-Covid recovery scheme that was financed through common borrowing.
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In June last year, the European Commission estimated additional defense investment of around €500 billion is needed in the EU over the next decade.
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Last week Commission President Ursula von der Leyen proposed triggering an emergency clause that would allow military spending to be exempted from the EU’s tightly controlled budget deficit limits.
Cuerpo issued a lukewarm response to this idea. He argued that stretching existing rules, which already grant preferential treatment to defense spending, would equally free up room for investment.
“The end point would be the same. And, therefore, the space would be there for those countries to actually implement those investments,” he said.
However, Cuerpo admitted that “EU fiscal rules in isolation” will do little to address the bloc’s underspending on defense.
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And as the article reminds us, commonly issued debt as long been anathema to the EU’s wealthier members like Germany and the Netherlands. Which is part of what made the fact that Germany’s incoming Chancellor, Friedrich Merz, actually proposed a version of joint debt for defense spending days before Cuerpo’s comments:
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Despite the urgency, the idea of joint debt is still politically toxic for more fiscally conservative states in Northern Europe.“More common debt is not the way forward,” Dutch Finance Minister Eelco Heinen told reporters on his way into the meeting of finance ministers, known as the Eurogroup, on Monday. In his view, politically unpopular budget cuts must compensate for more defense spending “because the money is not free.”
On the other hand, countries with high debt and overstretched budgets, such as Italy and France, view common borrowing as the only way to increase defense spending without falling foul of the EU’s budget police.
And over the weekend, Friedrich Merz, who is the front-runner to be the next German chancellor after an election on Feb. 23 according to polls, opened the door to joint borrowing.
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It was a historically significant declaration by a German leader, made all the more interesting by the fact that this was done in the final weeks of Germany’s elections with Merz’s CDU holding the leader. Joint funding of defense spending is apparently a political winner in Germany. As we’re going to see below, Merz’s calls for increased defense spending include massive new spending for Germany specifically, for years to come.
And as we can see in the following Reuters piece, Italy’s government appears to have had a similar overall response to the proposals to facilitate higher defense spending, with a limited welcome to Ursula von der Leyen’s calls to exclude defence from EU limits on government spending and much more enthusiasm about the idea of jointly issued debt to finance that spending:
Reuters
Italy says defence spending hikes should also aim to boost growth
By Reuters
February 28, 2025 2:30 PM UTC
UpdatedROME, Feb 28 (Reuters) — Any increase in national defence spending should also be aimed at boosting economic growth, Italian Economy Minister Giancarlo Giorgetti said on Friday, as European states grapple with U.S. pressure to shoulder the costs of their own security.
Highly indebted Italy is projecting defence spending of 1.61% of gross domestic product (GDP) in 2027. That is below a current 2% NATO target, which U.S. President Donald Trump wants raised to 5%.
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Giorgetti identified the automotive industry as one sector in which factories could be converted to defence production, saying that could have a knock-on effect in terms of growth.
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Prime Minister Giorgia Meloni this week welcomed a proposal from European Commission President Ursula von der Leyen to exclude defence from EU limits on government spending, but said that more could be done.
Italy has called on the EU to use common debt to pay for higher defence spending — traditionally anathema to the more fiscally conservative northern European EU members such as Germany and the Netherlands.
Daily Corriere della Sera reported on Friday that Italy was considering boosting defence investment to 2.5% of GDP if the EU agrees to exempt such spending from its fiscal rules.
As part of talks at EU level, officials have been discussing the possible use for defence of about 90 billion euros of loans and grants from the EU’s post-pandemic recovery fund that are unlikely to be spent before the planned 2026 deadline.
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“Italy says defence spending hikes should also aim to boost growth” By Reuters; Reuters; 02/28/2025
Highly indebted Italy is projecting defence spending of 1.61% of gross domestic product (GDP) in 2027. That is below a current 2% NATO target, which U.S. President Donald Trump wants raised to 5%.”
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With just 1.61% of its GDP spent on defense, Italy is already well below the 2% NATO target, barely over half the 3% ‘bare minimum’ and less than a third of Trump’s 5% demands. That’s the scale of the increase in defense spending that is being called for her. Reaching that 3% target calls for an 87% increase in spending on Italy’s military. That’s a massive new expenditure for years to come. And while they are just talking about committing to up to a decade of spending like this it’s not as if it ends. It’s only going to increase. We’re talking about financing a whole new continent military industrial complex that didn’t exist before. That’s what they are really negotiating. Which is part of what’s going to make proposals like commonly funded debt so interesting. The concessions made now will reverberate for decades to come:
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Prime Minister Giorgia Meloni this week welcomed a proposal from European Commission President Ursula von der Leyen to exclude defence from EU limits on government spending, but said that more could be done.Italy has called on the EU to use common debt to pay for higher defence spending — traditionally anathema to the more fiscally conservative northern European EU members such as Germany and the Netherlands.
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Common debt has traditionally been anathema to Germany, but it’s not anymore. Or at least those are the political theatrics currently being deployed. And that was rapidly evolving state of affairs in the EU’s quest for higher defense spending before Donald Trump blew up the Transatlantic alliance with his televised humiliation of Volodymyr Zelensky followed up with openly musing about not defending NATO members who don’t spend enough on defense.
The EU’s Landmark Decision: Military Spending Trumps Debt Worries
And all of a sudden, the existential security threat Europe was facing became that much more existential. Donald Trump had seemingly lifted the US’s security umbrella. The EU didn’t just have a ‘security emergency’. It had an urgent security emergency. The kind of urgent emergency that never ends, potentially. And the kind of emergency that can coerce all 27 members into rapidly signing up for commitments that will amount to trillions of euros in spending for decades to come. Yes, it’s starting with just a four year commitment. But it’s the kind of four year commitment that isn’t going to end in four years, which is really just the opening four year phase for what will eventually be a kind of new European military industrial complex.
That’s the remarkable context of the landmark new agreement to make an additional 650 billion euros in new defense spending over the next four years. With another 150 billion euros in loans for additional defense spending potentially on the way too, although that part of the plan is proving to be much more controversial. Because as we’re going to see, while the EU leaders appeared to be very fine with temporarily loosening the EU’s strict budget constraints to allow for much higher public borrowing for the purpose of defense spending, that borrowing is still being done by each individual government. Those 150 billion in loans, on the other hand, would be jointly issued by the EU and presumably at better rates than most EU governments could hope to borrow.
And while some governments feel like the loans aren’t big enough, or should be grants instead of loans, it turns out German leaders would like to see the 150 billion in loans potentially be lent out to non-EU states like the UK, Norway, and Turkey. It’s a truly remarkable turnaround from the extreme German reticence towards even jointly-pooled debt. At this point, the debate isn’t over whether to issue jointly-pooled debt. The debate is over whether or not that jointly-pooled debt can be lent out to non-EU members. And even without that jointly issued debt, the EU just signaled that higher deficits are going to be allowed going forward for years to come...as long as they are spent on defense:
Associated Press
Takeaways from the EU’s landmark security summit after Trump said Europe must fend for itself
By LORNE COOK and RAF CASERT
Updated 10:57 AM CDT, March 7, 2025BRUSSELS (AP) — European Union leaders are trumpeting their endorsement of a plan to free up hundreds of billions of euros to inject into their defense budgets after the Trump administration warned that the continent must look after its own security, including Ukraine, in future.
After more than 12 hours of talks on Thursday, the 27 leaders signed off on a scheme that would ease budget restrictions for defense spending, funnel some of the EU’s unused funds toward security priorities and provide 150 billion euros ($162 billion) in loans for military purchases.
As a priority, the funds would be spent on air and missile defense, artillery systems, ammunition, drones and air transport, as well as cyber systems, artificial intelligence and electronic warfare.
The three-year war in Ukraine was also top of the agenda, but no obvious short-term solutions were found to keep the country in the fight, after the U.S. halted military support and intelligence sharing. No new weapons were pledged, no ready cash identified.
Hungary also vetoed a joint statement on support to Ukraine, notably the stance of the 26 other member countries that their war-ravaged partner can only achieve “peace through strength.”
Taking the budget brakes off
All 27 leaders agreed that the EU’s executive branch, the European Commission, should loosen budget restrictions so countries that are willing can increase their military spending. The commission monitors whether members are keeping their debt under control.
It estimates that around 650 billion euros ($702 billion) could be freed up that way, and could allow each country to spend at least 3% of their gross domestic product on defense. NATO’s current guideline is that allies should spend at least 2%.
Seven EU countries fall short of that figure, including heavyweights Italy and Spain.
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A new defense loan program
The commission also tabled a proposal for an offer of loans worth 150 billion euros ($162 billion) to buy new military equipment, with material priorities to be based on lessons learned from the battlefield in Ukraine. Air and missile defenses are right up there.
The European Commission said it would raise the money on financial markets, and that around 20 member countries would benefit from the more favorable rates that it could generate.
But the leaders did not welcome the idea with open arms. Instead, they invited EU headquarters staff “to examine this proposal as a matter of urgency.”
France believes the pot is too small. Heavily indebted Spain is demanding free grants rather than loans.
Hungary. Together, alone
Hungarian Prime Minister Viktor Orbán, a staunch supporter of President Donald Trump and Russian President Vladimir Putin’s closest ally in Europe, refused to endorse part of the summit statement in favor of Ukraine.
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“Hungary is isolated among the 27, and we respect Hungary’s position,” European Council President Antonio Costa told reporters after the meeting. “But it’s one out of 27, and 26 are more than one.”
Orbán appears to relish his isolationist role and is intent on turning the tables.
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“After more than 12 hours of talks on Thursday, the 27 leaders signed off on a scheme that would ease budget restrictions for defense spending, funnel some of the EU’s unused funds toward security priorities and provide 150 billion euros ($162 billion) in loans for military purchases.”
An agreement has been reached! Unanimously! The leaders of all 27 EU member states signed off on a agreement for much higher defense spending across the continent, with a 3% GDP target that is a relatively significant hike from the 2% NATO target so many EU members were already struggling to meet. It was unambiguously a very big deal. The ambiguity comes with all the details yet to be worked out. It was a commitment. Not a plan:
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All 27 leaders agreed that the EU’s executive branch, the European Commission, should loosen budget restrictions so countries that are willing can increase their military spending. The commission monitors whether members are keeping their debt under control.It estimates that around 650 billion euros ($702 billion) could be freed up that way, and could allow each country to spend at least 3% of their gross domestic product on defense. NATO’s current guideline is that allies should spend at least 2%.
Seven EU countries fall short of that figure, including heavyweights Italy and Spain.
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And then we get to the very significant part of the plan that was tabled for further discussion: 150 billion euros in EU-level loans that would be offered to governments to help provide cheap financing for all this new defense spending. As the article describes, the complaints include France’s calls to make the loans bigger and Spain’s demands that the loans get turned into jointly-funded grants. But there’s another major bloc in this debate: those who don’t want to see jointly pooled debt at all. Which is the same austerity-focused bloc led by Germany that holds the purse strings and dominates these kinds of debates. As we’ve seen, joint pooling of debt is a huge red line for Germany. That red line isn’t mentioned in this article but it’s still there and it looms very large in this story and, in fact, explains much of the urgency of the negotiations: the opponents of jointly funded debt need to find a way to finance this new European military industrial complex that doesn’t involve jointly funded debt. And yet, remarkably, as we already saw, incoming Chancellor Merz has been proposing jointly issued debt for defense spending. And as we’re also going to see, outgoing German Chancellor Olaf Scholz is arguing that these defense loans should potential go to non-EU members like the UK, Switzerland, and Turkey. Germany’s red line on joint debt got a lot greyer over the last month:
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The commission also tabled a proposal for an offer of loans worth 150 billion euros ($162 billion) to buy new military equipment, with material priorities to be based on lessons learned from the battlefield in Ukraine. Air and missile defenses are right up there.The European Commission said it would raise the money on financial markets, and that around 20 member countries would benefit from the more favorable rates that it could generate.
But the leaders did not welcome the idea with open arms. Instead, they invited EU headquarters staff “to examine this proposal as a matter of urgency.”
France believes the pot is too small. Heavily indebted Spain is demanding free grants rather than loans.
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And, again, that successful-ish EU emergency summit by the European Council of EU presidents and prime ministers comes just days after the President of the EU Commission, Ursula von der Leyen, introduced the proposal, dubbing it the “REARM Europe” package. That’s how fast things are moving.
And as the following article notes, that proposed 150 billion in new loans would be jointly backed by the EU budget. Jointly issued debt that is “controversially backed by the common EU budget”, as the article puts it. Which is a reminder that jointly issued debt is something that was previously very anathema to Germany and the rest of the EU’s creditor states. And as we just saw, while the European Council of 27 EU leaders may have endorsed a plan that included 150 billion in loans, the European Commission decided to table that loan proposal for further review. Which is a polite way of saying it’s probably not going to happen or if it does happen it will be significantly different from this proposals. So, at this point, it’s looking like the lifting of fiscal debt breaks is likely to happen, the details on the jointly-issued debt have yet to be worked out. Including whether or not it gets issued at all:
Associated Press
EU ponders 800 billion euro plan to beef up defenses to counter possible US disengagement
By RAF CASERT
Updated 4:59 AM CDT, March 4, 2025BRUSSELS (AP) — The chief of the European Union’s executive on Tuesday proposed an 800 billion-euro ($841 billion) plan to beef up the defenses of EU nations, aiming to lessen the impact of potential U.S. disengagement and provide Ukraine with military muscle to negotiate with Russia following the freeze of U.S. aid to the embattled nation.
European Commission President Ursula von der Leyen said the massive “REARM Europe” package will be put to the 27 EU leaders. They are holding an emergency meeting in Brussels on Thursday following a week of increasing political uncertainty from Washington, where President Donald Trump questioned both his alliance to the continent and the defense of Ukraine.
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Key to the quandary of EU nations has been an unwillingness to spend much on defense over the past decades as they hid under the U.S. nuclear umbrella and were hurt by a sluggish economy, which creates challenges for a quick ramp-up of such spending. It increasingly has left them on the world’s diplomatic sidelines.”>the world’s diplomatic sidelines.
How it would work
Most of the money Von der Leyen is talking about, would come from loosening the fiscal constraints the EU puts on budgetary spending to “allow member states to significantly increase their defense expenditures without triggering” punishing rules aimed at keeping deficits from going too far into the red. It would help member states to spend on defense without being forced to cut into social spending purely to keep within EU rules.
“So if member states would increase their defense spending by 1.5% of GDP on average, this could create fiscal space of close to 650 billion euros ($683 billion) over a period of four years,” von der Leyen said. This would be topped up by a loans program, controversially backed by the common EU budget, of 150 billion euros ($157 billion) to allow member states to invest in defense.
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Such a plan will force many EU member states to greatly increase their military spending, which is still below 2% of gross domestic product. NATO Secretary-General Mark Rutte has told the member states they need to move to more than 3% as quickly as possible.
The plan will now be the blueprint for Thursday’s summit, although immediate decisions beyond strong commitments were unlikely.
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“European Commission President Ursula von der Leyen said the massive “REARM Europe” package will be put to the 27 EU leaders. They are holding an emergency meeting in Brussels on Thursday following a week of increasing political uncertainty from Washington, where President Donald Trump questioned both his alliance to the continent and the defense of Ukraine.”
An emergency EU summit dedicated to effectively financing a new military industrial complex. That’s the historic EU drama that just played out in the wake of the Trump administration’s apparent shredding of the longstanding Transatlantic alliance. A pledge to increase defense spending by at least 1.5% GDP over the next four years, which alone could generate around 650 billion euros in new spending, with an additional 150 billion euros in loans. Even loans are considered controversial when commonly backed. Or at least they used to be for Germany. It’s a new era. Maybe:
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Most of the money Von der Leyen is talking about, would come from loosening the fiscal constraints the EU puts on budgetary spending to “allow member states to significantly increase their defense expenditures without triggering” punishing rules aimed at keeping deficits from going too far into the red. It would help member states to spend on defense without being forced to cut into social spending purely to keep within EU rules.“So if member states would increase their defense spending by 1.5% of GDP on average, this could create fiscal space of close to 650 billion euros ($683 billion) over a period of four years,” von der Leyen said. This would be topped up by a loans program, controversially backed by the common EU budget, of 150 billion euros ($157 billion) to allow member states to invest in defense.
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And, again, don’t forget this provision was tabled during the recent European Council which is another way of letting us know there’s going to be a number of changes demanded. Whether or not those are changes in favor of counties like Spain and Italy or the Netherlands remains to be seen and remains especially hard to assess given Germany’s unexpected role as the champion of joint debt.
Olaf Scholz’s Big Idea: The EU-Jointly Funded Defense Loans May Not Be Just for EU Members
And that unexpected role Germany is playing in this story brings us to another unexpected twist: while France wants to ensure the loans are spent on EU-specific defense spending, outgoing German Chancellor Olaf Scholz is arguing for quite the opposite: the loans to be open to non-EU partners like Britain, Norway, Switzerland, or even Turkey:
Financial Times
France and Germany clash over ‘buy EU’ weapons
Berlin says new €150bn funding for defence industry should be open to non-EU partners, but Paris disagrees
Paola Tamma, Henry Foy and Ben Hall in Brussels
Published March 8, 2025 5:00 amA proposed €150bn injection into the EU’s defence industry has become a new flashpoint in a long-standing battle between France and Germany over the continent’s rearmament drive and whether it should include countries outside the bloc.
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Last week the European Commission proposed to raise €150bn that would be lent to capitals to boost their military production. While the broad idea has received unanimous political backing, the details are still being fleshed out, with heavy lobbying over whether the cash could be spent on arms made outside the bloc.
During an EU summit on Thursday, several leaders including German Chancellor Olaf Scholz said the initiative should be open to like-minded non-EU partners. “It is very important to us that the projects that can be supported with this are open to . . . countries that are not part of the European Union but work closely together, such as Great Britain, Norway, Switzerland or Turkey,” Scholz said.
However French President Emmanuel Macron, who has long supported increasing European autonomy and boosting domestic industrial production, said that “spending should not be for new off-the-shelf kit that is once again non-European”.
For the gaps in Europe’s critical capabilities — including air defence, long-range strikes, intelligence, reconnaissance and targeting — “the method is to identify the best businessmen and businesses we have”, he added.
He also said each EU member state would be asked to “re-examine orders to see if European orders could be prioritised”.
Brussels diplomats are concerned that the €150bn initiative will get derailed by the same argument that has delayed agreement for more than a year on the European Defence Industry Programme, a €1.5bn fund disbursing grants for defence. Efforts to implement it ground to a halt this winter after Paris demanded a cap on what proportion could be spent on extra-EU components and a ban on products with IP protection from third countries.
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The Polish government, which currently holds the rotating presidency of the EU and is tasked with chairing the bloc’s ministerial meetings, will be under pressure to work out a rapid agreement. The initiative can be approved by a majority of the EU’s 27 states, but French buy-in is seen as essential even if the country can be outvoted — as the EDIF precedent shows.
“We’re at a stage where this just needs to be sorted in the name of speed, not perfection,” said an EU diplomat involved in the negotiations. “But if there was reluctance to ram €1.5bn past French objections, how are we expected to do €150bn?”
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“During an EU summit on Thursday, several leaders including German Chancellor Olaf Scholz said the initiative should be open to like-minded non-EU partners. “It is very important to us that the projects that can be supported with this are open to . . . countries that are not part of the European Union but work closely together, such as Great Britain, Norway, Switzerland or Turkey,” Scholz said.”
It’s a truly remarkable turn of events: not only is the German Chancellor backing jointly-issued EU debt but advocating that the loans be offered to non-EU member states. And keep in mind that while Scholz might be the outgoing Chancellors, he’s still technically the Chancellor. As and we’re going to see, the plans for putting this historic shift in budget priorities into law entail passing laws through the current SPD-led parliamentary super-majority before the new term starts and Merz takes over. Scholz’s stances on these matters shouldn’t be treated as beside the point.
And as observers warn, while it’s possible the 150 billion loan program will happen, it could also get bogged down in the same kind of squabbles that have hampered another EU-level program designed to increase defense spending: the European Defence Industry Programme (EDIP). Squabbles like France’s demand that the grants disbursed by the EDIP be used to primarily purchase EU-made defense products. What kinds of strings will there be ultimately attached to these loans? As we’re going to see, the strings include the fact that these loans will only be used for the purchase of specific weapons systems chosen from a list provided by the EU Commission. Which is the kind of arrangement that could produce a lot more squabbling over what shows up on that list:
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However French President Emmanuel Macron, who has long supported increasing European autonomy and boosting domestic industrial production, said that “spending should not be for new off-the-shelf kit that is once again non-European”....
Brussels diplomats are concerned that the €150bn initiative will get derailed by the same argument that has delayed agreement for more than a year on the European Defence Industry Programme, a €1.5bn fund disbursing grants for defence. Efforts to implement it ground to a halt this winter after Paris demanded a cap on what proportion could be spent on extra-EU components and a ban on products with IP protection from third countries.
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And that’s just a preview of the types of complications that can arise from the 800 billion euro components of this plan. But the plans isn’t limited to those headline components.
The Rest of the Plan: Plans C, D, and E, and a “Rearmament Bank”
As the following Euronews piece describes, while the 650 billion euros in new defense spending and 150 billion euros in loans are really just the headline programs under consideration. Other proposals include expanding the EDIP, although the EU’s financial watchdog warns that the EDIP couldn’t come close filling the 500 billion euro perceived spending gap in defense spending in coming years. And then there’s the proposal that involve setting up more long-term defense-related financial entities like the European Savings and Investment Union, which would be designed to incentivize that private EU savings be invested in the EU and be made available to finance defense projects. But then we get this very intriguing proposal that would seem to be aligned with the German calls to make the 150 billion euro loans available to non-EU states: the creation of a “rearmament bank” that could potentially be co-financed with counties like the UK or even the US:
Euronews
How can the EU unlock up to €800bn for its ‘rearmament plan’?
EU Commission president Ursula von der Leyen presenting the defence package in Brussels.
The EU Commission has unveiled plans to borrow €150 billion to fund a major rearmament push. This joint borrowing proposal comes in the form of loans rather than grants—an idea largely rejected by so-called ‘frugal’ countries such as Germany and the Netherlands.
By Paula Soler & & video by Gregoire Lory
Published on 05/03/2025 — 16:41 GMT+1•Updated 16:57The EU has officially entered its “rearmament era” and is now ready to step up its efforts to support Ukraine in the short term and ensure its strategic autonomy to defend itself in the long term.
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The plan aims to mobilise around €800 billion over the next four years, the bulk of which will come from member states increasing their national spending on defence and security.
“If member states would increase their defence spending by 1.5% of GDP on average (which is the cap established by the Commission in additional defence spending per year), this could create fiscal space of close to €650 billion over a period of four years,” von der Leyen told reporters on Tuesday.
The remaining €150 billion would come from a new defence instrument, allowing the Commission to borrow from capital markets to issue bonds and lend to member states.
This plan mirrors how the EU raised funds for the COVID-19 recovery with the European instrument for temporary Support to mitigate Unemployment Risks in an Emergency (SURE), though this time, the funds would be distributed as loans rather than grants, based on national procurement plans for defence products throughout the decade.
“We’re talking about [funding] pan-European capabilities domains like for example, air and missile defence, the artillery systems, missiles and ammunition, drones and anti-drone systems, but also to address other needs from cyber to military mobility,” the Commission president said.
The new instrument will be an off-budget instrument, implying joint borrowing that would eventually have to be repaid.
“In the short term, I don’t think we have an alternative to some debt funding. We will have to have the debt funding to ensure that there is tax smoothing, that there’s spending smoothing and to actually get political majorities,” Guntram Wolff, senior fellow at the economic think-tank Bruegel, told Euronews.
“But it should be clear that it cannot be a permanent solution,” Wolff added.
A key pillar of von der Leyen’s rearmament plan is giving member states more fiscal leeway to increase defence spending by activating the so-called national escape clause of the Stability and Growth Pact, as announced at the Munich Security Conference last month.
The pact, adopted last year, imposes strict fiscal rules requiring member states to keep debt below 60% of GDP and deficits under 3%.
Countries such as Poland and the Baltic states have long pushed for looser rules to allow higher defence spending without penalty. The escape clause can be triggered under exceptional circumstances that “lead to a major impact on public finances,” though von der Leyen did not specify how ramping spending by highly indebted countries like France and Spain would be controlled.
Additional defence expenditure of up to 1.5% of GDP will be exempted from the EU’s spending limits for four years, but beyond that, increased defence spending must fit within national budgets.
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Plan C, D, E: more private capital and a flexible EIB mandate and EU budget
The Commission has also proposed three additional measures: mobilising more private capital, adapting the European Investment Bank’s (EIB) mandate, and incentivising defence-related investments in the EU budget.
In the short term, the EU is encouraging member states to redirect funds from cohesion policy programmes—which aim to bridge economic disparities between EU regions—to defence and security.
Unlocking the full potential of the Capital Markets Union will also be “indispensable” for von der Leyen’s plan.
“We need to ensure that the billions of savings from Europeans are invested in markets inside the EU,” she told member states in a letter sent on Tuesday morning.
The bloc is not short of capital: European households save €1.4 trillion a year, compared with €800 billion in the US — but €300 billion of Europeans’ savings flow into markets outside the EU every year.
To address this, the Commission will present by 19 March a communication on a European Savings and Investment Union to incentivise risk capital and promote seamless capital flows across the EU.
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The final pillar of the plan is to broaden the mandate of the European Investment Bank (EIB).
The EIB has already changed its policy on financing dual-use companies — i.e. those with less than 50% of their revenues coming from defence-related activities — and is currently examining how to extend its scope of financing while safeguarding its lending capacity.
“In a time of rising defence expenditures, that’s quite a constraint because many dual use companies cannot be funded by the EIB (...), so I think that there is scope to change the mandate of the EIB and use the EIB as a vehicle to fund companies that have a severe gap in their funding from private banks and from capital markets,” Wolff said.
Are there other proposals to improve Europe’s defence capabilities?
The Commission’s proposals respond to a Europe facing “a clear and present danger on a scale that none of us have seen in our adult lifetime.” However, additional long-term options could include boosting defence spending in the next EU budget or creating a “rearmament bank.”
The current Multiannual Financial Framework (2021–2027) allocated only €15 billion (1.2% of the MFF) to security and defence.
EU-funded initiatives include the Act in Support of Ammunition Production (ASAP), the European Defence Fund (EDF), and EDIRPA. The Commission has also proposed the European Defence Industry Programme (EDIP) for post-2025 to enhance capabilities.
Yet the EU’s financial watchdog has warned that EDIP lacks the budget to meet its objectives. At least €500 billion will be needed over the next decade to close key capability gaps.
Commissioner Andrius Kubilius has suggested allocating nearly €100 billion for defence investment in the next Multiannual Financial Framework (2028–2034).
Negotiations on the next MFF will begin this summer, but those funds will not be available in the short term.
Meanwhile, the EU is in discussions with non-EU countries such as the US and UK to establish a “rearmament bank” to significantly boost defence spending.
This new bank would not impact national borrowing capacity, as it would issue triple‑A bonds backed by shareholder nations. This would enable rapid investment in defence procurement and technology without adding to public debt.
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“A key pillar of von der Leyen’s rearmament plan is giving member states more fiscal leeway to increase defence spending by activating the so-called national escape clause of the Stability and Growth Pact, as announced at the Munich Security Conference last month.”
As we can see, at the core of the budgetary gimmicks proposed to make this extra defense spending happen is the activation of the so-called national escape clause of the Stability and Growth Pact. An escape clause that is only supposed to be triggered under exceptional circumstances. So we have the EU making the opening moves in what will likely be a decades-long major new investment in military spending under the pretext of short-term emergency escape clause. Think about the potential implications of that kind of gimmickry. It’s setting up a ‘military emergency’ that can never end:
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The pact, adopted last year, imposes strict fiscal rules requiring member states to keep debt below 60% of GDP and deficits under 3%.Countries such as Poland and the Baltic states have long pushed for looser rules to allow higher defence spending without penalty. The escape clause can be triggered under exceptional circumstances that “lead to a major impact on public finances,” though von der Leyen did not specify how ramping spending by highly indebted countries like France and Spain would be controlled.
Additional defence expenditure of up to 1.5% of GDP will be exempted from the EU’s spending limits for four years, but beyond that, increased defence spending must fit within national budgets.
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And as we can also see, another part of the gimmick entails ‘off budget’ spending, like the 150 billion euros in loans, which will apparently be ‘off-budget’ and therefore not count towards the general deficits. Where there’s a will, there’s a way. At least when it comes to military spending. Social spending gets the austerity treatment:
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The remaining €150 billion would come from a new defence instrument, allowing the Commission to borrow from capital markets to issue bonds and lend to member states.This plan mirrors how the EU raised funds for the COVID-19 recovery with the European instrument for temporary Support to mitigate Unemployment Risks in an Emergency (SURE), though this time, the funds would be distributed as loans rather than grants, based on national procurement plans for defence products throughout the decade.
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The new instrument will be an off-budget instrument, implying joint borrowing that would eventually have to be repaid.
“In the short term, I don’t think we have an alternative to some debt funding. We will have to have the debt funding to ensure that there is tax smoothing, that there’s spending smoothing and to actually get political majorities,” Guntram Wolff, senior fellow at the economic think-tank Bruegel, told Euronews.
“But it should be clear that it cannot be a permanent solution,” Wolff added.
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But then we get to the proposals that appear to be part of the more long-term plans for how Europe’s new MIC will be financed. Plans like the creation of a European Savings and Investment Union which will somehow redirect the EU’s substantial private savings back into the EU for the purpose of financing all of this new defense-related deficit spending. Or modifying the definition of “dual use” companies that would make more firms available for financing by entities like European Investment Bank. In other words, get ready for all sorts of European companies to suddenly discover the defense-related applications of their products:
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In the short term, the EU is encouraging member states to redirect funds from cohesion policy programmes—which aim to bridge economic disparities between EU regions—to defence and security.Unlocking the full potential of the Capital Markets Union will also be “indispensable” for von der Leyen’s plan.
“We need to ensure that the billions of savings from Europeans are invested in markets inside the EU,” she told member states in a letter sent on Tuesday morning.
The bloc is not short of capital: European households save €1.4 trillion a year, compared with €800 billion in the US — but €300 billion of Europeans’ savings flow into markets outside the EU every year.
To address this, the Commission will present by 19 March a communication on a European Savings and Investment Union to incentivise risk capital and promote seamless capital flows across the EU.
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The final pillar of the plan is to broaden the mandate of the European Investment Bank (EIB).
The EIB has already changed its policy on financing dual-use companies — i.e. those with less than 50% of their revenues coming from defence-related activities — and is currently examining how to extend its scope of financing while safeguarding its lending capacity.
“In a time of rising defence expenditures, that’s quite a constraint because many dual use companies cannot be funded by the EIB (...), so I think that there is scope to change the mandate of the EIB and use the EIB as a vehicle to fund companies that have a severe gap in their funding from private banks and from capital markets,” Wolff said.
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And then there’s the proposal to increase the scope of the European Defence Industry Programme (EDIP), which was only set up relatively recently in the wake of the conflict between Russian and Ukraine. As the EU’s financial watchdog warns, the scope of what the EDIP can deliver is nothing compared to the at least 500 billion euros that will be required over the next decade to meet the EDIP’s objectives. Something much bigger will be required:
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The current Multiannual Financial Framework (2021–2027) allocated only €15 billion (1.2% of the MFF) to security and defence.EU-funded initiatives include the Act in Support of Ammunition Production (ASAP), the European Defence Fund (EDF), and EDIRPA. The Commission has also proposed the European Defence Industry Programme (EDIP) for post-2025 to enhance capabilities.
Yet the EU’s financial watchdog has warned that EDIP lacks the budget to meet its objectives. At least €500 billion will be needed over the next decade to close key capability gaps.
Commissioner Andrius Kubilius has suggested allocating nearly €100 billion for defence investment in the next Multiannual Financial Framework (2028–2034).
Negotiations on the next MFF will begin this summer, but those funds will not be available in the short term.
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And then we get to this incredible proposal: the creation of a rearmament bank, potentially to be established with the UK and US, dedicated to financing defense spending:
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The Commission’s proposals respond to a Europe facing “a clear and present danger on a scale that none of us have seen in our adult lifetime.” However, additional long-term options could include boosting defence spending in the next EU budget or creating a “rearmament bank.”...
Meanwhile, the EU is in discussions with non-EU countries such as the US and UK to establish a “rearmament bank” to significantly boost defence spending.
This new bank would not impact national borrowing capacity, as it would issue triple‑A bonds backed by shareholder nations. This would enable rapid investment in defence procurement and technology without adding to public debt.
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As we can see, there are quite a few ideas under consideration. And note what doesn’t appear to be at all under consideration: hiking taxes on Europe’s billionaires. Also keep in mind that when we are told this rearmament bank includes talks with the US and UK, that would be consistent with the German calls for making those EU-backed loans available to non-EU allies. The plans for the EU’s military are massive, but the overall plans are for something even larger.
The Defence, Security and Resilience Bank, Set Up to Finance Defense Across The EU...Along with the US, UK, and Indo-Pacific Allies
But also keep in mind that, unlike the rest of the EU proposals we’ve seen, the kind of a “rearmament bank” entity under consideration doesn’t sound like a bank that will lend directly to governments. Instead, it will be a government-backed entity to provide financing for the private sector. And as the following article describes, such an entity was declared just days before the EU made its historic commitment to all this new spending: The Defence, Security and Resilience (DSR) Bank, to be capitalized with AAA-backed bonds from shareholder nations and focused on facilitating defense-related financing across not just the EU, but also the UK, US, and potentially even Indo-pacific allied nations:
The Banker
New defence bank launched to attract capital and fix ‘disastrous’ European procurement
DSR Bank founder says the multilateral bank will issue bonds and credit guarantees
by Anita Hawser
March 3, 2025A new multilateral defence bank aimed at tackling growing security threats will offer private sector lenders risk guarantees and help standardise procurement rules in Europe, which its founder describes as a “disaster”.
Announced on Sunday, the new Defence, Security and Resilience Bank — the first multilateral development bank for defence, which seeks to secure £100bn in capital — aims to solve the defence financing gap in western countries.
It plans to issue AAA-rated bonds backed by shareholder nations to get “cheap capital” for defence procurement quickly into Nato countries, across the EU and into Indo-Pacific allied nations without increasing government debt.
The bank’s founder, Rob Murray, a former British Army officer and head of innovation at Nato, said the DSR Bank also aims to “nudge” an improved culture of defence procurement by standardising procurement rules for defence companies or contracts it helps finance.
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He said financing defence companies rings “alarm bells” for banks’ compliance and risk departments — due to a combination of know-your-customer, anti-money-laundering, and ESG considerations — but that countless commercial banks would lend to defence companies “in a heartbeat” if a multilateral bank provided risk guarantees.
DSR Bank will underwrite compliance and credit risk for commercial banks.
To be effective, he said the multilateral bank will also need to be complemented by a greater offer of other financial tools and guarantees for the defence sector in Europe. “This [the multilateral bank] is not a silver bullet. We are going to need a whole suite of financial instruments . . . if nations are to get closer to spending 5 per cent of GDP on defence.”
In January, US President Donald Trump demanded Nato members raise defence spending from the current target of 2 per cent of GDP to 5 per cent, or risk losing US military support. While almost all European countries have increased their defence budgets since Russia’s full-scale invasion of Ukraine three years ago, according to Fitch Ratings, some still remain below Nato’s current 2 per cent target.
During the cold war, most Nato allies averaged spending of more than 3 per cent of GDP on defence, according to Nato figures. Spending in most Nato member countries fell dramatically in the post-cold-war period. In 2014, when Russia invaded Crimea, only three countries (the US, Greece and the UK) spent 2 per cent or more of their GDP on defence. By 2022, that number had jumped to seven, with Lithuania, Poland, Estonia and Latvia increasing their defence spending.
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Defence bank’s structure
The DSR Bank, which is still being set up, is based on a structure developed by senior banking leaders, including former JPMorgan executives.
Those with knowledge of how the bank will operate say it could be up and running within 18 months and will have a similar capital structure to the Asian Infrastructure Investment Bank, with a modest amount of paid-in capital from shareholder countries of around £20bn. The remaining £80bn is “callable capital” which countries only need to raise if called upon.
Murray said the new multilateral lender will take the “best bits” of organisations like the AIIB — the last multilateral financial institution to be set up in 2015 — the European Bank for Reconstruction and Development, the European Investment Bank, and the World Bank.
The DSR Bank has the backing of former politicians and senior defence leaders in the US and Europe, including Lord Stuart Peach, UK chief of the defence staff, Mircea Geoanã, former deputy secretary-general of Nato, and Richard Burr, former US senator and Republican chair of the US Senate intelligence committee.
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However, according to Murray, the Rearmament Bank will not solve the problem of “cheap capital” as it would only lend at “near market rates” to countries. It also would not provide risk guarantees to commercial lenders, he claimed. The authors of the Rearmament Bank proposal rejected Murray’s claim, asserting that they do offer guarantees. If a government fails to fulfil a bank-financed order with a defence manufacturer, it would be required to reimburse the bank, according to its concept paper.
The DSR Bank was first mooted in 2019, while Murray was still working at Nato, to address the shortfall in spending by members of the military alliance. Although the idea was “viable”, he said countries weren’t ready as there was no war in Europe and capital was more affordable due to lower or negative interest rates.
Right now, however, he said the political window is wide open for an entity like this.
The DSR Bank is in “advanced discussions” with governments across the UK, US, and EU. Murray would not comment on the involvement of private sector banks.
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“It plans to issue AAA-rated bonds backed by shareholder nations to get “cheap capital” for defence procurement quickly into Nato countries, across the EU and into Indo-Pacific allied nations without increasing government debt.”
Well look at that: just days before the EU makes its historic commitment to years of increased defense spending, a whole new type of “rearmament bank” was announced. The Defence, Security and Resilience (DSR) Bank — the first multilateral development bank for defence — has arrived. But it’s not just about EU rearmament. Indo-Pacific allied nations could be participants too. That presumably includes Australia and New Zealand, but it would be very interesting to learn which other Indo-Pacific allied nations might be participating. All backed by AAA-rated bonds backed by the shareholder nations, which promises to provide abundant cheap financing for defense related projects. As we saw above, part of the idea behind this back is that the spending involved wouldn’t actually contribute to national debt. So even though this DSR Bank wasn’t part of the EU’s big new defense announcements last week, it would appear it’s part of the plan. Or at least someone’s plan. The bank claims to already be in advanced discussions with the US, UK, and governments across the EU. And we are told this new bank could be up and running within 18 months:
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Announced on Sunday, the new Defence, Security and Resilience Bank — the first multilateral development bank for defence, which seeks to secure £100bn in capital — aims to solve the defence financing gap in western countries....
The bank’s founder, Rob Murray, a former British Army officer and head of innovation at Nato, said the DSR Bank also aims to “nudge” an improved culture of defence procurement by standardising procurement rules for defence companies or contracts it helps finance.
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The DSR Bank, which is still being set up, is based on a structure developed by senior banking leaders, including former JPMorgan executives.
Those with knowledge of how the bank will operate say it could be up and running within 18 months and will have a similar capital structure to the Asian Infrastructure Investment Bank, with a modest amount of paid-in capital from shareholder countries of around £20bn. The remaining £80bn is “callable capital” which countries only need to raise if called upon.
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The DSR Bank is in “advanced discussions” with governments across the UK, US, and EU. Murray would not comment on the involvement of private sector banks.
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And then we get to this rather confusing set of contradictions: first, we are told by the bank’s founder, Rob Murray, that part of the motive behind the bank is that it will be able to provide cheap financing for defense related projects and also underwrite compliance and credit risks for commercial banks. But then, lower down in the article, Murray cautions that the bank won’t solve the problem of “cheap capital” as it would only lend at “near market rates” to countries. Beyond that, Murray asserts that it would NOT provide risk guarantees to commercial lenders. But then we are told the original authors of the idea rejected these claims and insist that the bank will indeed offer guarantees to lenders. It’s a weirdly contradictory message for the new entity:
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He said financing defence companies rings “alarm bells” for banks’ compliance and risk departments — due to a combination of know-your-customer, anti-money-laundering, and ESG considerations — but that countless commercial banks would lend to defence companies “in a heartbeat” if a multilateral bank provided risk guarantees.DSR Bank will underwrite compliance and credit risk for commercial banks.
To be effective, he said the multilateral bank will also need to be complemented by a greater offer of other financial tools and guarantees for the defence sector in Europe. “This [the multilateral bank] is not a silver bullet. We are going to need a whole suite of financial instruments . . . if nations are to get closer to spending 5 per cent of GDP on defence.”
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However, according to Murray, the Rearmament Bank will not solve the problem of “cheap capital” as it would only lend at “near market rates” to countries. It also would not provide risk guarantees to commercial lenders, he claimed. The authors of the Rearmament Bank proposal rejected Murray’s claim, asserting that they do offer guarantees. If a government fails to fulfil a bank-financed order with a defence manufacturer, it would be required to reimburse the bank, according to its concept paper.
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It will be interesting to see who is ultimately correct: Murray or the anonymous plan authors who insist that the bank will indeed provided these guarantees. Especially since Murray seemed to contradict himself in the same article. Plus, what’s the point of the bank in the first place if it’s not providing those guarantees? It’s just some of the MANY details that have yet to be worked out. We’re talking about a new MIC, after all.
It’s a Grand Plan. With Strings Attached. Including the Fact that All this Borrowing has to be Paid Back. Eventually
But of all the questions looming over this massively ambitious proposal, perhaps the biggest questions is what’s going to have to be done to eventually pay off all of this additional debt that’s going to be rapidly accrued. Because while Von dey Leyen’s plan might lift short-term and medium-term EU penalties for the accumulation of all this extra defense-related debt, there’s no explanation for what’s going to have to happen after all this extra debt has been accrued years from now. If EU members like Spain and Italy can barely afford to make additional defense investments today, aren’t they going to have an even harder time managing much higher debt levels when this debt eventually has to be paid off? It’s just one of the many massive questions looming over this agenda. Questions that won’t necessarily have to be answered now, but will eventually...after all this extra debt has been accrued:
Euractiv
Von der Leyen’s ‘Rearm Europe’ plan and the holes in it
The spectre of the US withdrawing from Europe and reviewing its defence position has shaken the Old Continent.
Aurélie Pugnet
Mar 5, 2025 06:00European Commission President Ursula Von der Leyen’s new plan to “Rearm Europe” included close to no fresh money and left the burden of finding the real cash on member states’ shoulders.
Von der Leyen said on Tuesday morning that the EU leverage in issuing bonds and loosening its regulations could free up to €800 billion for the defence industry and member states’ purchases.
That number is, however, based more on hopes and guesses than tied realistically to immediately reforming the bloc’s defence under-production and under-investment.
The EU countries’ best way to access money relatively fast will be to use the proposed €150 billion emerging from joint borrowing. But the Commission provides few details as to how it achieves the €800 billion figure through the less-controversial options proposed.
Von der Leyen’s plan prioritises the least controversial options, such as the right to increase national deficit levels and move money around within EU accounts rather than coming up with fresh money.
The EU executive is planning on releasing official legislative text proposals by the EU leaders’ summit on 21 March, after she gathers their first reactions at Thursday’s summit.
Time to move
With the spectre of the US withdrawing from Europe and reviewing its commitment to defend its allies, shaken EU countries are looking for a way to find more ways to spend on suddenly urgent defence.
The EU countries’ leaders are meeting on Thursday, with a debate expected to focus on finding hundreds of billions to support the much-needed defence projects, such as an air defence shield, munitions, cyber defence and a stiffer border with Belarus and Russia.
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The Commission’s goal was offering an easy solution to free up cash ahead of the next EU budget, starting in 2028.
Tuesday’s proposals should work “very fast and very efficiently,” a senior EU official said, since adopting the texts needs only majority agreement from member states.
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Joint borrowing for joint procurement
Even though the EU Commission is calling its main initiative an “instrument under Article 122 of the treaty,” its proposal includes the very controversial joint borrowing of up to €150 billion for defence.
“It is not joint borrowing” though, a senior EU diplomat assured, as they said the fund is guaranteed by the EU budget.
The Commission would borrow that money in capital markets, then loan it to member states under the condition they jointly procure weapons in Europe. The grouping condition could involve a minimum of either three EU countries or two EU countries plus Ukraine.
How the countries’ projects would be approved for loans and how a preference for European-made hardware would be included have yet to be decided.
“Details must still be worked out,” a second senior EU official said.
Von der Leyen has given a long list of highly sophisticated and expensive equipment and systems that can be funded. They include “strategic enablers and critical infrastructure protection, including in relation to space; military mobility; cyber, artificial intelligence and electronic warfare,” she said.
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Arguments ahead
Expect Tuesday’s proposals to stir some fights among the member states, who will have to decide from which companies they purchase weapons. Also needing to be clarified is what counts as purchases qualifying for European funding.
Some will want to keep the focus as narrow as possible to focus on improving the bloc’s defence industry capabilities. Others, stressing urgency, want to buy from foreign companies.
The goal is to “support achieving a rapid and significant increase in investment in Europe’s defence capabilities now and over this decade,” the first senior EU official said. The money would help “reduce cost”.
Joint borrowing for defence costs needs only support from a qualified majority of EU countries, which means it might be easy to set up even though shared debt has faced critics in the past.
The frugality-focused countries, especially the Netherlands, may go along since the borrowing and repayments rest only on the shoulders of the countries participating in the joint procurement groupings. But Germany, the continent’s largest economy, remains unclear on common borrowing idea, while France has historically supported the move.
Once the system is set up, the money can flow in a couple of weeks, the first official said. However it might take time to get to the countries since they must propose procurement plans to the Commission, which then must approve them before disbursing the cash. In the regular defence industrial programmes, the process takes a whole year.
The Commission did not propose redirecting the leftover money from the pandemic recovery fund, where around€93 billion in loans remains available.
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Cohesion funds facing permanent change
Among the ideas the EU executive pitched is redirecting limited cohesion funds for defence costs.
The changes in the text to allow for large defence industries to benefit from the funds would be permanent once approved by the member states and the Parliament, which might take some time. The impact will be very different in each country because the funds are allocated so that the poorest regions of Europe receive the most.
Because of that, the EU executive refuses to give a figure as to how much could be used, the first senior official said.
The Strategic Technologies for Europe Platform, or STEP fund, also could see some changes by enlarging the scope of technology funded under the scheme.
Stability in fiscal rules
As a first step, the Commission has proposed allowing more flexibility in the bloc’s budget rules for countries that want to invest in defence, via a national escape clause from debt limitations.
This least-controversial idea gets more complicated when it comes to the details. The issue: a larger deficit does not equal higher defence spending. Though, according to the Commission, if all countries were to “increase the expenditure”, it would generate €650 billion.
It is unclear for now whether the idea will apply to all countries, or only those who spend more than the NATO-mandated 2% of GDP on defence.
Plus what helps in the short term does not in the long run. At some point, the governments will have to reduce their deficit somehow.
“The controlled activation of the clause gives the flexibility to raise to a structurally high level, but the expenditure over time will have to be accommodated by raising taxes or reducing expenditure,” a third EU senior official said.
Counting on banks
Considering that the EU loans and repurposed cash will not necessarily lead to enough contracts and orders that justify defence companies launching production lines, businesses will have to count on bank loans for the funding.
The European Investment Bank (EIB) will have to hope that changing its lending policy will motivate commercial banks to also invest more into defence.
In a letter to the EU countries that are its shareholders, the EIB proposed allowing investments in non-lethal defence products, providing unlimited loans to defence companies should EU countries wish it, and motivating commercial banks to join in lending cash to the defence industry.
A Capital Markets Union would free up more funds by putting to work people’s money now in savings. But while the Commission wants to “accelerate” work toward that goal, any results are likely to take months.
The ruled-out options
The proposal also does not mention confiscating Russia’s frozen assets. The EU’s top diplomat, Poland and the Baltic countries also want to use Russian Central Bank assets frozen inside the bloc to fund support to Ukraine and its defence needs. France remains against it, its government repeated today.
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Other ideas that have floated around were not mentioned, such as granting VAT exemptions on defence procurement to lower the prices, or using the European Stability Mechanism or the brand-new Defense, Security and Resilience Bank.
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“Von der Leyen’s ‘Rearm Europe’ plan and the holes in it” by Aurélie Pugnet; Euractiv; 03/05/2025
“The EU countries’ best way to access money relatively fast will be to use the proposed €150 billion emerging from joint borrowing. But the Commission provides few details as to how it achieves the €800 billion figure through the less-controversial options proposed.”
Yes, while the 650 billion euros in projected additional defense spending — resulting from the lifting of debt brakes for defense spending — might be the least controversial of the “Rearm Europe” plan. But it’s also the kind of proposal that doesn’t necessarily end well. The additional debt accrued through this extra defense spending might not immediately trigger the various penalties the EU has put in place to punish elevated deficits. But it’s still extra debt that will have to be repaid at some point. As one anonymous official puts it, “The controlled activation of the clause gives the flexibility to raise to a structurally high level, but the expenditure over time will have to be accommodated by raising taxes or reducing expenditure.” That’s the big unspoken part of this bold new scheme to build a new European military industrial complex: EU members are being given a free pass to accrue defense-related debts, but they aren’t going to have a free pass on eventually paying those debts. And while floating that debt indefinitely might be an option for a country like the US (or the UK, now), the EU is still ultimately guided by the Ordoliberal orthodoxy that prioritizes low debts and deficits and austerity mandates. At some point either higher taxes or lower spending is going to be demanded for all this extra defense spending. In other words, this entire plan is a recipe for massive austerity in the future:
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As a first step, the Commission has proposed allowing more flexibility in the bloc’s budget rules for countries that want to invest in defence, via a national escape clause from debt limitations.This least-controversial idea gets more complicated when it comes to the details. The issue: a larger deficit does not equal higher defence spending. Though, according to the Commission, if all countries were to “increase the expenditure”, it would generate €650 billion.
It is unclear for now whether the idea will apply to all countries, or only those who spend more than the NATO-mandated 2% of GDP on defence.
Plus what helps in the short term does not in the long run. At some point, the governments will have to reduce their deficit somehow.
“The controlled activation of the clause gives the flexibility to raise to a structurally high level, but the expenditure over time will have to be accommodated by raising taxes or reducing expenditure,” a third EU senior official said.
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And then we get to these very interesting assurances from a number of unnamed EU officials regarding the 150 billion euro loan package backed by joint borrow. As one official cautions, “It is not joint borrowing” though, because it’s really the EU Commission borrowing money from the markets and then loaning it out to member states for specific defense procurements. The EU Commission would get to approve all of the purchases, which will be limited to a list of highly sophisticated and expensive equipment and systems that the EU Commission will provide. Interestingly, it sounds like these loans would also entail at least three member states all procuring the same systems. Or maybe two EU members states and Ukraine. Yes, Ukraine is potentially a recipient for these loans too. Loans that will eventually have to be paid back. So while joint borrowing will be used to acquire the funds to be loaned out, those loans are still going to be the responsibility of individual member states. Which probably goes a long way to explain Germany’s surprising embrace of the proposal:
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Even though the EU Commission is calling its main initiative an “instrument under Article 122 of the treaty,” its proposal includes the very controversial joint borrowing of up to €150 billion for defence.“It is not joint borrowing” though, a senior EU diplomat assured, as they said the fund is guaranteed by the EU budget.
The Commission would borrow that money in capital markets, then loan it to member states under the condition they jointly procure weapons in Europe. The grouping condition could involve a minimum of either three EU countries or two EU countries plus Ukraine.
How the countries’ projects would be approved for loans and how a preference for European-made hardware would be included have yet to be decided.
“Details must still be worked out,” a second senior EU official said.
Von der Leyen has given a long list of highly sophisticated and expensive equipment and systems that can be funded. They include “strategic enablers and critical infrastructure protection, including in relation to space; military mobility; cyber, artificial intelligence and electronic warfare,” she said.
...
But then we get to this other important detail that also probably goes a long way to explain Germany’s surprising embrace of the 150 billion euro funds: joint borrowing for defense costs doesn’t require unanimous support of the EU members. Only a majority is required. So while the Netherlands may not be a fan of the joint borrowing scheme, it doesn’t have a veto. It’s just one of the quirks of the EU’s many rules:
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Expect Tuesday’s proposals to stir some fights among the member states, who will have to decide from which companies they purchase weapons. Also needing to be clarified is what counts as purchases qualifying for European funding.Some will want to keep the focus as narrow as possible to focus on improving the bloc’s defence industry capabilities. Others, stressing urgency, want to buy from foreign companies.
The goal is to “support achieving a rapid and significant increase in investment in Europe’s defence capabilities now and over this decade,” the first senior EU official said. The money would help “reduce cost”.
Joint borrowing for defence costs needs only support from a qualified majority of EU countries, which means it might be easy to set up even though shared debt has faced critics in the past.
The frugality-focused countries, especially the Netherlands, may go along since the borrowing and repayments rest only on the shoulders of the countries participating in the joint procurement groupings. But Germany, the continent’s largest economy, remains unclear on common borrowing idea, while France has historically supported the move.
Once the system is set up, the money can flow in a couple of weeks, the first official said. However it might take time to get to the countries since they must propose procurement plans to the Commission, which then must approve them before disbursing the cash. In the regular defence industrial programmes, the process takes a whole year.
...
But then we get to some of the other proposals under consideration, like redirection the “cohesion funds” into defense. Cohesion funds set up to help address to the growing economic inequalities across the EU and that therefore benefit the poorest members the most. It sounds like changes have already been made to the cohesion fund language to enable the redirection of these funds into defense spending, although the EU Commission won’t give a figure on how much can be redirected. It’s the kind of policy option that raises the grim question: is it net-helpful or net-harmful for the poorest EU members to see these cohesion funds redirected to defense spending given that they all have to increase their defense spending anyway and don’t really have a choice:
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Among the ideas the EU executive pitched is redirecting limited cohesion funds for defence costs.The changes in the text to allow for large defence industries to benefit from the funds would be permanent once approved by the member states and the Parliament, which might take some time. The impact will be very different in each country because the funds are allocated so that the poorest regions of Europe receive the most.
Because of that, the EU executive refuses to give a figure as to how much could be used, the first senior official said.
The Strategic Technologies for Europe Platform, or STEP fund, also could see some changes by enlarging the scope of technology funded under the scheme.
...
And then there’s reference to other initiatives to effectively create a defense-specific financial sector for the EU like a Capital Markets Union, another name for the European Savings and Investment Union idea we saw described above. Or changing EIB policy to allow for the better financing of “dual-use” companies that aren’t primarily focused on defense. And note how part of the purpose of these initiatives is to provide a pool of finance that is available for EU businesses to tap that will be in addition to the funds these businesses are expected to eventually directly receive from all the new EU defense spending. Which is a reminder that this big plan isn’t just to help EU member states procure more military hardware. It’s also about providing robust direct support for the private sector component of the military industrial complex:
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Considering that the EU loans and repurposed cash will not necessarily lead to enough contracts and orders that justify defence companies launching production lines, businesses will have to count on bank loans for the funding.The European Investment Bank (EIB) will have to hope that changing its lending policy will motivate commercial banks to also invest more into defence.
In a letter to the EU countries that are its shareholders, the EIB proposed allowing investments in non-lethal defence products, providing unlimited loans to defence companies should EU countries wish it, and motivating commercial banks to join in lending cash to the defence industry.
A Capital Markets Union would free up more funds by putting to work people’s money now in savings. But while the Commission wants to “accelerate” work toward that goal, any results are likely to take months.
...
Finally, note how the plan laid out by Von der Leyen didn’t actually include the DSR Bank. And yet, as we saw above, that EU is already in talks with non-EU states like the UK and US about the creation of a “rearmament bank” that sounds exactly like the DRS. Which is a reminder that the full scope of the EU’s plans will likely go beyond what Von der Leyen proposed. Her proposal was just an opening phase for something much bigger:
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The ruled-out optionsThe proposal also does not mention confiscating Russia’s frozen assets. The EU’s top diplomat, Poland and the Baltic countries also want to use Russian Central Bank assets frozen inside the bloc to fund support to Ukraine and its defence needs. France remains against it, its government repeated today.
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Other ideas that have floated around were not mentioned, such as granting VAT exemptions on defence procurement to lower the prices, or using the European Stability Mechanism or the brand-new Defense, Security and Resilience Bank.
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Keep in mind that now specific policies are laws have been agreed to at this point. The EU Council’s unanimous 27 member vote in support of Von der Leyen’s proposals was just a voice of support. We shouldn’t assume that plan will be the final plan.
Germany has an 800 Billion Euro Defense Plan of its Own. Vaguely Huge Plans for Decades to Come. And Very Little Time to Work it All Out
As we can see, it’s been an incredibly dramatic week for not just the future of EU military spending but the future of EU budget priorities. The kind of drama that, if it pans out as promised, compromises a major reversal in EU budget policy and priorities. An historic reversal that is being embraced and championed by the EU member that has, up to now, been the champion of strict deficit constraints as the EU’s highest priority: Germany.
In fact, Germany has an 800 billion euro defense plan of its own. Yep, Germany’s chancellor-in-waiting Friedrich Merz has big plans for even bigger defense spending for the EU’s largest economy. Plans for up to 800 billion euros in German defense spending over the next decade. And more plans for the decades to follow. Germany’s relationship with defense spending isn’t just going into reverse. It’s going into overdrive.
So how is chancellor-in-waiting Friedrich Merz intending on doing all this spending without violating the strict budget constraints Germany constitutionally enshrined in 2009? The same way Germany managed its emergency COVID spending: By doing it all ‘off the books’. Yes, the incoming CDU government has plans for an 800 billion euro special off the books fund that, technically, won’t violate Germany’s constitutional debt restrictions.
But there’s a catch, of course: the passage of this plan will likely require the SPD’s parliamentary supermajority that is poised to expire on March 25. So the CDU and SPD have less than two weeks to work out their historic defense spending measure that could result in 800 billion euros in ‘off the books’ German defense spending over the next decade:
Financial Times
Germany’s Friedrich Merz plans ‘double bazooka’ for defence and infrastructure
Economists’ proposal for up to €800bn of funding under review as part of coalition talks
Anne-Sylvaine Chassany in Berlin, Olaf Storbeck in Frankfurt and Paola Tamma in Brussels
Published Mar 4 2025 5:23 am | Updated Mar 4 2025, 09:28 amGermany’s chancellor-in-waiting Friedrich Merz is considering unlocking hundreds of billions in extra funding for the country’s military and infrastructure as coalition talks with Social Democrats gather pace.
One option under review is a proposal by top German economists to raise up to €800bn in new public borrowing for two separate off-budget funds over a decade, said two people with knowledge of the matter.
A third person briefed on the early-stage negotiations said they were centred on a combined €500bn package. The people cautioned that other options could be examined.
Such a plan would mark a step-change in Germany’s traditionally conservative approach to public borrowing. Berlin in 2009 enshrined a debt brake in its constitution, which limits government borrowing and keeps the structural deficit at 0.35 per cent of GDP.
The economists’ proposal would be “a double bazooka”, said Armin Steinbach, professor of economics at HEC, referring to the term used for Chancellor Olaf Scholz’s stimulus during the Covid-19 pandemic.
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The German central bank on Tuesday argued that any reform of the debt rules should focus on creating additional fiscal space for public investment. In a policy proposal, the Bundesbank said that a more fundamental reform of the debt brake could generate up to €220bn of investment by 2030.
If Germany’s debt-to-GDP level stayed at less than 60 per cent, the government’s ability to borrow should be more than tripled from 0.35 per cent of GDP to 1.4 per cent, the bank said. Even with debt levels above 60 per cent, the Bundesbank suggested increasing the structural deficit threshold to 0.9 per cent of GDP.
The talks in Germany came as the European Commission outlined on Tuesday a joint debt instrument that would enable member states to fund military equipment.
The instrument would involve the commission borrowing on the markets against the EU budget, then lending to member states at cheap rates. It would require unanimous backing from EU countries.
The €150bn in loans could buy “air and missile defence, the artillery system, missiles and ammunition drones and anti-drone systems, but also to address other means from cyber to military mobility”, said Ursula von der Leyen, president of the commission.
She added that lifting EU fiscal rules for defence investments would enable countries to spend €650bn on defence over four years, or about 1.5 per cent of GDP on average.
Countries will also be given the chance to redirect their regional development funding to defence, and the European Investment Bank will be asked to expand defence investments.
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In Germany, Merz, whose CDU/CSU conservative bloc won elections on February 23, has accelerated coalition talks with the SPD since Donald Trump publicly admonished Ukraine President Volodymyr Zelenskyy at the White House last week.
On Monday, Merz said he aimed for an agreement on defence funding with the SPD before Thursday, when EU leaders meet to discuss Ukraine and the continent’s security.
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Germany’s next chancellor has signalled he wants to use the outgoing parliament’s supermajority to pass the constitutional amendments that such borrowing would require, because his government would probably be blocked by the far-right Alternative for Germany and far-left Die Linke in the next parliament.
The outgoing parliament can be reconvened in an extraordinary session until March 25.
Speaking ahead of exploratory talks with the CDU/CSU, SPD co-leaders and negotiators Lars Klingbeil and Saskia Esken suggested on Monday they would request more funding for transport and energy infrastructure, which experts have said requires investment of about €600bn.
“Are we able to answer even the big questions now? This certainly includes the issue of external security and our country’s defence capabilities. But this also includes infrastructure, which has been neglected in recent years,” Esken said. “Too little has been invested in energy, network infrastructure, roads, railways, collapsing bridges, but also social infrastructure.”
Merz would also have to convince the Green party in order to secure a two-thirds majority. The Greens have pushed for a broader debt brake reform.
Caretaker chancellor Scholz, who led the SPD to its worst result since the turn of the 20th century, campaigned on relaxing the debt brake. But such a reform would take months and probably face stiff opposition from some factions in the CDU/CSU.
A way to temporarily circumvent the debt brake is to set up off-budget funds in the constitution. Scholz set up a €100bn vehicle in 2022 to buy military equipment and weapons following Russia’s full-scale invasion of Ukraine.
More than 80 per cent of this fund, which expires in 2027, has been committed, but one option is to top it up. The two-fund package would be a rapid “political compromise” to avoid a more complex debt brake overhaul, Steinbach said.
The proposal was drafted last week by experts from the country’s economic institutes.
The unsolicited proposal was brokered by Jakob von Weizsäcker, a former academic economist and SPD politician who is the finance minister of Saarland. The experts argued that the need to increase defence capabilities quickly was a strong argument for using debt, said two people with knowledge of their thinking.
They also endorsed an overhaul of the debt brake during the next legislature. But politicians needed to act quickly and at scale, they wrote. “There is no point in discussing €100bn or €200bn,” said one of the people.
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“Such a plan would mark a step-change in Germany’s traditionally conservative approach to public borrowing. Berlin in 2009 enshrined a debt brake in its constitution, which limits government borrowing and keeps the structural deficit at 0.35 per cent of GDP.”
Germany takes a fiscal U‑turn. An historic U‑turn that runs counter to the strict anti-deficit ideology that hasn’t just guided Germany for decades but became the underlying ethos of the EU-level budget battles that erupted out of the post-2008 eurozone crises. Budget battles ultimately won by Germany and the EU’s other strict austerity backers. This isn’t just a historic U‑turn but a hypocritical one too. When it comes to Germany’s social spending, austerity is the rule. But defense spending gets an exception. And don’t forget: Germany can always raise taxes on its many millionaires and billionaires — the group best positioned to make a fortune from all this proposed defense spending — if extra funds are desired. Somehow that’s just left off the table.
Also note how this proposal, which appears to be more of a budget gimmick of making the defense ‘off the books’ and therefore outside the constitutional budget constraints, was first conceived by Jakob von Weizsäcker, a former academic economist and SPD politician who is the finance minister of Saarland. Which is a key detail when it comes to the prospects of this becoming law. This is an SPD proposal. But along with the proposed off the books defense spending, the proposal also calls for an overhaul of Germany’s constitutional ‘debt brake’ too during the next legislature. So when we see reports about the CDU-led government talking about adopting this plan, keep in mind that it’s unclear yet if the CDU will be open to the larger debt brake overhaul. Which would be a much bigger historic U‑turn if it happens:
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One option under review is a proposal by top German economists to raise up to €800bn in new public borrowing for two separate off-budget funds over a decade, said two people with knowledge of the matter.A third person briefed on the early-stage negotiations said they were centred on a combined €500bn package. The people cautioned that other options could be examined.
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The proposal was drafted last week by experts from the country’s economic institutes.
The unsolicited proposal was brokered by Jakob von Weizsäcker, a former academic economist and SPD politician who is the finance minister of Saarland. The experts argued that the need to increase defence capabilities quickly was a strong argument for using debt, said two people with knowledge of their thinking.
They also endorsed an overhaul of the debt brake during the next legislature. But politicians needed to act quickly and at scale, they wrote. “There is no point in discussing €100bn or €200bn,” said one of the people.
...
Also note how part of the urgency of these negotiations is the desire of the incoming CDU-led government to use the outgoing SPD-led parliamentary supermajority to pass all these new pro-defense-debt proposals. All of this has to be done by March 25, which is the kind of time constraint that tends to lead to extraordinary concessions by one or both parties as the deadline nears and should give the SPD quite a bit of leverage. It’ll be interesting to see what kind of line in the sand the SPD draws for its support:
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In Germany, Merz, whose CDU/CSU conservative bloc won elections on February 23, has accelerated coalition talks with the SPD since Donald Trump publicly admonished Ukraine President Volodymyr Zelenskyy at the White House last week.On Monday, Merz said he aimed for an agreement on defence funding with the SPD before Thursday, when EU leaders meet to discuss Ukraine and the continent’s security.
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Germany’s next chancellor has signalled he wants to use the outgoing parliament’s supermajority to pass the constitutional amendments that such borrowing would require, because his government would probably be blocked by the far-right Alternative for Germany and far-left Die Linke in the next parliament.
The outgoing parliament can be reconvened in an extraordinary session until March 25.
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And so when we see the SPD going into these negotiations declaring their intent to ask for more funding for transport and energy infrastructure in exchange for their support for the special defense spending package, it’s pretty clear which side is going to be compromising the most. The SPD has already signaled its going to forget about a broader overhaul of Germany’s strict constitutional debt brake rules adopted in 2009 and will instead be satisfied with a little extra energy and transportation infrastructure which would probably be needed anyway to handle all this new defense infrastructure:
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Speaking ahead of exploratory talks with the CDU/CSU, SPD co-leaders and negotiators Lars Klingbeil and Saskia Esken suggested on Monday they would request more funding for transport and energy infrastructure, which experts have said requires investment of about €600bn.“Are we able to answer even the big questions now? This certainly includes the issue of external security and our country’s defence capabilities. But this also includes infrastructure, which has been neglected in recent years,” Esken said. “Too little has been invested in energy, network infrastructure, roads, railways, collapsing bridges, but also social infrastructure.”
...
Caretaker chancellor Scholz, who led the SPD to its worst result since the turn of the 20th century, campaigned on relaxing the debt brake. But such a reform would take months and probably face stiff opposition from some factions in the CDU/CSU.
A way to temporarily circumvent the debt brake is to set up off-budget funds in the constitution. Scholz set up a €100bn vehicle in 2022 to buy military equipment and weapons following Russia’s full-scale invasion of Ukraine.
More than 80 per cent of this fund, which expires in 2027, has been committed, but one option is to top it up. The two-fund package would be a rapid “political compromise” to avoid a more complex debt brake overhaul, Steinbach said.
...
Interestingly, the Bundesbank is weighing in on the proposed relaxation of Germany’s debt rules, arguing that if it happens it should be for the purpose of public investment. Which doesn’t exactly sound like an endorsement of defense spending. But that’s the point of making the defense spending ‘outside’ the budget so it doesn’t apply to the debt brake rules anyway:
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The German central bank on Tuesday argued that any reform of the debt rules should focus on creating additional fiscal space for public investment.The German central bank on Tuesday argued that any reform of the debt rules should focus on creating additional fiscal space for public investment. In a policy proposal, the Bundesbank said that a more fundamental reform of the debt brake could generate up to €220bn of investment by 2030.If Germany’s debt-to-GDP level stayed at less than 60 per cent, the government’s ability to borrow should be more than tripled from 0.35 per cent of GDP to 1.4 per cent, the bank said. Even with debt levels above 60 per cent, the Bundesbank suggested increasing the structural deficit threshold to 0.9 per cent of GDP.
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Also note this apparent contradiction in the reporting we’ve seen on the EU rules overseeing the implementation of the joint debt loans: As we saw above, jointly financing defense spending doesn’t require unanimous support of the EU members. This article seems to indicate that unanimous backing would be required, although it’s unclear if perhaps unanimous backing would be required for approval of each individual loan. Either way, it’s a reminder that these negotiations could become extremely messy. Made all the messier by the compressed time fame:
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The talks in Germany came as the European Commission outlined on Tuesday a joint debt instrument that would enable member states to fund military equipment.The instrument would involve the commission borrowing on the markets against the EU budget, then lending to member states at cheap rates. It would require unanimous backing from EU countries.
The €150bn in loans could buy “air and missile defence, the artillery system, missiles and ammunition drones and anti-drone systems, but also to address other means from cyber to military mobility”, said Ursula von der Leyen, president of the commission.
She added that lifting EU fiscal rules for defence investments would enable countries to spend €650bn on defence over four years, or about 1.5 per cent of GDP on average.
Countries will also be given the chance to redirect their regional development funding to defence, and the European Investment Bank will be asked to expand defence investments.
...
Also keep in mind that, while German leaders appear to have surprisingly embraced the concept of joint debt-backed loans for military spending, we shouldn’t necessarily assume those views are widely held by the rest of the German establishment.
Germany’s Other Big Idea: Lifting the EU Budget Constraints for Only Four Years isn’t Enough. A Longer Lift is Required
But then we get to the truly remarkable twist in this story: it’s Germany that is now advocating for the lifting of EU budget constraints for defense spending for far longer than just the four years Ursula von der Leyen proposed. Instead, Germany is calling for a “long-term” deficit exemption across the EU. Just for defense spending, of course:
Financial Times
Germany seeks ‘long-term’ EU exemption for defence spending
Friedrich Merz leads German pivot in Europe’s ‘rearmament’ race
Henry Foy, Andy Bounds and Paola Tamma in Brussels and Laura Pitel in Berlin
Published March 5, 2025 8:27 amGermany has called for the EU to exempt defence spending from its fiscal rules for longer than Brussels had proposed, marking a significant shift in Berlin’s tough stance on deficit and debt under chancellor-in-waiting Friedrich Merz.
The German ambassador to the EU told other national envoys on Wednesday that Berlin wanted to overhaul EU debt and deficit limits to allow for increased defence spending, according to four officials briefed on the discussion.
The ask, which is a complete reversal of Berlin’s previously frugal stance on public spending and borrowing, goes further than a 4‑year exemption floated earlier this week by European Commission president Ursula von der Leyen.
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“Berlin wants to make significant defence expenditure possible in the medium- and long-term through an adaptation of the rules,” said a person familiar with the discussion.
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The move came after Merz on Tuesday pledged that his country would do “whatever it takes” to defend European peace and security, including a plan to allow limitless national borrowing to fund German defence spending. This step increases pressure on other EU governments to follow suit.
European leaders in recent days have accelerated plans to increase the continent’s “rearmament”, as von der Leyen put it, including by relaxing fiscal rules and possibly setting up an intergovernmental fund with UK participation.
The flurry comes as US President Donald Trump halted military support and intelligence sharing with Ukraine and after his administration cast doubt on long-standing American security guarantees for the continent.
In an extraordinary about-face for a man whose party has long opposed changes to Germany’s strict borrowing rules, Merz on Tuesday announced plans to significantly ease the country’s constitutionally enshrined debt brake and to set up a €500bn fund aimed at boosting infrastructure and revitalising the country’s flagging economy.
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The plan will be rushed through the outgoing Bundestag, where Merz and his allies still command a supermajority — and was hailed as a “total game-changer” by long-standing advocates of fiscal reform.
But the conservative leader still needs the support of the Green party, which has reacted angrily to Merz’s U‑turn and criticised him for refusing to approve debt-brake reform when he was in opposition. Merz was due to meet Green party representatives on Wednesday.
Germany’s shift comes on the eve of an emergency summit of EU leaders in Brussels, where other capitals will be under intense pressure to follow Merz’s lead in radically increasing military spending.
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Seven EU member states, including major economies Italy and Spain, are below Nato’s defence spending benchmark of 2 per cent of GDP. Just four — Poland, Estonia, Latvia and Greece — spend more than 3 per cent, seen as a bare minimum for Europe’s necessary rearmament.
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Merz’s volte-face on spending came as von der Leyen encouraged the EU’s other 26 capitals to do likewise and use the 4‑year exemption from fiscal rules for their military budgets.
“A new era is upon us. Europe faces a clear and present danger on a scale that none of us have seen in our adult lifetime,” von der Leyen wrote in a letter to the EU’s 27 leaders on Tuesday.
Von der Leyen also proposed for the commission to raise €150bn that could be disbursed to EU capitals as loans to invest in the arms industry, as well as to redirect other EU funds to the effort.
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Many countries, including Italy, have been demanding a change to the fiscal rules to increase their flexibility to boost defence spending. If all capitals took advantage, von der Leyen said, it would collectively contribute some €650bn over four years. EU member states spent a total of €324bn on defence last year.
Roderich Kiesewetter, a member of parliament with Merz’s CDU, said that allowing defence spending outside of the fiscal rules was “a signal to Spain, Portugal, to Italy to do even more . . . It’s a very helpful action inside Europe to also motivate those who are even more behind”.
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“The German ambassador to the EU told other national envoys on Wednesday that Berlin wanted to overhaul EU debt and deficit limits to allow for increased defence spending, according to four officials briefed on the discussion.”
As we can see, Germany’s decade-long plan for handling its own deficit constraints in the face of calls for higher defense spending aren’t just plans for Germany. The German ambassador to the EU has already proposed a similar plan at the EU level. Perhaps for a decade. Perhaps longer. It’s unclear what exactly the “medium- to long-term” entails. But that’s the plan. A plan that, again, constitutes an historic reversal from Germany’s previous strict austerity-based deficit stance. It’s about priorities. With defense spending clearly having a higher priority than deficit concerns and a much higher priority than social welfare:
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The ask, which is a complete reversal of Berlin’s previously frugal stance on public spending and borrowing, goes further than a 4‑year exemption floated earlier this week by European Commission president Ursula von der Leyen.******
“Berlin wants to make significant defence expenditure possible in the medium- and long-term through an adaptation of the rules,” said a person familiar with the discussion.
...
And, again, this plan for expanded EU-member-level deficit spending is happening at the same time EU President Von der Leyen is proposing a plan that includes both increased deficit spending AND the issuance of jointly-financed debt. And as we saw, the 650 billion in new borrowing was readily approved by all 27 EU leaders while the 150 billion in loans remained tabled and up for debate. Which raises the question as to whether or not Germany’s sudden calls for expanded deficit-spending is being done, in part, as a replacement for that joint debt. We’ll find out soon given the speed of these negotiations:
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Germany’s shift comes on the eve of an emergency summit of EU leaders in Brussels, where other capitals will be under intense pressure to follow Merz’s lead in radically increasing military spending....
Seven EU member states, including major economies Italy and Spain, are below Nato’s defence spending benchmark of 2 per cent of GDP. Just four — Poland, Estonia, Latvia and Greece — spend more than 3 per cent, seen as a bare minimum for Europe’s necessary rearmament.
******
Merz’s volte-face on spending came as von der Leyen encouraged the EU’s other 26 capitals to do likewise and use the 4‑year exemption from fiscal rules for their military budgets.
“A new era is upon us. Europe faces a clear and present danger on a scale that none of us have seen in our adult lifetime,” von der Leyen wrote in a letter to the EU’s 27 leaders on Tuesday.
Von der Leyen also proposed for the commission to raise €150bn that could be disbursed to EU capitals as loans to invest in the arms industry, as well as to redirect other EU funds to the effort.
...
And note how, while only 4 EU states — Poland, Estonia, Latvia and Greece — are currently spending the 3 percent of GDP on defense seen as the bare minimum necessary for the EU’s remarming, seven EU members aren’t even meeting the 2 percent NATO minimum. Which is a reminder that there is a substantial EU bloc that tends to be on the ‘receiving end’ of the EU’s austerity-focused policies. The same bloc that tends to lose almost every major budget-related negotiation, presumably because it doesn’t hold the purse strings:
...
Seven EU member states, including major economies Italy and Spain, are below Nato’s defence spending benchmark of 2 per cent of GDP. Just four — Poland, Estonia, Latvia and Greece — spend more than 3 per cent, seen as a bare minimum for Europe’s necessary rearmament.
...
So when we see the surprising German support for the 150 billion euros of jointly issued debt in EU President Von der Leyen’s proposal — herself a member of Merz’s CDU party — it’s important to keep in mind that Germany’s new proposal to lift the EU budget rules for far longer than 4 years could potentially serve as a means of having a ‘more borrowing for longer’ scheme replace ‘cheap borrowing with jointly-issued debt’ as the German position heading into these negotiations. And yet both the outgoing and incoming German chancellors appear to be very much on board with these jointly financed loans. Jointly financed loans that, again, will eventually have to be paid back. When and how it gets paid back not only has yet to be determined but it’s very possible those determinations won’t happen until long after all of this new debt has been added to EU members’ books. Is the EU building a next-generation military? A next-generation austerity-trap? A bit of both? It’s the big questions that don’t have to be immediately answered that loom largest over this story.
Finally, keep in mind that the use of “defense spending” is a bit of a misnomer. Military industrial complexes can be used for a lot more than just “defense”. Which is going to be another feature of this new era of warfare.
Martin Borman, Nazi in Exile
Politics isn’t supposed to be a zero-sum game. Then again, it’s not supposed to be wildly corrupt either. But then there’s reality. A reality that includes the fact that zero-sum rhetorical gimmicks are pretty routine. Especially when political forces are looking for an excuse to make political unpopular cuts. That zero-sum mentality is a big part of the underlying justification of not just the EU’s years of austerity mandates but also the massive Department of Government Efficiency (DOGE) cuts already wreaking havoc across the United States in the opening months of second Trump administration. Vague fiscals ’emergencies’ get declare and massive cuts are imposed. It’s a now routine pattern of political behavior.
And that zero-sum dynamic brings us to a story that will likely prove to be far more consequential for how EU governments operate in the decades to come now that the EU has put itself on the path to building a military industrial complex that can rival the United States: the growth of defense lobbies and their impact on overall government priorities. Because while there are already plenty of defense lobbyists operating across the EU, it’s a sector that is only going to explode with trillions of euros in new defense spending likely to happen in coming year. Everyone is going to be fighting for a bigger piece of that giant pie. And, in fact, the explosion of EU defense lobbying was already underway well before the new plans for an EU military build up were unfurled, with lobbying budgets for the largest European defense firms jumping around 40 percent between 2022 and 2023 in response to the conflict in Ukraine. Surging lobbying budgets that are only going to surge further with all this new military spending. For decades to come.
And as we saw with, there’s going to be plenty for these lobbyist to fight about. Including non-EU lobbyists keen on ensuring they can to partake in the orgy of spending too. Recall how France and Germany have already disputed over whether or not the EU loans for military procurements should be exclusively used for the purchase of EU-built hardware, with France calling to keep it all in the EU while Germany is open to even extending the loans to countries like Switzerland, Norway, and Turkey. It’s going to be a global lobbying spree.
And while much of that lobbying will be done in the hopes of ensuring one defense form or another wins as big contract, let’s not pretend that this lobbying won’t also include lobbying to ensure that, when the austerity mandates inevitably arrive, the cuts aren’t focused on the military. Austerity mandates are effectively the manifestation of zero-sum logic, after all. Better the cuts hit social spending than military spending, as far as the defense lobby is concerned. And that lobby is only going to have more and more money and influence to throw around. It’s like governmental cancer getting ready to metastasize.
And it’s not like we have to speculate about whether or not the defense lobby will have hand in shaping austerity policies. It turns out we’re already getting a sad example of exactly that kind of influence thanks to the openly corrupt nature of DOGE: First, it turns out General Atomics — the maker of the Predator drone — sent a letter to Elon Musk in the early days of Trump’s second term request that DOGE ‘cut the red tape’ at the Pentagon on policies that slow down the acquisition of military hardware. Yes, General Atomics’s idea for ‘cutting waste, fraud, and abuse’ was to make military acquisitions even easier.
Other suggestions from General Atomics for Musk included accelerating the acquisition of larger defense systems by setting time limits on Pentagon milestones. Which sounds like another recipe for fostering more weapons sales for particularly expensive hardware. The company also called for changing the US’s interpretation of the Missile Technology Control Regime treaty to focus on missile technology tied to weapons of mass destruction rather than drones. Keep in mind that this global treaty was established in 1987 to help control the spread of not just weapons of mass destruction but also the platforms that can deliver them. It would appear General Atomics wants the US to stop caring about the global proliferation of drones capable of delivering nukes. Which some might consider a disturbing conflict of interest for a drone maker to be advocating.
Now, just because General Atomics wrote a letter to Musk doesn’t mean DOGE is going to be following its advice. But as we’re going to see, General Atomics has a bit of an inside track when it comes to peddling influence with DOGE: it turns out one of DOGE senior advisors, Katie Miller, also happens to have close ties to General Atomics’s lobbying firm. Beyond that, Elon Musk actually donated over $40 million in 2022 to a pro-MAGA non-profit that also has close ties to the lobbying firm. Yep. Before serving as a DOGE senior advisor, Miller worked as a senior advisor to the Building America’s Future non-profit as part of her work as a principal at P2 Public Affairs. Building America’s Future — dedicated to the MAGA agenda and the reelection of Donald Trump — received at least $43 million from Musk in 2022. The non-profit was formerly led by Generra Peck, a P2 partner and co-founder, and the board includes Katherine Neal, a senior vice president at P2.
Now, P2 doesn’t directly lobby, but it does have a “sister” lobbying firm, GuidePost Strategies. And GuidePost’s client list just happens to include three of the biggest defense contractors in the US: Honeywell, General Dynamics, and General Atomics. In other words, when General Atomics sent that letter to Elon Musk request DOGE’s assistance in cutting ‘red tape’, we can be pretty confident Katie Miller got the memo too, one way or another. It’s all in the family. Oh, and it also turns out Miller happens to be the wife of Stephen Miller, President Trump’s virulently anti-immigrant who is currently serving as Trump’s deputy chief of staff. As we’ve seen, Stephen Miller isn’t just a protege of Steve Bannon. He’s also old friends with Richard Spencer. It’s just one example of the kind of gross influence routinely peddled by the US Military Industrial Complex. The kind of influence that we can be confident will explode across the EU in coming years.
So what kind of ‘waste, fraud, and abuse’ has DOGE discovered so far? Well, according to recent reports, DOGE has discovered a whole $80 million in ‘savings’ from the Pentagon. Or roughly 0.009% of the Pentagon’s roughly $850 billion annual budget. And even that $80 million figure appears to be riddle with errors and is much smaller. In other words, DOGE has found basically nothing in ‘waste, fraud, and abuse’ at the Pentagon. Surprise! The kind of surprise that the EU had better get prepared for as the defense lobby turns its sights to the EU:
“Russia’s full-scale invasion of Ukraine three years ago sent shock waves through the continent — over both its ability to support Kyiv’s war effort, and its own resources should the bloc itself come under direct military threat. As traditional ally the United States reneges on support for Ukraine, the European Commission is searching for ways to drastically increase the EU’s own defense spending — and the industry is making sure it’s well-positioned to influence the EU policy agenda.”
The EU defense industry has been assembling an army of lobbyists and their grand moment has now arrived. A tidal wave of influence-peddling is set to swamp Brussels. But these lobbyists aren’t necessarily lobbying on behalf of EU-based defense contractors. US defense contractors are going to be scrambling for a piece of this pie too. And not just them. This is going to be a global influence-peddling scheme. Now, as we saw, when it came to the 150 billion euros in EU-backed defense procurement loans, France and Germany had a disputing that very much fell along these lines, with France arguing that the procurements should all be from EU defense contractors while Germany appears open to actually extending the loans to non-EU countries like Norway or Turkey. It’s going to be worth keeping in mind that this army of defense lobbyists will be weighing in heavily on that debate. Weighing in, in the form of lobbying and influence peddling. And while it’s unclear which ‘side’ will prevail — EU defense firms vs their non-EU competition — we can be pretty confident that one end result of all these influence peddling will be a lot more military spending:
And given the reality that the EU is planning on opening the deficit floodgates exclusively for military spending, get ready for all sorts of new entries into the ‘defense’ arena, like IT firms and other “dual use” companies that be potentially redefined as partially defense-related. The EU economy is slated to become a heavily defense-oriented economy if the plans for a new EU MIC fully play out:
And that look at the defense-intensive future of EU lobbying and influence peddling brings us to the following set of stories about the influence peddling already on display with the execution of DOGE across the US federal government. Yes, defense contractors are already lobbying DOGE. Or, in the case of General Atomics Aeronautical Systems, just lobbying Elon Musk directly with requests to ‘remove red tape’ at the Pentagon. Red tape that slows the procurement of more weapons. And don’t forget that the EU’s austerity-centric rules more or less create a permanent DOGE-like presence on the EU landscape, with ideologically driven austerity mandates empowered to shred government organizations for the EU’s poorer members. Sure, military spending might temporarily not trigger those austerity mandates, but that’s not necessarily going to last forever. And when those mandates return, we can be pretty confident the EU’s newly robust defense lobby will be there ready and willing to ensure military spending is as spared as much as possible. It’s all a reminder that Military Industrial Complexes are highly adept at enduring austerity mandates:
“General Atomics Aeronautical Systems Inc. sent the letter dated January 24 to billionaire Tesla CEO Elon Musk, who has been tasked with streamlining U.S. government efficiency as co-head of the Department of Operational Guidance and Efficiency.”
Well that didn’t take long: just days into the new Trump administration, General Atomics Aeronautical Systems Inc. sends Musk a letter requesting that DOGE be deployed to ‘cut red tape’ on the federal government’s military procurement rules. The kind of regulatory cuts changes that would help the US make bigger military purchases in a shorter timeframe. And General Atomics is just one of a growing number of defense contractors who have come to view DOGE as a giant business opportunity:
Also note how the letter to Musk even included calls for reforming the U.S. interpretation of the Missile Technology Control Regime, an international treaty established in 1987 to limit the proliferation of WMDs and the platforms that can deliver them. It would be appear that General Atomics would prefer it if the world ignored the obvious use of drones to deliver nuclear weapons. But that’s not what’s surprising here. What’s surprising if the notion that DOGE somehow has the authority to make such a change. But that’s how US defense contractors are interpreting the situation. Elon Musk has become the business community’s Santa Claus:
And as the following piece from Sludge describes, it’s not like General Atomics even needed to contact Musk directly to have its views heard. Because it turns out one of DOGE advisors, Katie Miller, happens to already have close ties to General Atomic’s lobbying firm: Miller, who also happens to be the wife of Stephen Miller, works as a principle at the public affairs firm P2 Public Affairs, led by Republican strategist Phil Cox. As part of her work as a P2 principal, Miller has served as the senior advisor to Building America’s Future, a ‘non-profit’ that raised tens of millions of dollars to support MAGA Republicans and Donald Trump’s reelection campaign. It turns Musk donated at least $43 million to Build America’s Future in 2022. It also turns out several P2 leaders sit on Build America’s Future’s board. P2 also happens to be the sister firm of GuidePost Strategies, a lobbying firm with a client list that includes major defense contractors like Honeywell, General Dynamics, and General Atomics. So when we learn about General Atomics reaching out to the DOGE team with calls for the removal of ‘red tape’ and other bureaucratic requests, keep in mind that the rest of the defense lobby is presumably doing something very similar. General Atomics just happened to have an insider edge:
“According to lobbying filings, the Cox-led lobbying company works for some of the largest government contractors in the world, companies that could have billions of dollars at stake in DOGE’s decisions on where to make cuts in the federal budget.”
Yes, it turns out one of the top DOGE staffers has close ties to a lobbying firm, GuidePost Strategies, a lobbying firm representing a number of major US defense contractors. And this DOGE staffer, Katie Miller, also happens to be Stephen Miller’s wife, which only enhances the potential sway she has with the Trump administration. But it isn’t just Katie Miller’s role in DOGE that makes this such a disturbing set of relationships. It’s also the fact that Elon Musk donated at least $43 million to the pro-Trump “Build America’s Future” non-profit in 2022, which is effectively run by the leadership of P2, GuidePost Strategies’s sister PR firm. Leadership that included Katie Miller. It’s the kind of blatant conflict-of-interest in DOGE’s operations that would be a much bigger deal if the Trump administration wasn’t already one giant conflict of interest:
And that brings us to this very interesting detail related to that General Atomics lobbying we saw above: it appears that Musk has been highlighting drones as a military ‘solution’ for the DOGE commission to examine. In other words, DOGE isn’t just making drastic cuts to the federal government. It’s also making new spending recommendations. So when we find that GuidePost Strategies represents Honeywell, a company that has been eyeing drone warfare as a growth opportunity, and then find that Musk has already touted that same opportunity as part of his DOGE activities, it’s not hard to spot the conflicts of interest:
And as the article reminds as, the US defense spending is notorious for wasteful spending by contractors who face little to now oversight or market competition. If DOGE was going to find big legitimate examples of ‘waste, fraud, and abuse’, that’s where to start:
So how have those DOGE cuts panned out so far at the Pentagon? About as well as we should probably expect, with a just a tiny sliver of ‘waste, fraud, and abuse’ identified so far. Just $80 million, or roughly 0.009% of the Pentagon’s $850 billion annual budget. And that $80 million figure doesn’t even add up:
“But after checking these numbers against the public ledger posted on DOGE’s website, the two don’t add up.”
$80 million isn’t nothing. But considering the incredible size of the US’s defense budgets, the notorious waste involved, and the fact that President Trump already declared that DOGE was going to find hundreds of billions of dollars of fraud and abuse in the military, $80 million is pretty damn close to nothing. And even that number appears to be some sort of grossly inflated hoax:
Finally, we get to the cherry on top of this DOGE sh*t sandwich: the Republican-controlled congress is actually planning on adding hundreds of billions of dollars in new defense spending over the next two years alone:
That’s right, $200 billion in additional defense spending is on the GOP’s agenda. The same agenda that includes trillions of dollars in new tax cuts and DOGE’s gutting of every part of the federal government it can find. Every part except the Pentagon, it appears. Funny how that works. Which is also a reminder that the implementation of zero-sum politics isn’t just effective at destroying popular public programs. It also tends to make a few people immense wealthy. Although it’s usually the already-immensely wealthy getting immensely wealthier.
Few things are more vital for human health and well-being than friendships. It’s why the ending of a friendship can feel so brutal and damaging. But it happens, and sometimes that’s for the best. That’s the sad but very human drama that appears to be playing out at the nation-state level in the opening months of the second Trump administration, with a growing number of long-standing US allies now openly questioning whether or not the US is a reliable ally. Sentiments are shifting, and fast. And these shifting sentiments on the long-term reliability of the US as a strategic partner are already manifesting in exactly the area where we should probably expect to see it happen first: defense procurements. And not just any defense procurements. The US’s allies are starting to take a second look at one of the most expensive and high-maintenance weapons systems ever developed: the F‑35 jet fighter.
Canada’s new Prime Minister Mark Carney has already announce that the country is going to be reviewing its existing contract for 88 F‑35 fighters. But as we can see from Carney’s statements, it’s not just the F‑35 contract under review. It’s Canada’s long-term strategic relationship with the US that is under review, with the US being increasingly seen as an unpredictable strategic partner who can no longer be relied on. As Carney put it, “It is clear that our security relationship ... is too focused on the United States. We must diversify.” With the EU now being seen as the next obvious choice, in part, with the hopes that Canadian purchases of EU military hardware might result in Canadian defense firms participating in the EU’s newly declared massive internal military build up.
The fact that Canada is reconsidering its relationship with the US isn’t exactly surprising given the increasingly disturbing threats by President Trump to annex the country and make it the 51st State. But it’s not just Canada taking a close look at its strategic reliance on the US. As we’re going to see, the EU has growing concerns of their own over their own significant F‑35 purchases. Concerns that have already resulted in Portugal canceling its own F‑35 purchases.
It’s not just general concerns over the US’s reliability as an ally. The concerns are more specific in many cases and now include fears of US-controlled “kill switches” that could be use to effectively disable the planes should the US choose to do so. Kill switches fears that the Pentagon has already attempted to allay with firm declarations that no kill switches exist.
But as we’re going to see, experts are already warning that no kill switch would be necessary should the US decide to limit the ability of its allies to use these F‑35s in the future. All the US would need to do is cut off access to the spare parts and maintenance necessary to keep the highly sophisticated jets in working order. Software updates could also be withheld, reducing their performance capacity.
The concerns have grown so palpable that the F‑35’s maker, Lockheed Martin, has already come out to assure its clients that they will have complete independence in how they use these jets. The company specifically assured Switzerland that it would have the ability independently choose how it uses its jets. And yet, at the same time, the company also had to acknowledge that F‑35’s, like other Western fighter aircraft, rely on US-secured data communication with with Link-16 and GPS satellite navigation and that complete independence in this area “is not possible… not even with European systems,” while added that the F‑35 still works without data links or satellite navigation. In other words, it sounds like Switzerland will indeed have independence in how it chooses to use its F‑35s. But that might include independence from data links and satellite navigation.
How many more US allies are there suddenly reevaluating their strategic reliance on US-build military systems? Presumably a lot more. And let’s not forget that “kill switch” concerns aren’t just going to be limited to the F‑35. Which is why we also shouldn’t be surprised if a reevaluation of all these giant, notoriously expensive, F‑35 contracts
is just a start:
““It is clear that our security relationship ... is too focused on the United States. We must diversify,” he told reporters during a visit to London, noting that Canada spent about 80% of its defense budget on American weapons.”
Yikes. Canada is starting to think it’s too dependent on the US. And US-built weapons systems in particular. Diversification is looking increasingly tempting. Especially when that diversification is aligned with a political zeitgeist now defined by President Trump’s repeated threats to annex the entire country. Long-term trust in the US is dissipating in real-time:
And, of course, this is all happening in the context of the EU’s plans for a dramatic military build up that will include all sorts of new lucrative defense contracts for years to come. Contracts that just might include Canadian defense firms. As a result, we shouldn’t be surprised if Canada ends up shifting a number of new procurement contracts over to European defense firms since such moves will only increase the odds of some sort of reciprocity down the line:
And those politically-driven Canadian-EU growing defense industry ties brings us to the other half of this story: the freak out by the EU over the possibility that the US could end the ability of its allies to even use all those expensive F‑35s should the US choose to do so. A freak out that has already resulted in Portugal canceling the rest of its F‑35s under contract:
“The country’s air force has recommended buying Lockheed Martin F‑35s, but when outgoing Defense Minister Nuno Melo was asked by Portugese media Público whether the government would follow that recommendation, he replied: “We cannot ignore the geopolitical environment in our choices. The recent position of the United States, in the context of NATO ... must make us think about the best options, because the predictability of our allies is a greater asset to take into account.””
There’s few features more important than long-term predictability when you’re trying to sell your allies on expensive weapon systems purchases that will require skilled maintenance for decades to come. And as we can see from the comments of Portugal’s outgoing Prime Minister, the US is no long seen as a predictable partner. Threatening to annex your closest allies tends to do that:
And as the following Euronews article describes, the concerns over what the US might do aren’t limited to fears over the US blocking access to spare parts and other maintenance services. Growing “kill switch” fears already have German officials cautioning the public that these aren’t just rumors. The US-controlled kill switches are real, they warn. But as experts also remind us, the “kill switches” aren’t really necessarily is the US wants to end the ability of its allies to use these planes. Just cutting off access to the necessary parts and maintenance will be enough:
“Joachim Schranzhofer, head of communications at German arms company Hendsolt, told the German newspaper Bild last week that a so-called “kill switch” put into American-produced F‑35s is more than just a rumour, insinuating that it would be easy for the US to ground the aircraft by blocking access to key software, which remains under their control.”
It’s not just a lack of US predictability. It’s fears that an unpredictable US might decide to deploy “kill switches” against its own allies. Or current allies. Who knows what kind of alliance the US will still have with the rest of NATO in coming years. And these fears are just being voiced by German defense firm executives. German politicians are publicly issuing these warnings too:
And then we get to Lockheed Martin’s attempts to address these concerns by assuring that Switzerland would have complete independence on how they use the F‑35 while, at the same time, the company acknowledges that the planes rely in US-secured data communications and that complete independence in this area “is not possible… not even with European systems,” but that the F‑35 still works without data links or satellite navigation. So it would appear that should Switzerland decide to operate their F‑35s completely independently from the US that will include being independent from data links or satellite navigation capabilities:
But then we get to the observations by experts who caution that, while there’s no evidence of US “kill switches” ion these F‑35s, such a switch isn’t necessary if the US wants to stop of client state from using their F‑35s. All the US has to do is stop selling spare parts:
And that all brings us to the public message the Pentagon was just forced to deliver in response to this diplomatic fiasco: “There is no kill switch.” Of course, you’ll have to take the Pentagon’s word, which requires trust. The vital diplomatic commodity the US is now finding in very short supply:
““There is no kill switch,” the Joint Program Office (JPO) for the F‑35 program said in a statement. “The program operates under well-established agreements that ensure all F‑35 operators have the necessary capabilities to sustain and operate their aircraft effectively. The strength of the F‑35 program lies in its global partnership, and we remain committed to providing all users with the full functionality and support they require.””
There is no kill switch. That’s the unequivocal statement from the Pentagon’s F‑35 program. A clear statement that, nonetheless, does nothing to allay the more basic concerns about the inherent ability of the US to cut off access to all of the hardware — and even software updates — necessary to keep these planes flying:
Also keep in mind that the reliance on US computer networks for the proper function of these jets also brings up the fact that the long-term reliance on the US depends on the US being able to properly maintain the security of these networks. Something that’s going to be increasingly difficult to do with the DOGE-led gutting of the US federal government. This trend is just getting started. A trend that will presumably only gain more and more momentum in line with the Trump-led evisceration of the US government’s technical expertise and general capacity to do big things. Because it turns out rapidly transforming into a global basketcase joke is a great way to lose friends fast. Even when you have the biggest military on the planet. Some traits are more important for friendships. Like trust and reliability. Oh well...
Is there a method to the madness? If so, is acting increasingly insane part of that method? That’s one of the growing number of disturbing questions about not just the general competence of the second Trump administration’s economic team but, increasingly, questions about their general sanity. Making crazy self-contradicting demands of the world isn’t exactly something a sane person would do, after all. And with the Trump administration’s global tariff standoff with the entire global community seemingly accelerating by the day as markets continue to meltdown, general questions like “do they actually have a plan?” or “do they even know what they want out of all of this?” are increasingly market-moving questions. Along with general questions about overall stability of the US as a world leader. Empires don’t typically self-implode like this. So is there a real plan here? Or are we simply watching the deranged antics of a mentally ill president?
Those are just some of the disturbing questions that serve as context for the following report on the increasingly absurdist nature of the Trump administration’s global demands. Absurdist new demands publicly issued by Stephen Miran, chair of the White House Council of Economic Advisers describing the kinds of concessions countries should have to expect to make to the US if they want to avoid an even deeper trade war. Concessions that include:
1. Just accepting the higher tariffs without any retaliation. As Miran put it, “Critically, retaliation will exacerbate rather than improve the distribution of burdens and make it even more difficult for us to finance global public goods.” As we’re going to see, the “global public goods” Miran is referring to are US security guarantees (the same ones Trump has been systematically undermining since taking office) along with the US dollar’s role as the dominant reserve currency. Yes, the dollars role as the reserve currency of choice is now being framed as a kind of burden the US is enduring on behalf of the rest of the globe. It’s getting upset at someone for handing you a limitless credit card.
2. Opening factories and manufacturing in the US. This is, of course, the obvious ‘solution’ the Trump administration was ostensibly angling for the entire time. A solution that will require the promise of sustained high tariffs for many years to come to have any hope of working.
3. Purchasing more US goods. Specifically, building up their militaries and purchasing more US defense hardware in the process. As Miran put it, countries could “stop unfair and harmful trading practices” by buying more American products, adding that countries could boost defense spending and procurement from the U.S. by “taking strain off our servicemembers and creating jobs here.” Now, as we’ve seen, the Trump administration’s public distancing from longstanding security alliances like NATO and the sudden tariffs on close allies like Canada and Australia has already had the effect of forcing the US’s allies to suddenly scramble to build up their militaries and create new security arrangements. Except, we we’ve also seen, this has involved the historic decision by the EU to effectively build its own EU-built replacement for the US ‘security umbrella’. In other words, expect substantial increases in the defense spending but don’t necessarily expect that to translate into more US defense exports.
4. Finally, as Miran puts it, other countries could simply write the US Treasury a check. Yep. The Trump administration is demanding direct financial tributes.
And as Miran argued, these are reasonable demands because of the “global public goods” that the U.S. provides, like global security and the dollar and other reserve assets, “which make possible the global trading and financial system which has supported the greatest era of prosperity mankind has ever known.” As Miran put it, “If other nations want to benefit from the U.S. geopolitical and financial umbrella, then they need to pull their weight, and pay their fair share. The costs cannot be solely borne by everyday Americans who have already given so much.” Again, this is coming from the chair of the White House Council of Economic Advisers.
And those increasingly unhinged demands bring us to the latest update on the EU’s ongoing moves to effectively divorce itself from at least one of those ‘global public goods’ — the US security umbrella — as soon as possible. A new paper put out by the Bruegel think tank and commissioned by the EU has a new proposal designed to facilitate those commitments to increased military spending without forcing the most heavily-indebted EU members to experience large spikes in their debt levels: The creation of the European Defense Mechanism (EDM), a new entity that would be collectively financed and empowered to procure military hardware and then lease it out to member states. Yep, a kind of jointly-procured shared pool of military hardware. Which sure sounds a lot like a major step towards the long-desired EU Army.
Notably, the paper calls for these procurements to be exclusively in EDM-participating countries. Which is another way of saying they won’t be buying American. Nor will it necessarily be exclusively EU countries, with the recommendation that non-EU European states like the UK, Norway, and Ukraine could also participate. Recall how the including of these non-EU states has been a point of contention between France and Germany when it comes to the development of this new European military industrial complex. It sounds like Germany might be winning that debate.
And when it comes to the “global public good” of the dollar as the dominant reserve currency, let’s also not forget that the US dollar’s reserve currency status isn’t some irreversible phenomena. It’s a reflection of decades of US global leadership and the willingness of countries around the world to trust in the long-term stability of the US’s economy and global leadership role. Let’s also not forget that the euro is the second most widely used reserve currency and an obvious replacement for the dollar if the world decides it can no longer make long-term commitments with an increasingly erratic and imperious US. So when we see the Trump administration engage in what amounts to a giant gamble that the globe community can simultaneously be brought to heel, keep in mind that, if that gamble goes awry and the US economy enters an extended period of turmoil and weakness, it’s the euro that could directly benefit as a replacement in the realm of “global public good” reserve currencies.
That’s a snapshot of the madness shaking the foundation of the global order. At the same time the Trump administration is demanding direct cash and US military hardware purchases as tributes for the “global public goods”, its closest allies are scrambling to figure out how to create their own stability and security in the face of an increasingly untrustworthy and unhinged United States that has already burned through the credibility it’s spent decades building:
“Miran argued that other countries ought to comply with Trump’s demands for more money because of the “global public goods” that the U.S. provides, including global security and the dollar and other reserve assets, “which make possible the global trading and financial system which has supported the greatest era of prosperity mankind has ever known.”
Yes, the global community needs to bend to President Trump’s will and just accept all of his demands as a form of payment for the twin “global public goods” provided by the US: the global security that comes from the US’s military supremacy and the use of the dollar as the globe’s primary reserve currency. That’s literally the argument made in public by Stephen Miran, chair of the White House’s Council of Economic Advisers. An argument that completely ignores the reality of the Trump administration’s active shredding of key global military alliances like NATO. The EU didn’t just spontaneously decide to build its own independent military industrial complex over the last couple months. And then there’s the reality that the dollar’s role as a reserve currency isn’t some sort burden imposed on the US. It’s the great economic tool a country could ask for and an achievement derived largely from global faith in the overall competency of the United States as a world leader over the long-run. Global faith that, again, is being actively shredded by this erratic trade war. And yet, the world is apparently supposed to pay some sort of tribute to the US for the privilege of using dollars for international commerce. Tribute that could come in the form of just passively accepting all of these new tariffs without any response. Or perhaps more direct tribute like increase purchases of US military hardware or simply writing checks directly to the Treasury Department. It’s such an unhinged set of demands we also have to wonder if the White House pharmacy is getting frisky again:
And those demands for some form of tribute in return for the “global public goods” of dollar and US military security guarantees brings us to the following update on the EU’s ongoing push to divorce itself from those same guarantees that it no longer views as credible. The EU has a new plan, on top of the existing plan for historic increases in defense spending: The European Defence Mechanism (EDM), an new collectively financed entity that would focus on procuring expensive military hardware and then leasing that hardware to the more heavily indebted EU member states. The idea being that leasing military hardware is going to be a lot less impactful on the budgets of these member states than buying them outright. The EDM could also possible issue loans of its own. And it’s not necessarily going to be an EU-only entity, with other European states like Norway, the UK, and even Ukraine under consideration for EDM participation. And as we should expect, the EDM isn’t going to be procuring military hardware from around the world. Whatever the EDM buys will be built in EDM-participating countries. That’s the plan laid out in a new paper drafted by the Bruegel think tank after being commissioned by the EU presidency. A plan for taking big early steps towards the creation of a joint EU army while stepping away from the trans-Atlantic alliance:
“The paper is part of an EU discussion on how to finance preparations against a potential attack from Russia .as European governments realise they can no longer fully rely on the United States for their security”
This wasn’t a randomly government study on how the EU might jointly procure military hardware. It’s a paper issued in direct response to the Trump administration’s historic lifting of the US’s security umbrella. Europe has concluded the US is no longer a reliable security partner.
And as we can see, this newly proposed European Defence Mechanism (EDM) would serve as as kind of collectively financed EU entity that would serve the purpose of both boosting the EU defense sector — by focusing on EU manufactured hardware — while also allowing the financially weaker member states to effectively lease military hardware without having to purchase it outright. It’s effectively a backdoor to an EU Army. Collectively owned military hardware is coming to the EU, at least assuming this EDM plan becomes reality. But it’s not just an EU plan. As we can see, non-EU European states like the UK, Norway, and even Ukraine are envisioned as possible participants in this new continent military procurement entity, in keeping with the German desires to see this new European military industrial complex go beyond the EU. This could be a very big development, if it comes to fruition. A development designed to ween Europe off of US security guarantees that are no longer deemed credible::
And as we can see with the “strategic enablers” part of the proposal, eliminating security roles currently played by the US — very costly roles in many cases — really is the focus of this plan. Which is presumably part of the reasoning behind the idea that the EDM would only buy from fellow EDM countries. This is a good time to recall all those concerns about “kill switches” and other options the US has to potentially cripple the use of US-build military hardware. The US has turned itself into an untrustworthy bully:
Sure, the EDM is just an idea at this point. But it’s an idea commissioned by the EU President and with immense momentum behind it already. Momentum that only builds with each imperious Trump administration declaration and demand. Mad King Trump is turning out to be quite the “strategic enabler” when it comes to the creation of of new forms of “global public goods” that don’t rely on the whims of a mad king.
Courage is contagious. It’s a slogan we are hearing more and more across the US as the vindictive ‘mad king’ nature of the second Trump term becomes more and more apparent. Of course, that sloganeering is, in part, of response to the undeniable reality that cowardice is pretty contagious too. But as we’re going to see in the following set of articles, when it comes to Trumpian contagions, we can’t just be looking at the US. Because it’s increasingly looking like the EU may have caught a case of Trumpitis. Ironically, a case of Trumpitis that appears to be a reaction in response to the historic intra-NATO rift that has destroyed the long-term credibility of the US’s security guarantees and resulted in an apparent European commitment to the development of a unified continental military industrial complex.
Yes, it turns out that EU governments are increasingly becoming aware of the reality that all these new commitments to elevated military spending are going to have to be accounted for eventually. With cuts to social welfare programs as the likely result. Because as we’ve seen, while the EU’s new budget and deficit rules may allow for the temporary lifting of budget constraints to allow for higher military spending, these are just temporary measures that are allowing for the accumulation of even more debt than would have otherwise been generated. Debt that will eventually trigger the EU’s harsh austerity rules. And when that day arrives, there really isn’t going to be much of a choice for EU governments. Taxes will have to be hiked and social welfare programs, and even pensions, are going to have to be cut. That’s the warning Belgium’s budget minister Vincent Van Peteghem just publicly issued. If there’s going to be major increases in defense spending major cuts to social welfare programs are simply a given. Maybe not immediately, but eventually. As he put it, “every euro that’s a deficit today . . . is a euro that will be debt, and that debt will be one day a tax or a cut and in the social welfare state.”
But it’s not just Belgium’s budget minister hinting at future welfare cuts to pay for all this increased defense spending. US Secretary of State Marco Rubio was in Brussels last week when he called on NATO allies to spend more on defense even if it meant cuts to welfare programs. Last week was also when the Belgian government agreed to spend at least 2 percent of its GDP on defense spending, in line with the NATO minimum although less than the 3 percent target the EU is now pushing for with these no pro-military-spending austerity loopholes. That’s the context of Van Peteghem’s warning to the public. Belgium was making commitments under US pressure. The kind of commitments that the Belgian public is going to have to pay for some day. Presumably with tax hikes and social welfare cuts. That’s the plan.
But as we’re also going to see, the Trump administration’s demands and behavior isn’t just resulting plans for future cuts to things like social welfare and pensions. The Trump administration’s clear intent on pursuing the strategy of ‘dismantling the administrative state’ — a core goal of Project 2025 — across the US is having an alarming side-effect: EU conservatives and business interests are gaining more and more political leverage to push anti-regulatory and anti-environmental agendas under the pretext that EU businesses are operating at a competitive disadvantage if the US no longer cares about regulations and the environment while EU maintains its own standards. For example, the EU Council voted this month to delay both the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD) for two years and there are growing expectations that the EU’s landmark General Data Protection Regulation (GDPR) data privacy laws will be watered-down sooner or later as this newly empowered anti-regulation coalition takes advantage of the Trump-triggered political opportunity.
It’s all a grim reminder that the ascendant gross oligarchic agenda manifested by the Trump administration isn’t just a festering cancer threatening to destroy what’s left of the US-led global order. It’s also stupidly contagious:
“Last week in Brussels, U.S. Secretary of State Marco Rubio called for NATO allies to spend more on defense — even if it meant cuts to welfare programs.”
As we can see, the Trump administration isn’t just intent on slashing social welfare programs across the US. The EU’s social welfare is now in the Trump administration’s crosshairs. With more spending for NATO as the ostensible pretext.
And as Belgium’s budget minister, Vincent Van Peteghem, recently warned, it’s highly likely that increased defense spending would indeed translate into cuts to social welfare programs. Maybe not immediately, but eventually. As he warned, “every euro that’s a deficit today . . . is a euro that will be debt, and that debt will be one day a tax or a cut and in the social welfare state.” A warning that is going to be extra applicable to the EU member states like Belgium that are already operating under so-called excessive deficit procedures for failing to meet targets of 3 per cent for public deficits and 60 per cent debt-to-GDP ratios. Maybe those countries will receive a temporary reprieve on these EU-level penalties for a few years, but there’s no reason to assume that the debt associated with all that extra defense spending won’t eventually be counted against these strict debt and deficit rules. The new EU rules are effective more defense spending now in exchange for more austerity later. Which is bad news for EU workers, but great news for EU ideologues who are looking for any excuse they can to ‘dismantle the administrative state’:
“Belgian budget minister Vincent Van Peteghem told the Financial Times that bigger defence budgets would take a toll on Europe’s welfare systems. Nato leaders are likely to agree in June to raise military budgets to more than 3 per cent of GDP, following the US president’s threats to stop protecting European countries that spend insufficiently on their own security.”
As we can see, the Trump administration’s NATO threats appear to already be yielding results when it comes to increased defense spending. The kind of results that will allow the EU to become much less reliant on US military might in the future. But also the kind of results EU conservatives wanted anyway. Because as Belgium’s budget minister makes clear, all this extra defense spending will inevitably result in either tax hikes or social welfare cuts. Or pension cuts. Along with the privatization of state-owned assets. More military spending and less welfare. It’s all quite convenient for EU conservatives:
But that emerging dynamic — Trump administration threats leading to EU conservative policies — isn’t limited to social welfare cuts. Everything from the EU’s Green New Deal to regulations are apparently on the chopping block. And it’s a dynamic that isn’t just being driven by the Trump administration’s demands for higher spending. The mass dismantlement of the US administrative state has a growing number of EU policymakers asking whether or not the EU’s more robust regulations and consumer protections have become simply unaffordable and anti-competitive given the new global landscape. In other words, if the US is going to hand its economy over to the oligarchs the EU can’t afford to not follow suit:
“With the impending impact of Trump’s tariffs, economic strains on the European economy are increasing demands for deregulation, and unlikely allies have emerged across Europe of the far right, the conservatives, and centrist business owners, all questioning if the Green New Deal shouldn’t be watered down.”
Well look at that: Trumpism is becoming contagious. At least for the EU’s business community, which smells an opportunity. Under this ‘logic’, if non-EU governments are not demanding that businesses operate more sustainably, or worse, deprioritizing it, then EU has no choice but to follow suit or watch its economy trail. Even the EU’s groundbreaking General Data Protection Regulation (GDPR) law is at risk of being tossed away. Keep in mind we’re talking about following the lead of a US administration that appears intent on inducing some sort of global depression. That’s the demented nature of this dynamic:
And, finally, let’s not forget that the abandonment of policies like the EU Green New Deal and environmental regulations in favor of more military spending isn’t just asking for mass social harm. It’s a recipe for a further climate disaster. Caring about the state of the environment has become ‘uncompetitive’ too, apparently:
And let’s not forget that there are few human activities worse for the health of the environment than modern warfare. All of this environment-destroying military build up activity is also a prelude to the orgy of environmental destruction that comes with active warfare. But that’s the destructive capability that the EU has committed itself to developing. Thanks in large part to a global case of Trumpian madness that is clearly spreading.
It’s virtually impossible at this point to not suspect the Trump administration’s self-inflicted economic roller coaster hasn’t become a historic insider trading opportunity. And with recent reports about Treasury Secretary Scott Bessent giving an off-the-record talk at an invitation-only event sponsored by JPMorgan where he admitted that Trump’s trade war with China is unsustainable, it’s becoming increasingly hard to assume that this historic insider trading opportunity isn’t getting more and more historic with each market-breaking Trumpian proclamation. IYKYK.
It’s obviously a historically great time to be an insider. Which raises an interesting question: so what kind of inside info is Deutsche Bank getting. The scandal-plagued bank was Trump’s long-time banker, after all. Granted, Deutsch Bank publicly pledged to no longer do business with Trump in the days following the January 6 Capitol insurrection. And sure, Trump’s long-time banker at Deutsche Bank may have resigned in December of 2020. But it’s not hard to imagine Trump has quietly maintained a relationship with the bank that has served him for so long, especially after returning to the White House. Just imagine the kind of relationship Deutsche Bank might be interested in these days.
And while insider information on new market-moving US economic policies (or just tweets) is going to obviously be of keen interest to any financial player keen on making a killing when those markets move, here’s a series of article that serve as a reminder that this market-moving turmoil is turning into a historic opportunity for the euro to dethrone the dollar as the world’s top-tier ‘safe haven’ currency. Because as we’re going to see, while the dollar’s role in global financial markets have clearly broken down over the past couple of weeks in response to Trump’s trade madness, so has the euro’s and it’s broken down in the opposite direction. The dollar is exhibiting the kind of behavior associated with a ‘capital flight’ scenario seen in emerging markets while the euro is experience a breakdown in the typical inversion relationship between movements in euro bonds and the value of the euro itself. The euro is surging at the same time money is piling into European bonds and driving down yields. That doesn’t normally happen. But it’s happening thanks to a global shift reassessment of dollar’s safe-haven status.
And as we’re also going to see, while it might sound overall great for the EU if the euro supplants the dollar as the premier safe haven asset, it’s not that simple. Especially for the EU which has built itself around optimizing exports through the imposition of what amounts to an EU-wide adoption of Germany’s traditional Ordoliberal economic paradigm. A surging euro really could lead to a deflationary shock. That was the warning Deutsche Bank was issuing three weeks ago, a week before the worst of Trump’s tariff madness sent US bond markets reeling.
It was part of a broader warning about a global ‘confidence crisis’ in the dollar. George Saravelos, the bank’s global head of FX strategy, wrote in a note to clients, “As We are in the midst of dramatic regime change in markets,...Given the dramatic nature of the moves, we are becoming increasingly concerned that the dollar is at risk of a broader confidence crisis.” Sarvelos went on to warn about the exact market melting scenario that played out over the last couple of week with across-the-board declines in dollar-based assets being the “strongest market signal” that a process of US disinvestment is accelerating. He went on to warn that while that scenario hadn’t yet happened, “it would be a very negative signal if it did.” And then it happened, of course. The dollar markets broke as Sarvelos warned days after this warning and Trump ‘paused’ the tariffs, citing the growing ‘yippee’ nature of the markets. But the ‘pause’ obviously didn’t end the damage. The fallout has continued as the confidence crisis festers.
As Sarvelos also predicted, the European Central Bank (ECB) wasn’t going to just stand by and allow a deflationary shock of this magnitude to happen without a response. Rate cuts can be expected in an attempt to keep the value of the euro down (and the competitiveness of European exports up). And sure enough, the ECB cut those rates last week. The eurozone has what could arguably be considered an ‘overconfidence crisis’ emerging in response.
And that overconfidence crisis for the eurozone could get a lot worse fast. Because the worse thing get for the dollar, the faster they can get even worse as the assumptions that long drove finance get overturned. For example, we’ve gotten reports about the comments made during a closed-door meeting of EU financial supervisors by Petra Hielkema, the chair of the European Insurance and Occupational Pensions Authority, about the growing questions about the ‘risk free’ safe haven status of US Treasuries. Consequences that could emerge in less visible areas of the market like hedge funds or private credit, as Hielkema warned. But as a representative for the bloc’s markets regulator also argued during the meeting, he current period of upheaval could bring an opportunity to curb the dominance of US financial and market players. And that’s the key thing to keep in mind when assessing EU policy responses to this US-created global crisis: It’s an enormous danger, but also an incredible opportunity for Europe.
As we’re also going to see, PIMCO, the California-based bond giant that was bought by German insurance giant Allianz back in 1999 issued a similar warning about a growing crisis in confidence in the dollar’s safe haven status. It’s going to be very interesting to see what kind of role the bond giant plays in that growing crisis of confidence in coming months and years.
And yet, again, a surging euro value as a consequence of its growing safe haven status really is a serious complication for the EU’s overall export-based economic strategy. It’s a serious mismatch. But that’s where the historic commitment to trillions in euros of new military spending comes into play in a major way. Because as we’re going to be reminded of in the Financial Times piece below on the market-breaking reverse dynamics that have emerged in Germany’s markets as German Bund become even more coveted, there has long been one major problem holding Bunds back from replacing US Treasuries as the premier global reserve asset: there simply aren’t enough Bunds. It’s a consequence of Germany’s strict debt ceilings. Or rather, formerly strict debt ceilings. And it’s a dynamic that applies to the eurozone as a whole: there’s just way more US Treasuries than euro-denominated government debt that has ensure the global markets have a robust stable supply of the dollars for global investors. Yes, this new military austerity loophole that the EU has discovered in response to the Trump administration’s rupturing of the NATO alliance is turning out to be incredibly handy in the context of the dollar’s Trump-created confidence crisis. The more the euro surges, the more incentive the eurozone, and Germany especially, has to issue more bonds and the more that growing supply of euro-denominated bonds helps to fill the necessary demand that a top-tier global reserve asset requires. The development of a European military industrial complex doubling as a deflationary shock absorber in response to a US self-inflicted shock. It really is this insane. Rampant insider trading is the cherry on top. That’s all part of the context of the growing number of warnings about a confident crisis in the dollar. It’s a crisis for the EU too, but also a giant opportunity:
““The last thing the ECB wants is an externally imposed disinflationary shock from a loss in dollar confidence and a sharp appreciation in the euro on top of tariffs. Expect pushback,” Saravelos wrote. The euro rose more than 2% on Thursday, and was set for its best day since 2015.”
It’s a key warning to keep in mind as this market tumult plays out in a manner that results in more and more demand for European bonds: a surging euro really could be a disinflationary shock. The kind of shock that undercuts advantages a relatively weak euro presented to export powerhouses like Germany. As a result, we should probably expect upcoming ECB rate cuts. That was the prediction Deutsche Bank made roughly three weeks ago. A prediction that, as we’ll see, turned out to be correct. The ECB cut those rates with more cuts expected:
Now, let’s take a look at how these warnings evolved in the weeks following that Deutsche Bank prediction. First, here’s a report on the guidance given by an entity that could ultimately play an important role in any major developments in the US bond markets: California-based bond giant PIMCO. Of course, while PIMCO might be based in California, it’s been majority owned by German insurance giant Allianz since 1999. And as we can see in the following piece published just a week ago, PIMCO is observing how the behavior of the market toward dollar-based assets — stocks, dollars, and bonds — hasn’t just broken down. It’s been mirroring dynamics typically associated with emerging markets, with parallel drops across all dollar-based asset classes. The kind of dynamic that signals an international market where the go-to reserve status of US Treasuries are being seriously reconsidered. A reconsideration that, in turn, will end up benefiting the bond markets of Europe, the UK, Japan, and even emerging markets:
“California-based PIMCO, which manages about $2 trillion in assets, said the recent selloff, which saw parallel drops in U.S. equities, the dollar, and Treasuries, mirrored dynamics typically associated with emerging market economies.”
Yes, the world’s premier reserve assets are behaving like an emerging market. Something that is not supposed to happen. Everything ‘dollar’ is being sold. In other words, it’s not so much that other currencies are surging in value so much as it’s the dollar dropping against everything. A dynamic that might help boost US exports. But at the cost of the dollar’s reserve status. Because when even emerging markets are looking like a relative safe haven to weakness in the dollar something has fundamentally broken:
That was PIMCO’s view. Now let’s take a look at a warning also issued last week by the head of the EU’s insurance watchdog. According to reports, Petra Hielkema, the chair of the European Insurance and Occupational Pensions Authority, warned EU financial supervisers during a closed-door meeting that the dollar’s ‘safe haven’ status is now in question as a result of the massive volatility in the US Treasury market. Keep in mind that there are few things that could be more impactful on the reserve status of the dollar than a shift in EU regulations regarding the prevailing ‘risk free’ status of US Treasuries. Especially when it comes to major consumers of US Treasuries like pension funds. The ‘bond vigilantes’ in the markets have immense power during times like this but so do regulators. And while there’s no indication of an imminent shift in EU financial regulations regarding the dollar’s safe haven status, it’s a hint that talks about enacting such a shift have implicitly already begun. Talks that start with warnings like these:
“Petra Hielkema, the chair of the European Insurance and Occupational Pensions Authority, made the comments last week as part of a presentation on behalf of EU financial supervisors, according to people familiar with the matter.”
It’s not particularly unusual to get reports of what was discussed during a close-door meeting of policy-makers. What is unusual is a discussion about the collapse of the dollar’s safe haven status. That’s not supposed to happen. But it happened after the 10-year yield on US Treasuries surged the most in two decades. The market is being forced to look for safe haven alternatives, with the euro as an obvious choice:
And note these ominous warnings about how problems might surface in less visible parts of the market, such as hedge funds. At the same time, we’re hearing about hedge funds pulling back on high-yield (high risk) and private-equity positions. Are we going to be looking at a private-equity-led market ‘event’? We’ll see, but it would hardly be surprising at this point. But maybe some other sector will blow up first. President Trump lit a lot of fuses. Time will tell which one is shortest:
And note how Hielkema’s warnings are juxtaposed with talk of the “opportunity” presented by the situation to curb the dominance of US financial markets. It’s not a surprising comment given the situation but it sure is notable:
And that brings us to the following Financial Times piece that reminds of the fact that it’s not just the dollar’s traditional market dynamics that have broken down in the past couple of weeks. The euro’s dynamics are breaking too, but in the other direction. As we should expect given the fact that euros are one of the top destinations for all that dollar-denominated flight capital:
“The usual correlation between euro and relative rates has “completely broken down in the past two weeks, as Bunds and the euro have both benefited from US policy-induced market concerns”, said Mike Riddell, a bond fund manager at Fidelity International. This was “symptomatic of capital flight”, he added.”
It was “symptomatic of capital flight.” That’s how a bond fund manager at Fidelity International characterized the market dynamics last week. But as he reminds us, it wasn’t just that the dollar’s traditional behavior broke down. The relationship between the euro and the relative rates also broke down as German Bunds and the euro both surged in value. A dynamic that still held last month following the adoption of the historic commitment to an unprecedented debt-fueled military buildup. It was only this month, after Trump’s tariff madness really took hold, that was saw this new dynamic take hold. A capital flight dynamic with European markets operating as a prime flight destination:
Also note the grim assessment from April LaRusse, head of investment specialists at Insight Investment, who observes that investors are looking outside of the US for a “safe, rule-of-law and we-can-rely-on-it government, with a well-run economy.” It’s especially grim when you consider the likelihood of ‘rule-of-law returning to the US any time soon. President Trump may or may not drop the tariff madness. But he’s obviously not doing ‘rule-of-law’ any time time. Or ever:
Finally, we get to this crucial point that underscores how the self-inflicted damage being committed by the US plays perfectly into the EU plans for a massive expansion of European debt: One of the factors that has long held back the ability of German Bunds to take on a real ‘safe haven’ status is their relatively limited supply as a consequence of Germany’s long-term commitment to debt-phobic Ordoliberal economic strategies designed to maximize exports. That’s how Bunds end up with long periods of sub-zero Bund rates. If Bunds are to really start challenging US Treasuries as the global ‘risk free’ safe haven asset of choice, Germany is going to have to issue a lot more of them. At the same time, one of the most direct solutions to those EU fears of a ‘deflationary shock’ resulting from a surging euro is policies that increase the overall supply of the euro. And issuing historic levels of public debt is one way to increase that supply. In other words, the historic military spending the EU has committed itself to could double as a monetary policy tool for managing the deflationary shock of the dollar’s downfall:
It’s also worth keeping in mind that the more the US self-implodes, the more of an incentive for bigger and more immediate military investments by Germany and the rest of the EU, both to take advantage of the dollar’s flagging status but also to contain the deflationary shock. The more US accelerates its implosion the faster the EU gets a shiny new military industrial complex and the magical credit card that comes with being the premier safe haven economy. It’s a crisis for the globe. But kind of a dream crisis for the EU.