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The New World Ordoliberalism, Part 8: A New MIC Becomes the EU’s New Austerity Loophole. Maybe.

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
Updat­ed

BRUSSELS, 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.

————

“France and six oth­er coun­tries face EU bud­get dis­ci­pline mea­sures” By Jan Strupczews­ki; Reuters; 06/19/2024

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 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.

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.

...

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.

...

This arti­cle is part of the Project“EU For­ward”Social Europe runs in coop­er­a­tion with the Friedrich-Ebert-Stiftung.

————

“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:

...
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:

...
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.
...

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:

...
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 Fag­gion­a­to

BRUSSELS — The Euro­pean Union must explore issu­ing com­mon debt to finance increas­ing defense spend­ing, Span­ish Finance Min­is­ter Car­los Cuer­po told POLITICO.

...

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.

...

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.

...

———–

“EU-wide bor­row­ing for defense a ‘no-brain­er,’ says Spain’s finance min­is­ter” By Gre­go­rio Sor­gi, Car­lo Mar­tus­cel­li and Gio­van­na Fag­gion­a­to; Politi­co; 02/17/2025

“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:

...
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.

...

In June last year, the Euro­pean Com­mis­sion esti­mat­ed addi­tion­al defense invest­ment of around €500 bil­lion is need­ed in the EU over the next decade.

...

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.
...

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:

...
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.
...

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
Updat­ed

ROME, 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%.

...

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.

...

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.

———–

“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%.”

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:

...
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.
...

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, 2025

BRUSSELS (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.

...

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.

...

“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.

...

————

“Take­aways from the EU’s land­mark secu­ri­ty sum­mit after Trump said Europe must fend for itself” By LORNE COOK and RAF CASERT; Asso­ci­at­ed Press; 03/07/2025

“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:

...
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.
...

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:

...
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.
...

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, 2025

BRUSSELS (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.

...

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.

...

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.

...

———–

“EU pon­ders 800 bil­lion euro plan to beef up defens­es to counter pos­si­ble US dis­en­gage­ment” By RAF CASERT; Asso­ci­at­ed Press; 03/04/2025

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:

...
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.
...

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 am

A 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.

...

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.

...

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?”

...

———-

“France and Ger­many clash over ‘buy EU’ weapons” by Pao­la Tam­ma, Hen­ry Foy and Ben Hall; Finan­cial Times; 03/08/2025

“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:

...
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.
...

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 16:57

The 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.

...

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.

...

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.

...

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.

———–

“How can the EU unlock up to €800bn for its ‘rear­ma­ment plan’?” By Paula Sol­er; Euronews; 05/03/2025

“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:

...
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.
...

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:

...
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.

...

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.
...

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:

...
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.

...

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.
...

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:

...
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.
...

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:

...
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.
...

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, 2025

A 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.

...

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.

...

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.

...

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.

...

———–

“New defence bank launched to attract cap­i­tal and fix ‘dis­as­trous’ Euro­pean pro­cure­ment” by Ani­ta Hawser; The Banker; 03/03/2025

“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:

...
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.

...

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.

...

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.
...

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:

...
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.”

...

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.
...

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 06:00

Euro­pean 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.

...

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.

...

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.

...

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.

...

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.

...

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.

————

“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:

...
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.
...

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:

...
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:

...
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:

...
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:

...
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:

...
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.

...

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.
...

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 am

Germany’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.

...

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.

...

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.

...

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.

———–

“Germany’s Friedrich Merz plans ‘dou­ble bazooka’ for defence and infra­struc­ture” by Anne-Syl­vaine Chas­sany in Berlin, Olaf Stor­beck in Frank­furt and Pao­la Tam­ma in Brus­sels; Finan­cial Times; 03/04/2025

“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:

...
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.

...

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:

...
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.

...

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.
...

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:

...
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:

...
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.
...

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:

...
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 am

Ger­many 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.

******

“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.

...

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.

*****

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.

...

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.

...

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”.

————-

“Ger­many seeks ‘long-term’ EU exemp­tion for defence spend­ing” by Hen­ry Foy, Andy Bounds, Pao­la Tam­ma and Lau­ra Pitel; Finan­cial Times; 03/05/2025

“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:

...
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:

...
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.

Discussion

5 comments for “The New World Ordoliberalism, Part 8: A New MIC Becomes the EU’s New Austerity Loophole. Maybe.”

  1. 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:

    Politi­co

    Defense indus­try spends big on lob­by­ing Brus­sels

    With Brus­sels increas­ing­ly tak­ing charge of Europe’s defense agen­da, arms-mak­ers are beef­ing up their influ­ence in EU insti­tu­tions.

    March 5, 2025 4:20 am CET
    By Elisa Braun and Gio­van­na Coi

    BRUSSELS — Since war arrived on Europe’s doorstep in Feb­ru­ary 2022, defense com­pa­nies have been mak­ing hay — by sig­nif­i­cant­ly increas­ing their pres­ence in Brus­sels.

    The lob­by­ing bud­gets of the largest Euro­pean defense com­pa­nies surged around 40 per­cent between 2022 and 2023, a data inves­ti­ga­tion by POLITICO found. Most have expand­ed their Brus­sels-based teams over the past three years to meet the grow­ing demand for influ­ence in the cap­i­tal of Euro­pean Union pow­er.

    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.

    “We see an unprece­dent­ed inter­est dri­ven by the stark real­i­ty of the secu­ri­ty land­scape,” said Line Tres­selt, part­ner and group direc­tor of defense and secu­ri­ty at Rud Ped­er­sen, a pub­lic affairs con­sul­tan­cy that has been advis­ing the defense sec­tor for two decades.

    ...

    At stake is an old-fash­ioned bat­tle over mon­ey: Euro­pean arms-mak­ers want to ensure EU cash goes to local com­pa­nies, while for­eign con­trac­tors also want a slice of the pie.

    “It’s more than a response to the full-scale inva­sion in Ukraine: with EDIP [the €1.5 bil­lion Euro­pean Defence Indus­try Pro­gramme], but also the Euro­pean Defense Fund, the upcom­ing EU defense white paper, the new­ly appoint­ed defense com­mis­sion­er, cou­pled with NATO’s evolv­ing pos­ture … there’s a mas­sive increase of EU-made poli­cies for the sec­tor,” said Tres­selt.

    Every­one wants a piece

    The top 10 EU defense firms — Air­bus, Leonar­do, Thales, Rhein­metall, Naval, Saab, Safran, KNDS Deutsch­land, Das­sault and Fin­cantieri — have to declare their lob­by­ing efforts in the EU Trans­paren­cy Reg­is­ter when they lob­by in mem­ber coun­tries. Archives from the NGO-dri­ven data­base Lob­by­Facts also allow a com­par­i­son with pre­vi­ous entries from ear­ly 2022 and ear­ly 2023.

    In 2022, cumu­la­tive spend­ing for the top 10 ranged between €3.95 mil­lion and €5.1 mil­lion; by 2023, that fig­ure had risen to between €5.5 mil­lion and €6.7 mil­lion. Work­ing off the low­er ends of the brack­ets, that would equate to a 40 per­cent increase in just one year.

    The trend is par­tic­u­lar­ly evi­dent with Swedish defense giant Saab, which dou­bled its spend­ing — fol­lowed by Air­bus and Das­sault, both of which sig­nif­i­cant­ly ramped up their lob­by­ing efforts.

    Along­side increas­ing bud­gets, the major­i­ty of these com­pa­nies have bol­stered their teams. In 2024, 90 per­cent of the firms sur­veyed report­ed hir­ing addi­tion­al full-time staff to rep­re­sent their inter­ests in Brus­sels. Thales led the charge, expand­ing its lob­by­ing team from 3.5 to 10 employ­ees. Leonar­do fol­lowed by grow­ing its team from three to five employ­ees.

    Com­pa­nies once focused on nation­al mar­kets like Ger­many and Poland, due to the U.S. mil­i­tary pres­ence there, are now estab­lish­ing a foothold in Brus­sels too, added Tres­selt.

    U.S. defense giant Lock­heed Mar­tin, for exam­ple, signed on the EU lob­by­ing reg­is­ter for the first time last May, and has already deployed two lob­by­ists to the Euro­pean Par­lia­ment. Mean­while, U.S. aero­space firm RTX has two full-time lob­by­ists and four exter­nal rep­re­sen­ta­tives advanc­ing its inter­ests in Brus­sels.

    Big appetite

    Don­ald Trump has added anoth­er ele­ment of uncer­tain­ty to Euro­pean defense. Coun­tries don’t know whether to appeal to the trans­ac­tion­al U.S. pres­i­dent by buy­ing more Amer­i­can weapons, or shift to Euro­pean arms inde­pen­dent of U.S. influ­ence. Regard­less, both options mean work for defense lob­by­ists.

    Brus­sels-based con­sul­tan­cies are rac­ing to meet the increased demand. Tres­selt said that Rud Ped­er­sen has expand­ed its prac­tice, dri­ven by an influx of IT com­pa­nies enter­ing the defense mar­ket.

    “Banks and invest­ment funds, which his­tor­i­cal­ly saw rep­u­ta­tion­al risk in enter­ing defense, also seek spe­cial­ized advice now,” said Jean-Marc Vesco, CEO of C&V Con­sult­ing, a con­sul­tan­cy ded­i­cat­ed to the defense sec­tor. He added that the grow­ing demand led to his com­pa­ny dou­bling in size.

    In terms of con­sult­ing firms, Brus­sels’ lob­by­ing scene remains large­ly dom­i­nat­ed by a hand­ful of estab­lished play­ers.

    ...

    ———–

    “Defense indus­try spends big on lob­by­ing Brus­sels” By Elisa Braun and Gio­van­na Coi; Politi­co; 03/05/2025

    “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:

    ...
    The lob­by­ing bud­gets of the largest Euro­pean defense com­pa­nies surged around 40 per­cent between 2022 and 2023, a data inves­ti­ga­tion by POLITICO found. Most have expand­ed their Brus­sels-based teams over the past three years to meet the grow­ing demand for influ­ence in the cap­i­tal of Euro­pean Union pow­er.

    ...

    “We see an unprece­dent­ed inter­est dri­ven by the stark real­i­ty of the secu­ri­ty land­scape,” said Line Tres­selt, part­ner and group direc­tor of defense and secu­ri­ty at Rud Ped­er­sen, a pub­lic affairs con­sul­tan­cy that has been advis­ing the defense sec­tor for two decades.

    ...

    At stake is an old-fash­ioned bat­tle over mon­ey: Euro­pean arms-mak­ers want to ensure EU cash goes to local com­pa­nies, while for­eign con­trac­tors also want a slice of the pie.

    “It’s more than a response to the full-scale inva­sion in Ukraine: with EDIP [the €1.5 bil­lion Euro­pean Defence Indus­try Pro­gramme], but also the Euro­pean Defense Fund, the upcom­ing EU defense white paper, the new­ly appoint­ed defense com­mis­sion­er, cou­pled with NATO’s evolv­ing pos­ture … there’s a mas­sive increase of EU-made poli­cies for the sec­tor,” said Tres­selt.

    ...

    Com­pa­nies once focused on nation­al mar­kets like Ger­many and Poland, due to the U.S. mil­i­tary pres­ence there, are now estab­lish­ing a foothold in Brus­sels too, added Tres­selt.

    U.S. defense giant Lock­heed Mar­tin, for exam­ple, signed on the EU lob­by­ing reg­is­ter for the first time last May, and has already deployed two lob­by­ists to the Euro­pean Par­lia­ment. Mean­while, U.S. aero­space firm RTX has two full-time lob­by­ists and four exter­nal rep­re­sen­ta­tives advanc­ing its inter­ests in Brus­sels.
    ...

    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:

    ...
    Don­ald Trump has added anoth­er ele­ment of uncer­tain­ty to Euro­pean defense. Coun­tries don’t know whether to appeal to the trans­ac­tion­al U.S. pres­i­dent by buy­ing more Amer­i­can weapons, or shift to Euro­pean arms inde­pen­dent of U.S. influ­ence. Regard­less, both options mean work for defense lob­by­ists.

    Brus­sels-based con­sul­tan­cies are rac­ing to meet the increased demand. Tres­selt said that Rud Ped­er­sen has expand­ed its prac­tice, dri­ven by an influx of IT com­pa­nies enter­ing the defense mar­ket.

    “Banks and invest­ment funds, which his­tor­i­cal­ly saw rep­u­ta­tion­al risk in enter­ing defense, also seek spe­cial­ized advice now,” said Jean-Marc Vesco, CEO of C&V Con­sult­ing, a con­sul­tan­cy ded­i­cat­ed to the defense sec­tor. He added that the grow­ing demand led to his com­pa­ny dou­bling in size.

    In terms of con­sult­ing firms, Brus­sels’ lob­by­ing scene remains large­ly dom­i­nat­ed by a hand­ful of estab­lished play­ers.
    ...

    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:

    Reuters

    Preda­tor drone mak­er asks Musk’s DOGE to cut Pen­ta­gon red tape, let­ter shows

    By Reuters
    Jan­u­ary 27, 2025 9:23 PM CST
    Updat­ed

    WASHINGTON, Jan 27 (Reuters) — A lead­ing defense man­u­fac­tur­er has asked the Trump admin­is­tra­tion to reform the Pen­tagon’s con­tract­ing sys­tem, say­ing it was too slow and bureau­crat­ic to com­bat threats from Chi­na and Iran, a let­ter reviewed by Reuters showed.

    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.

    The com­pa­ny, which makes the pop­u­lar Preda­tor drone, joins a grow­ing list of firms that have viewed the DOGE effi­cien­cy pan­el as a route to lob­by for the removal of rules that slow the sale of mil­i­tary equip­ment.

    L3Harris Tech­nolo­gies (LHX.N), one of the world’s biggest defense con­trac­tors, called on the pan­el to reform the Pen­tagon’s con­tract­ing sys­tem ear­li­er this month, cit­ing sim­i­lar con­cerns.

    In the let­ter, Gen­er­al Atom­ics Aero­nau­ti­cal Sys­tems CEO Lin­den Blue urged Musk to reform the defense acqui­si­tion sys­tem to enhance its effi­cien­cy and con­tri­bu­tion to nation­al secu­ri­ty.

    ...

    Blue sug­gest­ed that the U.S. gov­ern­ment could accel­er­ate larg­er sys­tem acqui­si­tions by set­ting time lim­its on Pen­ta­gon mile­stones.

    He also called for estab­lish­ing account­abil­i­ty with­in the U.S. For­eign Mil­i­tary Sales sys­tem, and reform­ing the U.S. inter­pre­ta­tion of the Mis­sile Tech­nol­o­gy Con­trol Regime to focus on mis­sile tech­nol­o­gy tied to weapons of mass destruc­tion rather than Unmanned Aer­i­al Sys­tems (drones).

    ...

    Speed­ing up Pen­ta­gon con­tract­ing could poten­tial­ly boost prof­its for com­pa­nies that do busi­ness with the defense depart­ment. Com­pa­nies nor­mal­ly pay lob­by­ists mil­lions of dol­lars to advo­cate on their behalf.

    ————-

    “Preda­tor drone mak­er asks Musk’s DOGE to cut Pen­ta­gon red tape, let­ter shows” By Reuters; Reuters; 01/27/2025

    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:

    ...
    The com­pa­ny, which makes the pop­u­lar Preda­tor drone, joins a grow­ing list of firms that have viewed the DOGE effi­cien­cy pan­el as a route to lob­by for the removal of rules that slow the sale of mil­i­tary equip­ment.

    L3Harris Tech­nolo­gies (LHX.N), one of the world’s biggest defense con­trac­tors, called on the pan­el to reform the Pen­tagon’s con­tract­ing sys­tem ear­li­er this month, cit­ing sim­i­lar con­cerns.

    In the let­ter, Gen­er­al Atom­ics Aero­nau­ti­cal Sys­tems CEO Lin­den Blue urged Musk to reform the defense acqui­si­tion sys­tem to enhance its effi­cien­cy and con­tri­bu­tion to nation­al secu­ri­ty.

    ...

    Blue sug­gest­ed that the U.S. gov­ern­ment could accel­er­ate larg­er sys­tem acqui­si­tions by set­ting time lim­its on Pen­ta­gon mile­stones.

    ...

    Speed­ing up Pen­ta­gon con­tract­ing could poten­tial­ly boost prof­its for com­pa­nies that do busi­ness with the defense depart­ment. Com­pa­nies nor­mal­ly pay lob­by­ists mil­lions of dol­lars to advo­cate on their behalf.
    ...

    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:

    ...
    He also called for estab­lish­ing account­abil­i­ty with­in the U.S. For­eign Mil­i­tary Sales sys­tem, and reform­ing the U.S. inter­pre­ta­tion of the Mis­sile Tech­nol­o­gy Con­trol Regime to focus on mis­sile tech­nol­o­gy tied to weapons of mass destruc­tion rather than Unmanned Aer­i­al Sys­tems (drones).
    ...

    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:

    Sludge

    DOGE’s Ties to the Mil­i­tary-Indus­tri­al Com­plex

    By Don­ald Shaw
    Pub­lished on Dec 23, 2024

    A polit­i­cal group fund­ed by Elon Musk that until recent­ly employed one of his part­ners in the Depart­ment of Gov­ern­ment Effi­cien­cy is deeply tied to a lob­by­ing firm that helps sev­er­al of the largest Defense con­trac­tors secure con­tracts from the Pen­ta­gon and appro­pri­a­tions from Con­gress.

    In 2022, Musk report­ed­ly began donat­ing tens of mil­lions to a non­prof­it called Build­ing America’s Future. The group raised more than $53 mil­lion that year, a big uptick from the $11 mil­lion it raised the year pri­or, and accord­ing to the Wall Street Jour­nal, at least $43 mil­lion of that fund­ing was pro­vid­ed by Musk. Accord­ing to the group’s lat­est tax fil­ing, it raised $20.9 mil­lion in 2023.

    Dur­ing the 2024 elec­tion cycle, Build­ing America’s Future set up and fund­ed a net­work of groups that sup­port­ed Trump’s elec­tion, includ­ing the fic­ti­tious Project 2028, a group that pre­tend­ed to be Har­ris’ ver­sion of the con­tro­ver­sial Project 2025 doc­u­ment, and Future Coali­tion PAC, which tar­get­ed Arab and Jew­ish vot­ers in bat­tle­ground states with con­tra­dic­to­ry mes­sages on Kamala Har­ris’ stance on Israel.

    Build­ing America’s Future is close­ly con­nect­ed to a pub­lic affairs firm led by Repub­li­can strate­gist Phil Cox called P2 Pub­lic Affairs. Its board mem­bers include Kather­ine Neal, a senior vice pres­i­dent at P2, and it was for­mer­ly led by Gen­erra Peck, a part­ner and pres­i­dent with the com­pa­ny.

    P2 prin­ci­pal Katie Miller was work­ing as a senior advi­sor for Build­ing America’s Future as recent­ly as this past Sep­tem­ber, though this week­end she was named by Pres­i­dent-elect Trump to join the Depart­ment of Gov­ern­ment Effi­cien­cy (DOGE), along­side Musk and Vivek Ramaswamy. Miller, the spouse of Trump advi­sor Stephen Miller, was for­mer­ly a press sec­re­tary for vice pres­i­dent Mike Pence.

    While P2 Pub­lic Affairs does not dis­close the com­pa­nies it pro­vides its ser­vices to, it works close­ly with its “sis­ter firm” Guide­Post Strate­gies, a lob­by­ing firm that pub­licly reports its clients in manda­to­ry fil­ings with the House and Sen­ate. “Through work with our sis­ter firm, P2 Pub­lic Affairs, Guide­Post has the toolk­it and expe­ri­ence to run nation­al cam­paigns to acti­vate voic­es in sup­port of pol­i­cy, shape pub­lic opin­ion, and cre­ate actions on behalf of your inter­ests,” the company’s web­site says. Guide­Post and P2 Pub­lic Affairs share the same office in Wash­ing­ton D.C.

    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.

    Guide­Post Strate­gies lob­bies the gov­ern­ment on Defense appro­pri­a­tions for three mas­sive Depart­ment of Defense con­trac­tors: Gen­er­al Dynam­ics, Hon­ey­well, and Gen­er­al Atom­ics. Accord­ing to fig­ures from Defense News, Gen­er­al Dynam­ics had near­ly $34 bil­lion in Defense rev­enue in 2023, the fourth-high­est amount among U.S. com­pa­nies, while Hon­ey­well had almost $5 bil­lion. Hon­ey­well exec­u­tives see drone war­fare as a growth oppor­tu­ni­ty, and Musk has high­light­ed drones as a mil­i­tary solu­tion for the DOGE com­mis­sion to exam­ine.

    The Defense bud­get is by far the largest dis­cre­tionary por­tion of fed­er­al spend­ing, and about half of it goes to pri­vate con­trac­tors. The Defense bud­get is noto­ri­ous for waste­ful spend­ing through its con­trac­tors, who face lit­tle over­sight and almost no mar­ket com­pe­ti­tion. Just last month, the Pen­ta­gon failed its 7th annu­al audit in a row, for fail­ing to pro­vide audi­tors with suf­fi­cient data.

    ...

    ———-

    “DOGE’s Ties to the Mil­i­tary-Indus­tri­al Com­plex” By Don­ald Shaw; Sludge; 12/23/2025

    “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:

    ...
    In 2022, Musk report­ed­ly began donat­ing tens of mil­lions to a non­prof­it called Build­ing America’s Future. The group raised more than $53 mil­lion that year, a big uptick from the $11 mil­lion it raised the year pri­or, and accord­ing to the Wall Street Jour­nal, at least $43 mil­lion of that fund­ing was pro­vid­ed by Musk. Accord­ing to the group’s lat­est tax fil­ing, it raised $20.9 mil­lion in 2023.

    ...

    Build­ing America’s Future is close­ly con­nect­ed to a pub­lic affairs firm led by Repub­li­can strate­gist Phil Cox called P2 Pub­lic Affairs. Its board mem­bers include Kather­ine Neal, a senior vice pres­i­dent at P2, and it was for­mer­ly led by Gen­erra Peck, a part­ner and pres­i­dent with the com­pa­ny.

    P2 prin­ci­pal Katie Miller was work­ing as a senior advi­sor for Build­ing America’s Future as recent­ly as this past Sep­tem­ber, though this week­end she was named by Pres­i­dent-elect Trump to join the Depart­ment of Gov­ern­ment Effi­cien­cy (DOGE), along­side Musk and Vivek Ramaswamy. Miller, the spouse of Trump advi­sor Stephen Miller, was for­mer­ly a press sec­re­tary for vice pres­i­dent Mike Pence.

    While P2 Pub­lic Affairs does not dis­close the com­pa­nies it pro­vides its ser­vices to, it works close­ly with its “sis­ter firm” Guide­Post Strate­gies, a lob­by­ing firm that pub­licly reports its clients in manda­to­ry fil­ings with the House and Sen­ate. “Through work with our sis­ter firm, P2 Pub­lic Affairs, Guide­Post has the toolk­it and expe­ri­ence to run nation­al cam­paigns to acti­vate voic­es in sup­port of pol­i­cy, shape pub­lic opin­ion, and cre­ate actions on behalf of your inter­ests,” the company’s web­site says. Guide­Post and P2 Pub­lic Affairs share the same office in Wash­ing­ton D.C.
    ...

    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:

    ...
    Guide­Post Strate­gies lob­bies the gov­ern­ment on Defense appro­pri­a­tions for three mas­sive Depart­ment of Defense con­trac­tors: Gen­er­al Dynam­ics, Hon­ey­well, and Gen­er­al Atom­ics. Accord­ing to fig­ures from Defense News, Gen­er­al Dynam­ics had near­ly $34 bil­lion in Defense rev­enue in 2023, the fourth-high­est amount among U.S. com­pa­nies, while Hon­ey­well had almost $5 bil­lion. Hon­ey­well exec­u­tives see drone war­fare as a growth oppor­tu­ni­ty, and Musk has high­light­ed drones as a mil­i­tary solu­tion for the DOGE com­mis­sion to exam­ine.
    ...

    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:

    ...
    The Defense bud­get is by far the largest dis­cre­tionary por­tion of fed­er­al spend­ing, and about half of it goes to pri­vate con­trac­tors. The Defense bud­get is noto­ri­ous for waste­ful spend­ing through its con­trac­tors, who face lit­tle over­sight and almost no mar­ket com­pe­ti­tion. Just last month, the Pen­ta­gon failed its 7th annu­al audit in a row, for fail­ing to pro­vide audi­tors with suf­fi­cient data.
    ...

    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:

    Defense News

    Pen­ta­gon touts $80M in DOGE cuts, but pub­lic receipts don’t add up

    By Court­ney Albon and Noah Robert­son
    Tues­day, Mar 4, 2025

    In a video post­ed to social media Mon­day evening, a Pen­ta­gon spokesper­son read from a list of $80 mil­lion in sav­ings found by the Depart­ment of Gov­ern­ment Effi­cien­cy, bil­lion­aire Elon Musk’s chain­saw effort to cut the fed­er­al gov­ern­ment.

    “$80 mil­lion in waste­ful spend­ing, just right here,” Press Sec­re­tary Sean Par­nell said after read­ing a short list.

    ...

    But after check­ing these num­bers against the pub­lic ledger post­ed on DOGE’s web­site, the two don’t add up.

    Online, Musk’s team lists about $11 mil­lion in Defense Depart­ment sav­ings iden­ti­fied so far. Adding the var­i­ous items Par­nell men­tioned in the video, which don’t appear on DOGE’s web­site, would bring the total to around $25 mil­lion.

    The Defense Depart­ment declined to share the list Par­nell read. It also refused to respond to ques­tions about why there was a dis­par­i­ty between the two num­bers and when the full receipts would be post­ed online.

    Pres­i­dent Don­ald Trump said in Feb­ru­ary that DOGE would find “hun­dreds of bil­lions of dol­lars of fraud and abuse” in the mil­i­tary, task­ing Musk to lead the effort.

    The Biden administration’s last bud­get request for the Pen­ta­gon was just under $850 bil­lion. The first round of DOGE’s Pen­ta­gon cuts rep­re­sents about .009% of that bud­get.

    DOGE says it updates its “wall of receipts” — which lists fed­er­al con­tracts, grants and build­ing leas­es that the orga­ni­za­tion has ter­mi­nat­ed in recent months — on a week­ly basis. The site was last updat­ed March 2, a lag that could account for the dis­crep­an­cy. It’s also pos­si­ble that some of the con­tracts mak­ing up the $80 mil­lion tout­ed by the depart­ment haven’t been can­celed yet and are there­fore not includ­ed on DOGE’s list.

    Numer­ous media out­lets have found errors in the organization’s account­ing, includ­ing typos that skew con­tract val­ues or the inclu­sion of agree­ments that end­ed before DOGE was cre­at­ed. The orga­ni­za­tion says the num­bers it posts come direct­ly from gov­ern­ment con­tract­ing offi­cials.

    The web­site cur­rent­ly fea­tures nine Defense Depart­ment con­tracts worth approx­i­mate­ly $4.8 mil­lion. Fund­ing for many of them has been ful­ly oblig­at­ed, mean­ing there was no mon­ey to gain from can­cel­ing them ear­ly — like can­cel­ing a year­long sub­scrip­tion six months in. The remain­ing three would yield about $2.5 mil­lion in sav­ings.

    Includ­ed among those is a $3.6 mil­lion con­tract the Air Force award­ed in 2023 to Dig­i­tas Tech­nolo­gies for diver­si­ty, equi­ty, inclu­sion and acces­si­bil­i­ty train­ing. The ser­vice has already oblig­at­ed $1.4 mil­lion in fund­ing, so can­cel­ing the agree­ment a year ear­ly would net about $2.2 mil­lion in sav­ings.

    ...

    The DOGE-led cuts fol­low oth­ers promised in the Pen­ta­gon under the sec­ond Trump admin­is­tra­tion. In Feb­ru­ary, the Pen­ta­gon said it planned to fire 5,400 civil­ian employ­ees, part of an ear­ly effort to reduce the work­force by 5% to 8%. And the act­ing Pen­ta­gon lead­er­ship has said it intends to redi­rect around $50 bil­lion toward new pri­or­i­ties, offer­ing lit­tle detail on what would be sac­ri­ficed.

    Mean­while, Repub­li­cans in the Sen­ate are call­ing for a mas­sive defense buildup, poten­tial­ly adding $200 bil­lion to the defense bud­get over the next two years.

    ———–

    “Pen­ta­gon touts $80M in DOGE cuts, but pub­lic receipts don’t add up” By Court­ney Albon and Noah Robert­son; Defense News; 03/04/2025

    “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:

    ...
    “$80 mil­lion in waste­ful spend­ing, just right here,” Press Sec­re­tary Sean Par­nell said after read­ing a short list.

    ...

    Online, Musk’s team lists about $11 mil­lion in Defense Depart­ment sav­ings iden­ti­fied so far. Adding the var­i­ous items Par­nell men­tioned in the video, which don’t appear on DOGE’s web­site, would bring the total to around $25 mil­lion.

    The Defense Depart­ment declined to share the list Par­nell read. It also refused to respond to ques­tions about why there was a dis­par­i­ty between the two num­bers and when the full receipts would be post­ed online.

    Pres­i­dent Don­ald Trump said in Feb­ru­ary that DOGE would find “hun­dreds of bil­lions of dol­lars of fraud and abuse” in the mil­i­tary, task­ing Musk to lead the effort.
    ...

    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:

    ...
    The DOGE-led cuts fol­low oth­ers promised in the Pen­ta­gon under the sec­ond Trump admin­is­tra­tion. In Feb­ru­ary, the Pen­ta­gon said it planned to fire 5,400 civil­ian employ­ees, part of an ear­ly effort to reduce the work­force by 5% to 8%. And the act­ing Pen­ta­gon lead­er­ship has said it intends to redi­rect around $50 bil­lion toward new pri­or­i­ties, offer­ing lit­tle detail on what would be sac­ri­ficed.

    Mean­while, Repub­li­cans in the Sen­ate are call­ing for a mas­sive defense buildup, poten­tial­ly adding $200 bil­lion to the defense bud­get over the next two years.
    ...

    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.

    Posted by Pterrafractyl | March 14, 2025, 5:36 pm
  2. 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:

    Reuters

    Cana­da reviews fight­er deal, says it relies on US too much for secu­ri­ty

    By David Ljung­gren
    March 17, 2025 4:58 PM CDT
    Updat­ed

    * Cana­da reviews $13.29-billion fight­er jet con­tract amid trade war with US
    * Canada’s defense spend­ing under pres­sure from US, aims clos­er to NATO tar­get by 2030

    OTTAWA, March 17 (Reuters) — Cana­da is look­ing for pos­si­ble alter­na­tives to its deal to buy U.S. fight­er jets in part because it relies too much on the Unit­ed States for secu­ri­ty, Prime Min­is­ter Mark Car­ney said on Mon­day.

    Car­ney made the com­ments just days after order­ing a review of a C$19-billion ($13.29 bil­lion) con­tract for 88 F‑35 fight­er jets from Lock­heed Mar­tin (LMT.N). Cana­da is locked in a trade war with the Unit­ed States.

    Canada’s defense min­istry says the con­tract remains in place and Ottawa has made a legal com­mit­ment of funds for the first 16 F‑35 air­craft. Car­ney made clear Cana­da would seri­ous­ly look else­where.

    “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.

    “Giv­en the need for val­ue for mon­ey, giv­en the pos­si­bil­i­ty of hav­ing sub­stan­tial pro­duc­tion of alter­na­tive air­craft in Cana­da ... it’s pru­dent and in the inter­est of Cana­da to review those options,” he said.

    Car­ney did not men­tion spe­cif­ic firms. Swe­den’s Saab (SAABb.ST) which lost out on the fight­er jet con­tract to Lock­heed Mar­tin, had promised to assem­ble its planes in Cana­da.

    ...

    U.S. Pres­i­dent Don­ald Trump has slapped tar­iffs on Cana­da and mused about turn­ing it into the 51st state.

    Philippe Lagasse, a pro­fes­sor at Car­leton Uni­ver­si­ty who spe­cial­izes in pro­cure­ment, said buy­ing 16 F‑35s and then adding anoth­er jet would be expen­sive.

    Cana­da, pres­sured by suc­ces­sive U.S. admin­is­tra­tions to increase defense spend­ing, last year pledged bil­lions more for the armed forces and said mil­i­tary expen­di­tures would be clos­er to the NATO tar­get by 2030.

    ...

    U.S. CUT OFF INTELLIGENCE SHARING WITH UKRAINE

    Wash­ing­ton this month briefly cut off intel­li­gence shar­ing and weapons ship­ments to Ukraine, rais­ing ques­tions about the poten­tial per­ils of becom­ing too depen­dent on U.S. sys­tems.

    Cana­da and oth­er allies are large­ly depen­dent on the Unit­ed States for oth­er sup­port, such as the abil­i­ty to iden­ti­fy tar­gets, process data and sup­press ene­my air defens­es.

    “There are a lot of peo­ple rethink­ing right now, ‘How reli­able is access to Amer­i­can mil­i­tary tech­nol­o­gy going to be?’ ” said David Per­ry, a defense expert who serves as pres­i­dent of the Cana­di­an Glob­al Affairs Insti­tute think tank.

    “All of the options, beyond stick­ing with our sta­tus quo plans, are much less good.”

    Cana­da signed the F‑35 deal in 2023 and said it expect­ed the first plane to be deliv­ered in 2026.

    ...

    Moves by Euro­pean nations to boost defense spend­ing could be ben­e­fi­cial since they might open the pos­si­bil­i­ty of more work for Cana­di­an firms, Car­ney said.

    ————

    “Cana­da reviews fight­er deal, says it relies on US too much for secu­ri­ty” By David Ljung­gren; Reuters; 03/17/2025

    ““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:

    ...
    “Giv­en the need for val­ue for mon­ey, giv­en the pos­si­bil­i­ty of hav­ing sub­stan­tial pro­duc­tion of alter­na­tive air­craft in Cana­da ... it’s pru­dent and in the inter­est of Cana­da to review those options,” he said.

    ...

    Wash­ing­ton this month briefly cut off intel­li­gence shar­ing and weapons ship­ments to Ukraine, rais­ing ques­tions about the poten­tial per­ils of becom­ing too depen­dent on U.S. sys­tems.

    Cana­da and oth­er allies are large­ly depen­dent on the Unit­ed States for oth­er sup­port, such as the abil­i­ty to iden­ti­fy tar­gets, process data and sup­press ene­my air defens­es.

    “There are a lot of peo­ple rethink­ing right now, ‘How reli­able is access to Amer­i­can mil­i­tary tech­nol­o­gy going to be?’ ” said David Per­ry, a defense expert who serves as pres­i­dent of the Cana­di­an Glob­al Affairs Insti­tute think tank.

    “All of the options, beyond stick­ing with our sta­tus quo plans, are much less good.”
    ...

    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:

    ...
    Car­ney did not men­tion spe­cif­ic firms. Swe­den’s Saab (SAABb.ST) which lost out on the fight­er jet con­tract to Lock­heed Mar­tin, had promised to assem­ble its planes in Cana­da.

    ...

    Moves by Euro­pean nations to boost defense spend­ing could be ben­e­fi­cial since they might open the pos­si­bil­i­ty of more work for Cana­di­an firms, Car­ney said.
    ...

    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:

    Politi­co

    Por­tu­gal rules out buy­ing F‑35s because of Trump

    The country’s air force has rec­om­mend­ed buy­ing the jets, but the out­go­ing defense min­is­ter said “the pre­dictabil­i­ty of our allies” must be tak­en into account when mak­ing pro­cure­ment deci­sions.

    March 14, 2025 12:17 am CET
    By Lau­ra Kay­ali

    Por­tu­gal ruled out replac­ing its U.S.-made F‑16 fight­er jets with more mod­ern F‑35s because of Don­ald Trump — in one of the first exam­ples of the U.S. pres­i­dent killing a poten­tial lucra­tive arms deal.

    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.”

    With the dra­mat­ic realign­ment tak­ing place under Trump — who said again today he would annex Green­land and threat­ened Cana­da — there are fears the U.S. gov­ern­ment could decide block access to soft­ware updates and spare parts need­ed to make the F‑35 ful­ly oper­a­tional.

    “The world has changed ... and this ally of ours ... could bring lim­i­ta­tions to use, main­te­nance, com­po­nents, and every­thing that has to do with ensur­ing that air­craft will be oper­a­tional and used in all types of sce­nar­ios,” Melo said.

    He added: “There are sev­er­al options that must be con­sid­ered, par­tic­u­lar­ly in the con­text of Euro­pean pro­duc­tion,

    ...

    ————

    “Por­tu­gal rules out buy­ing F‑35s because of Trump” By Lau­ra Kay­ali; Politi­co; 03/14/2025

    “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:

    ...
    With the dra­mat­ic realign­ment tak­ing place under Trump — who said again today he would annex Green­land and threat­ened Cana­da — there are fears the U.S. gov­ern­ment could decide block access to soft­ware updates and spare parts need­ed to make the F‑35 ful­ly oper­a­tional.

    “The world has changed ... and this ally of ours ... could bring lim­i­ta­tions to use, main­te­nance, com­po­nents, and every­thing that has to do with ensur­ing that air­craft will be oper­a­tional and used in all types of sce­nar­ios,” Melo said.
    ...

    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:

    Euronews

    Can the US turn off Euro­pean weapons? Experts weigh in on ‘kill switch’ fears

    By Anna Des­marais
    Pub­lished on 13/03/2025 — 10:26 GMT+1

    Ger­man offi­cials are sound­ing the alarm over what they say is a “kill switch” embed­ded in the US-made F‑35 fight­er jet. Experts say it’s not that sim­ple.

    After US Pres­i­dent Don­ald Trump ini­tial­ly walked back mil­i­tary sup­port to Ukraine, Ger­man offi­cials have voiced con­cern that the Amer­i­cans could con­trol one of the country’s new­ly pro­cured weapons.

    Ger­many inked a mul­ti-bil­lion euro deal with Amer­i­can aero­space giant Lock­heed Mar­tin in 2022 for 35 F‑35A Light­ning II air­craft. The Bun­deswehr — Germany’s armed forces -pro­cured a fur­ther eight F‑35s last year.

    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.

    Wolf­gang Ischinger, the for­mer chair­man of the Munich Secu­ri­ty Con­fer­ence, and Ingo Gädechens, a for­mer mil­i­tary offi­cer and mem­ber of Germany’s Chris­t­ian Demo­c­ra­t­ic Union (CDU) par­ty, also echoed this sen­ti­ment.

    ...

    F‑35 is the ‘NATO stan­dard fight­er of choice’

    Accord­ing to the US Air Force, Lockheed’s “most com­mon” F‑35 mod­el, the F‑35A Light­ning II, is a mul­ti­role fight­er jet that pairs “stealth, sen­sor fusion and unprece­dent­ed sit­u­a­tion­al aware­ness” in the sky.

    ...

    Bel­gium, Czech Repub­lic, Den­mark, Fin­land, Greece, Italy, Nether­lands, Nor­way, Poland, and Switzer­land have F35s in their fleets. Roma­nia signed an agree­ment with Lock­heed Mar­tin for the same air­craft in Decem­ber as well.

    Lock­heed Mar­tin said in a state­ment last year that it expect­ed over 550 F‑35s to be in oper­a­tion in 10 Euro­pean coun­tries by the end of the decade and that these weapons have “increased inter­op­er­abil­i­ty in Europe”.

    The com­pa­ny also acknowl­edged that F‑35 fight­ers, like oth­er West­ern fight­er air­craft, rely on US-secured data com­mu­ni­ca­tion with Link-16 and GPS satel­lite nav­i­ga­tion.

    Com­plete inde­pen­dence in this area, the com­pa­ny con­tin­ued, “is not pos­si­ble… not even with Euro­pean sys­tems,” but not­ed that the F‑35 still works with­out data links or satel­lite nav­i­ga­tion.

    ‘Extreme­ly dif­fi­cult’ to inte­grate new soft­ware into F‑35s

    Mark Caza­let, edi­tor-in-chief at Euro­pean Secu­ri­ty and Defence Mag­a­zine, told Euronews Next he has not heard or seen any hard evi­dence that a kill switch exists but that it’s “not out­side the realm of pos­si­bil­i­ty” that mea­sures to block air­craft soft­ware could be pro­duced.

    Caza­let said the US “does­n’t nec­es­sar­i­ly need” a kill switch on the F‑35 to block the weapon’s use, the gov­ern­ment could “sim­ply with­hold ammu­ni­tion and spare parts”.

    To replace US con­trol of the soft­ware would be “extreme­ly dif­fi­cult, if not impos­si­ble,” to inte­grate into their weapon­ry, Caza­let said.

    “The more rel­e­vant ques­tion for mil­i­tary plan­ners is, can the US effec­tive­ly pre­vent F‑35s oper­at­ed by oth­er coun­tries from being used, should it choose to do so?” Caza­let said. “Here the answer would seem to be most­ly yes”.

    Coun­tries block parts of ammu­ni­tion or weapons on occa­sion, Caza­let con­tin­ued.

    ...

    F‑35s ‘can be used inde­pen­dent­ly’

    Euronews Next has con­tact­ed the US Depart­ment of Nation­al Defence (DND) and Lock­heed Mar­tin to con­firm whether the US gov­ern­ment has con­trol over the soft­ware and hard­ware of the F‑35 after the air­craft have been deliv­ered but did not receive an imme­di­ate reply.

    A DND spokesper­son con­firmed to Cana­di­an media that the US is in charge of both soft­ware and hard­ware upgrades for the planes and said that updates would con­tin­ue for all nations that par­tic­i­pat­ed in their devel­op­ment.

    Euronews Next also asked Lock­heed Mar­tin whether they’d be able to give Ger­many and oth­er Euro­pean nations some assur­ances that these updates would con­tin­ue.

    In response to Swiss media reports of sim­i­lar kill switch con­cerns, Lock­heed Mar­tin pub­lished a post on their web­site on Mon­day titled ‘Switzer­land can use their F‑35s inde­pen­dent­ly’.

    The com­pa­ny says that block­ing the F‑35A fight­er jets, through exter­nal inter­ven­tions in the elec­tron­ics, is not pos­si­ble.

    “Switzer­land does not need con­sent if it wants to use its weapon sys­tems or guid­ed mis­siles for its defence,” the post reads. “It can do this autonomous­ly, inde­pen­dent­ly, and at any time”.

    Coun­tries like Switzer­land can also decide when they want to upgrade the soft­ware of the fight­er jets or not, and the mis­siles remain oper­a­tional with­out these upgrades.

    If a coun­try does want to upgrade, Lock­heed said it sends a “mobile team” to car­ry out the updates with the respec­tive gov­ern­ment.

    ———–

    “Can the US turn off Euro­pean weapons? Experts weigh in on ‘kill switch’ fears” By Anna Des­marais; Euronews; 03/13/2025

    “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:

    ...
    Wolf­gang Ischinger, the for­mer chair­man of the Munich Secu­ri­ty Con­fer­ence, and Ingo Gädechens, a for­mer mil­i­tary offi­cer and mem­ber of Germany’s Chris­t­ian Demo­c­ra­t­ic Union (CDU) par­ty, also echoed this sen­ti­ment.
    ...

    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:

    ...
    Lock­heed Mar­tin said in a state­ment last year that it expect­ed over 550 F‑35s to be in oper­a­tion in 10 Euro­pean coun­tries by the end of the decade and that these weapons have “increased inter­op­er­abil­i­ty in Europe”.

    The com­pa­ny also acknowl­edged that F‑35 fight­ers, like oth­er West­ern fight­er air­craft, rely on US-secured data com­mu­ni­ca­tion with Link-16 and GPS satel­lite nav­i­ga­tion.

    Com­plete inde­pen­dence in this area, the com­pa­ny con­tin­ued, “is not pos­si­ble… not even with Euro­pean sys­tems,” but not­ed that the F‑35 still works with­out data links or satel­lite nav­i­ga­tion.

    ...

    In response to Swiss media reports of sim­i­lar kill switch con­cerns, Lock­heed Mar­tin pub­lished a post on their web­site on Mon­day titled ‘Switzer­land can use their F‑35s inde­pen­dent­ly’.
    ...

    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:

    ...
    Mark Caza­let, edi­tor-in-chief at Euro­pean Secu­ri­ty and Defence Mag­a­zine, told Euronews Next he has not heard or seen any hard evi­dence that a kill switch exists but that it’s “not out­side the realm of pos­si­bil­i­ty” that mea­sures to block air­craft soft­ware could be pro­duced.

    Caza­let said the US “does­n’t nec­es­sar­i­ly need” a kill switch on the F‑35 to block the weapon’s use, the gov­ern­ment could “sim­ply with­hold ammu­ni­tion and spare parts”.

    To replace US con­trol of the soft­ware would be “extreme­ly dif­fi­cult, if not impos­si­ble,” to inte­grate into their weapon­ry, Caza­let said.

    “The more rel­e­vant ques­tion for mil­i­tary plan­ners is, can the US effec­tive­ly pre­vent F‑35s oper­at­ed by oth­er coun­tries from being used, should it choose to do so?” Caza­let said. “Here the answer would seem to be most­ly yes”.

    Coun­tries block parts of ammu­ni­tion or weapons on occa­sion, Caza­let con­tin­ued.
    ...

    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:

    Break­ing Defense

    No, there’s no ‘kill switch’: Pen­ta­gon tries to reas­sure inter­na­tion­al F‑35 part­ners

    The clar­i­fi­ca­tion comes after two Amer­i­can allies said they were pub­licly reeval­u­at­ing their future fight­er needs amid ten­sions with Wash­ing­ton.

    By Lee Fer­ran and Michael Mar­row
    on March 18, 2025 at 4:16 PM

    WASHINGTON — The Pen­ta­gon today attempt­ed to reas­sure its inter­na­tion­al part­ners in the F‑35 pro­gram that there is no “kill switch” on the stealth fight­er jet that the US could use to ren­der it inef­fec­tive — the lat­est sig­nal that there are real con­cerns abroad about Amer­i­can stew­ard­ship of the pro­gram amid ten­sions with his­tor­i­cal allies.

    “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.”

    Dis­cus­sion of a poten­tial kill switch emerged ear­li­er this month in Euro­pean news reports, in the wake of Pres­i­dent Don­ald Trump’s deci­sion to pause mil­i­tary aid to Ukraine. For­eign offi­cials denied the idea at the time, but con­cern appeared to stem more gen­er­al­ly from the fact that the tech­no­log­i­cal­ly dri­ven F‑35 is depen­dent on rolling updates from the US, espe­cial­ly for the plane’s com­plex soft­ware, as well as logis­tics sup­port. The F‑35 pro­gram, for which Amer­i­can aero­space giant Lock­heed Mar­tin is the prime con­trac­tor, includes 19 inter­na­tion­al part­ners or cus­tomers.

    “[It] isn’t an elec­tron­ic kill switch. The US also can­not remote­ly take con­trol of the F‑35,” Sta­cie Pet­tyjohn, the direc­tor of the defense pro­gram at the Cen­ter for a New Amer­i­can Secu­ri­ty, told Break­ing Defense. “But by sev­er­ing main­te­nance sup­port, ship­ments of spare parts, and cut­ting for­eign F‑35s off from U.S. com­put­er net­works, the air­craft would quick­ly be hob­bled.

    “With­out these soft­ware updates, F‑35s could fly, but would be much more like­ly to be shot down by ene­my air defens­es. Also with­out U.S. main­tain­ers and spare parts, it would be dif­fi­cult to keep the air­craft fly­ing for long, as it is an incred­i­bly com­plex weapons sys­tem,” she said.

    Since those ini­tial reports in the Euro­pean press, offi­cials from two Amer­i­can allies, Por­tu­gal and Cana­da, have pub­licly said their defense min­istries are reex­am­in­ing their future fight­er jet options in light of the new geopo­lit­i­cal real­i­ties. While Lis­bon has not made a com­mit­ment to a next-gen­er­a­tion fight­er, Ottawa had planned to pur­chase near­ly 90 F‑35As from the US. It is under con­tract to go ahead with the first 16, Canada’s defense depart­ment told Break­ing Defense on Mon­day, but it is doing its “home­work” on whether the remain­ing jets are still in Canada’s best inter­est as a trade war with the US boils on.

    ...

    ————

    “No, there’s no ‘kill switch’: Pen­ta­gon tries to reas­sure inter­na­tion­al F‑35 part­ners” By Lee Fer­ran and Michael Mar­row; Break­ing Defense; 03/18/2025

    “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:

    ...
    Dis­cus­sion of a poten­tial kill switch emerged ear­li­er this month in Euro­pean news reports, in the wake of Pres­i­dent Don­ald Trump’s deci­sion to pause mil­i­tary aid to Ukraine. For­eign offi­cials denied the idea at the time, but con­cern appeared to stem more gen­er­al­ly from the fact that the tech­no­log­i­cal­ly dri­ven F‑35 is depen­dent on rolling updates from the US, espe­cial­ly for the plane’s com­plex soft­ware, as well as logis­tics sup­port. The F‑35 pro­gram, for which Amer­i­can aero­space giant Lock­heed Mar­tin is the prime con­trac­tor, includes 19 inter­na­tion­al part­ners or cus­tomers.

    “[It] isn’t an elec­tron­ic kill switch. The US also can­not remote­ly take con­trol of the F‑35,” Sta­cie Pet­tyjohn, the direc­tor of the defense pro­gram at the Cen­ter for a New Amer­i­can Secu­ri­ty, told Break­ing Defense. “But by sev­er­ing main­te­nance sup­port, ship­ments of spare parts, and cut­ting for­eign F‑35s off from U.S. com­put­er net­works, the air­craft would quick­ly be hob­bled.

    “With­out these soft­ware updates, F‑35s could fly, but would be much more like­ly to be shot down by ene­my air defens­es. Also with­out U.S. main­tain­ers and spare parts, it would be dif­fi­cult to keep the air­craft fly­ing for long, as it is an incred­i­bly com­plex weapons sys­tem,” she said.
    ...

    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...

    Posted by Pterrafractyl | March 18, 2025, 11:04 pm
  3. 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:

    The New Repub­lic

    Trump Advis­er Releas­es Insane List of Demands for Tar­iffed Coun­tries

    Top White House econ­o­mist Stephen Miran appar­ent­ly wants free hand­outs from oth­er nations.

    Edith Olm­st­ed
    April 7, 2025
    4:43 p.m. ET

    Don­ald Trump’s chief eco­nom­ic advis­er put out a list of out­ra­geous demands Mon­day for oth­er coun­tries inflict­ed by the president’s tar­iffs to start “bur­den shar­ing.”

    Stephen Miran, chair of the Coun­cil of Eco­nom­ic Advis­ers, deliv­ered a speech at the Hud­son Insti­tute com­plete with a to-do list for oth­er coun­tries look­ing to light­en the load that “unfair bar­ri­ers to trade” and “unsus­tain­able trade deficits” have sup­pos­ed­ly inflict­ed on the Unit­ed States.

    Miran said that these fac­tors had led to a “decline of our man­u­fac­tur­ing work­force by over a third since its peak and a reduc­tion in our share of world man­u­fac­tur­ing pro­duc­tion of 40 per­cent.”

    It’s worth not­ing that while man­u­fac­tur­ing employ­ment has gone down, U.S. man­u­fac­tur­ing out­put is up and near­ing its all-time high of Decem­ber 2007. Who exact­ly will actu­al­ly work all of these hypo­thet­i­cal man­u­fac­tur­ing jobs? No one seems to know! Trump’s own sec­re­tary of com­merce said ear­li­er this month that he planned to use automa­tion to replace cheap labor, and the trea­sury sec­re­tary sug­gest­ed Mon­day that maybe oust­ed fed­er­al work­ers could pick up some shifts.

    Oth­er coun­tries should work to improve “bur­den shar­ing” to address the issues, a process that could take many forms, said Miran.

    For instance, coun­tries could roll over and accept Trump’s tar­iffs with­out retal­i­a­tion. “Crit­i­cal­ly, retal­i­a­tion will exac­er­bate rather than improve the dis­tri­b­u­tion of bur­dens and make it even more dif­fi­cult for us to finance glob­al pub­lic goods,” Miran said in his remarks.

    Miran said that coun­tries could “stop unfair and harm­ful trad­ing prac­tices” by buy­ing more Amer­i­can prod­ucts, specif­i­cal­ly not­ing that coun­tries could boost defense spend­ing and pro­cure­ment from the U.S. by “tak­ing strain off our ser­vice­mem­bers and cre­at­ing jobs here.”

    He also sug­gest­ed that coun­tries invest in U.S. man­u­fac­tur­ing and open fac­to­ries in the U.S. “They won’t face tar­iffs if they make their stuff in this coun­try,” Miran said.

    Final­ly, Miran said that coun­tries could “sim­ply write checks” to the Trea­sury Depart­ment.

    ...

    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.

    “In my view, to con­tin­ue pro­vid­ing these twin glob­al pub­lic goods, there needs to be improved bur­den-shar­ing at the glob­al lev­el,” Miran said. “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.”

    But that’s not how pub­lic goods work: If you have to pay to use them, then they’re not actu­al­ly pub­lic goods.

    Miran sin­gled out Chi­na as America’s “biggest adver­sary” respon­si­ble for weak­en­ing U.S. man­u­fac­tur­ing, and even blamed it for the 2008 finan­cial cri­sis. Trump is cur­rent­ly mount­ing a trade war with Bei­jing, and threat­ened a new round of tar­iffs Mon­day, bring­ing the total tar­iff rate on imports from Chi­na to 104 per­cent.

    ...

    ————

    “Trump Advis­er Releas­es Insane List of Demands for Tar­iffed Coun­tries” by Edith Olm­st­ed; The New Repub­lic; 04/07/2025

    “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:

    ...
    Oth­er coun­tries should work to improve “bur­den shar­ing” to address the issues, a process that could take many forms, said Miran.

    For instance, coun­tries could roll over and accept Trump’s tar­iffs with­out retal­i­a­tion. “Crit­i­cal­ly, retal­i­a­tion will exac­er­bate rather than improve the dis­tri­b­u­tion of bur­dens and make it even more dif­fi­cult for us to finance glob­al pub­lic goods,” Miran said in his remarks.

    Miran said that coun­tries could “stop unfair and harm­ful trad­ing prac­tices” by buy­ing more Amer­i­can prod­ucts, specif­i­cal­ly not­ing that coun­tries could boost defense spend­ing and pro­cure­ment from the U.S. by “tak­ing strain off our ser­vice­mem­bers and cre­at­ing jobs here.”

    He also sug­gest­ed that coun­tries invest in U.S. man­u­fac­tur­ing and open fac­to­ries in the U.S. “They won’t face tar­iffs if they make their stuff in this coun­try,” Miran said.

    Final­ly, Miran said that coun­tries could “sim­ply write checks” to the Trea­sury Depart­ment.
    ...

    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:

    Reuters

    EU finance min­is­ters to dis­cuss joint fund to buy and own defence gear

    By Jan Strupczews­ki
    April 6, 2025 10:02 PM CDT
    Updat­ed

    * Bruegel think tank pro­pos­es Euro­pean Defence Mech­a­nism
    * EDM aims to reduce EU’s mil­i­tary depen­dence on the US
    * Could include non-EU mem­bers like Britain, Ukraine, Nor­way

    BRUSSELS, April 7 (Reuters) — Euro­pean Union finance min­is­ters will dis­cuss this week the set­ting up of a joint inter­gov­ern­men­tal defence fund that would buy and own defence equip­ment, and charge mem­bers a fee for its use, a paper pre­pared for the min­is­ters’ dis­cus­sions showed.

    The paper, draft­ed by the Bruegel think tank, was com­mis­sioned by the Pol­ish pres­i­den­cy of the EU and could gen­er­ate large defence fund­ing with­out boost­ing nation­al pub­lic debt lev­els — a wor­ry of many high-debt coun­tries.

    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

    ...

    The defence fund, to be dis­cussed on Sat­ur­day dur­ing an infor­mal meet­ing of EU finance min­is­ters in War­saw, would come on top of the already announced financ­ing ini­tia­tives.

    The fund, called the Euro­pean Defence Mech­a­nism (EDM), would be estab­lished under an inter­gov­ern­men­tal treaty and have sub­stan­tial paid-in and callable cap­i­tal, allow­ing it to bor­row on the mar­ket.

    The EDM, which could also issue loans, would admit mem­bers from out­side the Euro­pean Union, like Britain, Ukraine or Nor­way.

    The added ben­e­fit of the Bruegel idea would also be to pro­mote a sin­gle Euro­pean mar­ket for defence equip­ment to low­er costs and pool resources.

    Defence pro­cure­ment and pro­duc­tion in the 27-nation EU is high­ly frag­ment­ed with at least sev­en dif­fer­ent types of tanks, nine types of self-pro­pelled how­itzers and sev­en dif­fer­ent types of infantry fight­ing vehi­cles, which increas­es costs, reduces inter­op­er­abil­i­ty and hin­ders economies of scale.

    FOCUS ON “STRATEGIC ENABLERS”

    The Bruegel pro­pos­al said the fund could focus on “strate­gic enablers” — cost­ly mil­i­tary infra­struc­ture and equip­ment armies need to oper­ate, now often pro­vid­ed by the Unit­ed States.

    These include joint com­mand and con­trol sys­tems, satel­lite-based intel­li­gence and com­mu­ni­ca­tion, devel­op­ment of expen­sive new weapon sys­tems such as fifth- or sixth-gen­er­a­tion fight­er jets, inte­grat­ed weapon sys­tems need­ed by mul­ti­ple coun­tries like strate­gic air defence, strate­gic large-scale air trans­port and mar­itime logis­tics, mis­siles and nuclear deter­rence.

    ...

    Bruegel said Europe had a chance to reduce its mil­i­tary depen­dence on the U.S. by 2030 only if it pooled pro­cure­ment to the great­est extent pos­si­ble and cre­at­ed a com­mon Euro­pean defence mar­ket includ­ing Britain as a major indus­tri­al defence play­er to boost com­pe­ti­tion.

    To boost Europe’s own defence indus­try, the EDM would buy only from con­trac­tors from EDM coun­tries, or from con­sor­tia with a defined min­i­mum degree of par­tic­i­pa­tion by con­trac­tors head­quar­tered in EDM coun­tries.

    A major­i­ty of the EDM board could over­ride this rule to accom­mo­date cir­cum­stances in which the desired mil­i­tary capa­bil­i­ty can­not be bought from an EDM coun­try, or only at a much high­er cost.

    Cru­cial­ly for high-debt EU coun­tries, the EDM would allow them to keep their pub­lic debt from increas­ing because as the own­er of the defence assets, the debt incurred to acquire those assets would remain on the EDM’s books, rather than nation­al accounts. This is impor­tant for coun­tries like Italy, Spain, Greece, Bel­gium, Por­tu­gal or France.

    ...

    ———–

    “EU finance min­is­ters to dis­cuss joint fund to buy and own defence gear” By Jan Strupczews­ki; Reuters; 04/06/2025

    “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::

    ...
    The paper, draft­ed by the Bruegel think tank, was com­mis­sioned by the Pol­ish pres­i­den­cy of the EU and could gen­er­ate large defence fund­ing with­out boost­ing nation­al pub­lic debt lev­els — a wor­ry of many high-debt coun­tries.

    ...

    The defence fund, to be dis­cussed on Sat­ur­day dur­ing an infor­mal meet­ing of EU finance min­is­ters in War­saw, would come on top of the already announced financ­ing ini­tia­tives.

    The fund, called the Euro­pean Defence Mech­a­nism (EDM), would be estab­lished under an inter­gov­ern­men­tal treaty and have sub­stan­tial paid-in and callable cap­i­tal, allow­ing it to bor­row on the mar­ket.

    The EDM, which could also issue loans, would admit mem­bers from out­side the Euro­pean Union, like Britain, Ukraine or Nor­way.

    The added ben­e­fit of the Bruegel idea would also be to pro­mote a sin­gle Euro­pean mar­ket for defence equip­ment to low­er costs and pool resources.

    ...

    Bruegel said Europe had a chance to reduce its mil­i­tary depen­dence on the U.S. by 2030 only if it pooled pro­cure­ment to the great­est extent pos­si­ble and cre­at­ed a com­mon Euro­pean defence mar­ket includ­ing Britain as a major indus­tri­al defence play­er to boost com­pe­ti­tion.

    ...

    Cru­cial­ly for high-debt EU coun­tries, the EDM would allow them to keep their pub­lic debt from increas­ing because as the own­er of the defence assets, the debt incurred to acquire those assets would remain on the EDM’s books, rather than nation­al accounts. This is impor­tant for coun­tries like Italy, Spain, Greece, Bel­gium, Por­tu­gal or France.
    ...

    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:

    ...
    The Bruegel pro­pos­al said the fund could focus on “strate­gic enablers” — cost­ly mil­i­tary infra­struc­ture and equip­ment armies need to oper­ate, now often pro­vid­ed by the Unit­ed States.

    These include joint com­mand and con­trol sys­tems, satel­lite-based intel­li­gence and com­mu­ni­ca­tion, devel­op­ment of expen­sive new weapon sys­tems such as fifth- or sixth-gen­er­a­tion fight­er jets, inte­grat­ed weapon sys­tems need­ed by mul­ti­ple coun­tries like strate­gic air defence, strate­gic large-scale air trans­port and mar­itime logis­tics, mis­siles and nuclear deter­rence.

    ...

    To boost Europe’s own defence indus­try, the EDM would buy only from con­trac­tors from EDM coun­tries, or from con­sor­tia with a defined min­i­mum degree of par­tic­i­pa­tion by con­trac­tors head­quar­tered in EDM coun­tries.

    A major­i­ty of the EDM board could over­ride this rule to accom­mo­date cir­cum­stances in which the desired mil­i­tary capa­bil­i­ty can­not be bought from an EDM coun­try, or only at a much high­er cost.
    ...

    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.

    Posted by Pterrafractyl | April 8, 2025, 10:11 pm
  4. 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:

    Politi­co

    Bel­gium warns defense spend­ing boost will hurt wel­fare state

    “Defense def­i­nite­ly requires our full atten­tion, but so does also the sus­tain­abil­i­ty of our wel­fare state,” says Bud­get Min­is­ter Vin­cent Van Peteghem.

    April 16, 2025 10:51 am CET
    By Lau­ra Kay­ali

    Major increas­es in defense spend­ing will lead to wel­fare cuts, cau­tioned Bel­gium’s Bud­get Min­is­ter Vin­cent Van Peteghem.

    “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,” he told the Finan­cial Times. “Defense def­i­nite­ly requires our full atten­tion, but so does also the sus­tain­abil­i­ty of our wel­fare state.”

    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.

    Van Peteghem’s remarks come on the heels of a gov­ern­ment agree­ment last week to spend 2 per­cent of GDP on defense and final­ly reach NATO’s decade-old cur­rent tar­get. Bel­gium will seek to acti­vate the nation­al escape clause — a mech­a­nism autho­rized by the Euro­pean Com­mis­sion to loosen fis­cal rules — and ben­e­fit from some of the €150 bil­lion in loans offered by the EU’s exec­u­tive branch, he said.

    ...

    Bel­gium will ask NATO to count region­al invest­ments in roads and bridges as defense spend­ing, Van Peteghem added, accord­ing to the FT.

    Indeed, spend­ing lag­gards such as Spain and Italy want to widen the def­i­n­i­tion of defense spend­ing to include cyber­se­cu­ri­ty, the fight against cli­mate change and bor­der patrols, among oth­er items. Coun­tries bor­der­ing Rus­sia such as Esto­nia and Fin­land have already said no to that, want­i­ng cash to be focused main­ly on the mil­i­tary.

    ———–

    “Bel­gium warns defense spend­ing boost will hurt wel­fare state” By Lau­ra Kay­ali; Politi­co; 04/16/2025

    “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’:

    Finan­cial Times

    Bel­gium scram­bles to reach Nato defence spend­ing goal

    Bud­get min­is­ter says coun­try will meet this year’s tar­get but an increase will take its toll on wel­fare sys­tem
    Bel­gian sol­diers on and beside a mil­i­tary vehi­cle

    Lau­ra Dubois in Brus­sels
    Pub­lished
    Apr 15 2025

    Bel­gium is prepar­ing to bor­row more and imple­ment painful cuts to reach Nato’s cur­rent defence spend­ing goal, but will strug­gle to meet an increased tar­get like­ly to be agreed after pres­sure from Don­ald Trump.

    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.

    ...

    While it was easy to com­mit to a high­er tar­get, he warned that “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”.

    The Bel­gian gov­ern­ment last week agreed to increase its defence bud­get to 2 per cent of GDP this year through a mix of tem­po­rary cash injec­tions, cre­ative account­ing and struc­tur­al reforms, Van Peteghem said.

    Sev­er­al oth­er Nato lag­gards includ­ing Italy and Spain are also strug­gling to increase their mil­i­tary spend­ing, with their pub­lic finances already under strain fol­low­ing the Covid-19 pan­dem­ic and years of eco­nom­ic lan­guor.

    The Euro­pean Com­mis­sion has pro­posed exempt­ing defence spend­ing from its fis­cal rules, as well as pro­vid­ing €150bn in loans to EU coun­tries. Van Peteghem said his gov­ern­ment would make use of both options to reach the 2 per cent tar­get this year.

    Bel­gium is one of nine coun­tries cur­rent­ly under a so-called exces­sive deficit pro­ce­dure for fail­ing to meet tar­gets of 3 per cent for pub­lic deficits and 60 per cent for its debt-to-GDP ratio. In 2024, the Bel­gian deficit was pro­ject­ed to reach 4.6 per cent and its debt bur­den 103.4 per cent.

    Van Peteghem said Bel­gium plans to spend an addi­tion­al €3.8bn on defence this year.

    Part of it will come from cre­ative account­ing: ask­ing Nato to clas­si­fy region­al invest­ments in roads and bridges as mil­i­tary expen­di­ture, which would amount to €125mn. The min­is­ter also said Bel­gium would attempt to list as defence spend­ing the €1.2bn in nation­al tax­es scooped up from the prof­its of Russ­ian state assets frozen in the coun­try, which are being donat­ed to Ukraine.

    The min­is­ter added that his gov­ern­ment planned to raise more debt to main­tain the 2 per cent lev­el. One way to pay back the debt would be to sell state-owned assets, from a port­fo­lio that includes stakes in the insur­ance com­pa­ny Ethias and the French bank­ing group BNP Paribas.

    “We are going to look at that port­fo­lio of state assets and look [at] which of these assets can be pri­va­tised or can be opti­mised.”

    Van Peteghem said the gov­ern­ment hoped to raise at least €3.2bn through pri­vati­sa­tion.

    The rest of the debt would have to be paid back through spend­ing cuts, includ­ing reforms agreed last week such as lim­it­ing unem­ploy­ment ben­e­fits, cut­ting cer­tain pen­sions, and a tax reform.

    ...

    ————–

    “Bel­gium scram­bles to reach Nato defence spend­ing goal” by Lau­ra Dubois; Finan­cial Times; 04/15/2025

    “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:

    ...
    While it was easy to com­mit to a high­er tar­get, he warned that “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”.

    ...

    Bel­gium is one of nine coun­tries cur­rent­ly under a so-called exces­sive deficit pro­ce­dure for fail­ing to meet tar­gets of 3 per cent for pub­lic deficits and 60 per cent for its debt-to-GDP ratio. In 2024, the Bel­gian deficit was pro­ject­ed to reach 4.6 per cent and its debt bur­den 103.4 per cent.

    ...

    The min­is­ter added that his gov­ern­ment planned to raise more debt to main­tain the 2 per cent lev­el. One way to pay back the debt would be to sell state-owned assets, from a port­fo­lio that includes stakes in the insur­ance com­pa­ny Ethias and the French bank­ing group BNP Paribas.

    “We are going to look at that port­fo­lio of state assets and look [at] which of these assets can be pri­va­tised or can be opti­mised.”

    Van Peteghem said the gov­ern­ment hoped to raise at least €3.2bn through pri­vati­sa­tion.

    The rest of the debt would have to be paid back through spend­ing cuts, includ­ing reforms agreed last week such as lim­it­ing unem­ploy­ment ben­e­fits, cut­ting cer­tain pen­sions, and a tax reform.
    ...

    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:

    For­tune

    Is the EU’s Green New Deal about to be killed off and replaced by defense spend­ing?

    BY Alex Led­som
    April 15, 2025 at 1:00 AM EDT

    In 2020, leg­is­la­tors in the Euro­pean Par­lia­ment agreed to pass leg­is­la­tion to enact the Green New Deal. The deal is a pack­age of 150 far-reach­ing direc­tives and leg­is­la­tion enabling the EU bloc to become cli­mate-neu­tral by 2050; the EU is home to 449 mil­lion peo­ple and is respon­si­ble for 6% of world­wide emis­sions.

    Advo­cates envis­aged that these laws would enable the EU to lead the way in the envi­ron­ment, increase trans­paren­cy regard­ing how com­pa­nies oper­ate, and allow investors to com­pare busi­ness sus­tain­abil­i­ty on a like-for-like basis.

    Many For­tune 500 Europe com­pa­nies sup­port ini­tia­tives out­lined in the Green New Deal. Iber­dro­la, a glob­al ener­gy com­pa­ny, aims to have net-zero emis­sions before 2040, and Volk­swa­gen, the third biggest elec­tric vehi­cle man­u­fac­tur­er glob­al­ly, aims to be car­bon neu­tral by 2050.

    So why is there back­track­ing on its Green New Deal?

    Pres­i­dent Trump’s dri­ve for effi­cien­cy has led some politi­cians to demand that the EU gov­ern­ment be small­er and more effi­cient.

    More impor­tant­ly, Amer­i­can poli­cies are mak­ing the EU ner­vous regard­ing com­pet­i­tive­ness. If non-EU gov­ern­ments are not demand­ing that busi­ness­es oper­ate more sus­tain­ably, depri­or­i­tiz­ing it even, then that will leave the EU econ­o­my trail­ing. For exam­ple, the EU has passed 13,000 sus­tain­abil­i­ty laws since 2019 com­pared to 3,500 pieces of leg­is­la­tion and 2,000 res­o­lu­tions at the U.S. fed­er­al lev­el. Cen­trist busi­ness own­ers are vocal about the extra paper­work required to con­form to new leg­is­la­tion.

    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.

    Some com­pa­nies have already tak­en action. Equinor, an ener­gy com­pa­ny and the largest oil pro­duc­er on the Nor­we­gian con­ti­nen­tal shelf, pledged to be net zero by 2050 by invest­ing in renew­ables. How­ev­er, in Feb­ru­ary, the com­pa­ny announced plans in the next two years to half renew­able invest­ment from $10 bil­lion to $5 bil­lion and to increase oil and gas pro­duc­tion by 10%.

    In France, with Marine Le Pen’s poten­tial ban from the pres­i­den­tial elec­tions, this could be a time for Jor­dan Bardel­la, seen by some to be her nat­ur­al heir, to come into his own. In Jan­u­ary, Bardel­la, chair­man of the Euro­pean Parliament’s far-right Patri­ots for Europe, called for the deal to be killed off, say­ing it was “a con­straint on eco­nom­ic growth” and a threat to French work­ers.

    ...

    The WWF cit­ed sev­er­al ways in which the EU has rescind­ed its com­mit­ments. In Octo­ber, the Euro­pean Coun­cil pro­posed to delay by 12 months the appli­ca­tion of the EU defor­esta­tion-free prod­ucts reg­u­la­tion, and the Euro­pean Coun­cil has stalled an upcom­ing legal pro­pos­al for sus­tain­able food sys­tems.

    In April, the EU Coun­cil vot­ed to delay two sig­nif­i­cant pieces of leg­is­la­tion, the Cor­po­rate Sus­tain­abil­i­ty Report­ing Direc­tive (CSRD) and the Cor­po­rate Sus­tain­abil­i­ty Due Dili­gence Direc­tive (CSDDD). Both apply sig­nif­i­cant restric­tions and red tape to Euro­pean busi­ness­es because they force com­pa­nies to pub­lish sus­tain­abil­i­ty data on every­thing from emis­sions, water usage, chem­i­cal leaks, and the effect of a chang­ing cli­mate on staff work­ing con­di­tions. The same would be true for their sup­pli­ers. The delay will be for two years.

    Like­wise, Europe’s GDPR pri­va­cy law – Gen­er­al Data Pro­tec­tion Reg­u­la­tion– seems like it’s next to fall under the Euro­pean axe. The for­mi­da­ble law, intro­duced sev­en years ago, forces com­pa­nies com­pet­ing in Europe to man­age cus­tomers’ data. Now, there are fears that some of this frame­work is also due to be cut. Some­thing Politi­co is call­ing a “red tape bon­fire.”

    ...

    Increased EU defense bud­gets have an eco­nom­ic upside

    Euro­pean coun­tries have not yet made a con­clu­sive deci­sion on whether Euro­pean ground troops will set foot in Ukraine, but more mil­i­tary spend­ing is com­ing. The new­ly-formed Ger­man gov­ern­ment has agreed that mil­i­tary spend­ing is out­side the con­sti­tu­tion­al lim­its on debt spend­ing.

    As Le Monde states, the most sig­nif­i­cant impact is like­ly on how EU coun­tries spend mon­ey. A lot of pooled COVID fund­ing was wast­ed due to inef­fi­cien­cies. Euro­pean mil­i­taries oper­ate many dif­fer­ent types of war­ships and air­planes, mak­ing joint oper­a­tions and buy­ing dif­fi­cult. The recent EU white paper out­lined much of this think­ing on defense.

    A move towards rear­ma­ment is not nec­es­sar­i­ly bad news for the econ­o­my. If Europe mobi­lizes, as planned, between €500 and €800 bil­lion by 2030, some believe it can increase the GDP by 1.5 points. How­ev­er, the impact on the EU’s car­bon emis­sions might be just as rad­i­cal.

    ———–

    “Is the EU’s Green New Deal about to be killed off and replaced by defense spend­ing?” BY Alex Led­som; For­tune; 04/15/2025

    “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:

    ...
    More impor­tant­ly, Amer­i­can poli­cies are mak­ing the EU ner­vous regard­ing com­pet­i­tive­ness. If non-EU gov­ern­ments are not demand­ing that busi­ness­es oper­ate more sus­tain­ably, depri­or­i­tiz­ing it even, then that will leave the EU econ­o­my trail­ing. For exam­ple, the EU has passed 13,000 sus­tain­abil­i­ty laws since 2019 com­pared to 3,500 pieces of leg­is­la­tion and 2,000 res­o­lu­tions at the U.S. fed­er­al lev­el. Cen­trist busi­ness own­ers are vocal about the extra paper­work required to con­form to new leg­is­la­tion.

    ...

    The WWF cit­ed sev­er­al ways in which the EU has rescind­ed its com­mit­ments. In Octo­ber, the Euro­pean Coun­cil pro­posed to delay by 12 months the appli­ca­tion of the EU defor­esta­tion-free prod­ucts reg­u­la­tion, and the Euro­pean Coun­cil has stalled an upcom­ing legal pro­pos­al for sus­tain­able food sys­tems.

    In April, the EU Coun­cil vot­ed to delay two sig­nif­i­cant pieces of leg­is­la­tion, the Cor­po­rate Sus­tain­abil­i­ty Report­ing Direc­tive (CSRD) and the Cor­po­rate Sus­tain­abil­i­ty Due Dili­gence Direc­tive (CSDDD). Both apply sig­nif­i­cant restric­tions and red tape to Euro­pean busi­ness­es because they force com­pa­nies to pub­lish sus­tain­abil­i­ty data on every­thing from emis­sions, water usage, chem­i­cal leaks, and the effect of a chang­ing cli­mate on staff work­ing con­di­tions. The same would be true for their sup­pli­ers. The delay will be for two years.

    Like­wise, Europe’s GDPR pri­va­cy law – Gen­er­al Data Pro­tec­tion Reg­u­la­tion– seems like it’s next to fall under the Euro­pean axe. The for­mi­da­ble law, intro­duced sev­en years ago, forces com­pa­nies com­pet­ing in Europe to man­age cus­tomers’ data. Now, there are fears that some of this frame­work is also due to be cut. Some­thing Politi­co is call­ing a “red tape bon­fire.”
    ...

    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:

    ...
    A move towards rear­ma­ment is not nec­es­sar­i­ly bad news for the econ­o­my. If Europe mobi­lizes, as planned, between €500 and €800 bil­lion by 2030, some believe it can increase the GDP by 1.5 points. How­ev­er, the impact on the EU’s car­bon emis­sions might be just as rad­i­cal.
    ...

    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.

    Posted by Pterrafractyl | April 19, 2025, 5:37 pm
  5. 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:

    Bloomberg

    Deutsche Bank Warns Dol­lar at Risk of Broad ‘Con­fi­dence Cri­sis’

    By Alice Gled­hill
    April 3, 2025 at 10:55 AM UTC

    The dol­lar is at risk of a con­fi­dence cri­sis if Pres­i­dent Don­ald Trump’s trade war leads investors to dump US assets accu­mu­lat­ed over the past decade, accord­ing to Deutsche Bank AG.“

    We are in the midst of dra­mat­ic regime change in mar­kets,” George Sar­ave­los, the bank’s glob­al head of FX strat­e­gy, wrote in a note to clients. “Giv­en the dra­mat­ic nature of the moves, we are becom­ing increas­ing­ly con­cerned that the dol­lar is at risk of a broad­er con­fi­dence cri­sis.”

    Saravelos’s com­ments fol­low a plunge in the green­back in the wake of US Pres­i­dent Don­ald Trump’s trade tar­iffs unveiled Wednes­day. Fears that height­ened glob­al trade ten­sions will hit an already wob­bly US econ­o­my have boost­ed bets on fur­ther inter­est-rate cuts from the Fed­er­al Reserve and put the Bloomberg US dol­lar index on track for its worst day since 2022.

    Deutsche Bank says fur­ther dol­lar declines com­bined with a drop in US equi­ties and a rise in term pre­mi­um in US Trea­suries would be the “strongest mar­ket sig­nal” that a process of US dis­in­vest­ment is accel­er­at­ing. While the lat­ter has yet to emerge, “it would be a very neg­a­tive sig­nal if it did,” he added.

    The bank issued a sim­i­lar warn­ing last month, when it said the green­back may lose its tra­di­tion­al safe-haven sta­tus as glob­al mar­kets adjust to a new geopo­lit­i­cal order.“

    ...

    He also added the dol­lar rout increas­es the chance that the Euro­pean Cen­tral Bank will cut inter­est rates in April, a prob­a­bil­i­ty priced by broad­er mar­kets at about 90%, based on overnight inter­est-rate swaps. That com­pares to about 70% on Wednes­day.

    “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.

    ———-

    “Deutsche Bank Warns Dol­lar at Risk of Broad ‘Con­fi­dence Cri­sis’” By Alice Gled­hill; Bloomberg; 04/03/2025

    ““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:

    ...
    Deutsche Bank says fur­ther dol­lar declines com­bined with a drop in US equi­ties and a rise in term pre­mi­um in US Trea­suries would be the “strongest mar­ket sig­nal” that a process of US dis­in­vest­ment is accel­er­at­ing. While the lat­ter has yet to emerge, “it would be a very neg­a­tive sig­nal if it did,” he added.
    ...

    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:

    Reuters

    PIMCO bear­ish on dol­lar, long-term Trea­suries as US safe-haven sta­tus wavers

    By Davide Bar­bus­cia
    April 17, 2025 10:27 AM CDT
    Updat­ed

    NEW YORK, April 17 (Reuters) — U.S. bond giant PIMCO said pro­tec­tion­ism in U.S. trade pol­i­cy strength­ened the case for dial­ing down expo­sure to the U.S. dol­lar and long-dat­ed Trea­sury bonds, while greater reliance on for­eign bond mar­kets had become more attrac­tive.

    U.S. Pres­i­dent Don­ald Trump’s tar­iffs have rocked finan­cial mar­kets and trig­gered a vio­lent sell­off last week in Trea­suries and the dol­lar that cast fresh doubt on the long-held belief in the safe-haven sta­tus of U.S. assets.

    “With its pro­tec­tion­ist pol­i­cy piv­ots, the U.S. is giv­ing investors world­wide an occa­sion to rethink long-held assump­tions about the U.S. invest­ment land­scape,” Marc Sei­d­ner, chief invest­ment offi­cer for non-tra­di­tion­al strate­gies, and Pramol Dhawan, head of emerg­ing mar­ket port­fo­lio man­age­ment at PIMCO, said in a note on Thurs­day.

    “The U.S. has long enjoyed a priv­i­leged posi­tion, with the dol­lar serv­ing as the glob­al reserve cur­ren­cy and Trea­suries as the go-to reserve asset. How­ev­er, this sta­tus is not guar­an­teed,” they said. “If glob­al cap­i­tal flows into U.S. assets dwin­dle, it could point toward a more mul­ti­po­lar world with a dimin­ished reliance on a sin­gu­lar reserve cur­ren­cy.”

    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.

    The change in glob­al trade dynam­ics spurred by Trump’s poli­cies could damp­en cap­i­tal flows into the coun­try, bol­ster­ing the case to be under­weight, or hold a bear­ish stance, on the U.S. dol­lar, Sei­d­ner and Dhawan said in the note.

    At the same time, they said, long-dat­ed for­eign gov­ern­ment bonds in Europe, the UK, Japan, or emerg­ing mar­kets, appeared attrac­tive alter­na­tives to U.S. Trea­suries.

    ...

    ———-

    “PIMCO bear­ish on dol­lar, long-term Trea­suries as US safe-haven sta­tus wavers” By Davide Bar­bus­cia; Reuters; 04/17/2025

    “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:

    ...
    At the same time, they said, long-dat­ed for­eign gov­ern­ment bonds in Europe, the UK, Japan, or emerg­ing mar­kets, appeared attrac­tive alter­na­tives to U.S. Trea­suries.
    ...

    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:

    Bloomberg

    Europe’s Finan­cial Watch­dogs Ques­tion Trea­suries’ Haven Sta­tus

    By Jorge Valero and Lau­ra Noo­nan
    April 17, 2025 at 1:10 PM UTC

    The head of Europe’s insur­ance watch­dog said the US Trea­sury market’s recent volatil­i­ty is bring­ing into ques­tion its sta­tus as a safe haven.

    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.

    The strik­ing assess­ment at a closed-door meet­ing hints at some of the ner­vous­ness about Trea­suries, which have served as the world’s ‘risk-free’ asset and act as col­lat­er­al for tril­lions of dol­lars of lend­ing a day. While there’s no indi­ca­tion that Euro­pean reg­u­la­tors are tak­ing any con­crete action yet, the com­ments under­score how quick­ly the world’s per­cep­tion of Trea­suries has changed in the span of a few weeks.

    The Trea­sury mar­ket has endured vio­lent swings, with the 10-year yield surg­ing the most in two decades last week as Pres­i­dent Don­ald Trump’s sweep­ing tar­iffs threat­en to upend glob­al trade and send the econ­o­my into a reces­sion. Investors have snapped up alter­na­tives, like gold, Ger­man bunds and the euro.

    ...

    Hielke­ma also said the Trea­sury mar­ket tur­bu­lence was prob­a­bly behind the US deci­sion to sus­pend some of its tar­iffs, accord­ing to the peo­ple, who asked not to be iden­ti­fied because the talks were pri­vate. Trump sug­gest­ed last week that the pause was to give trad­ing part­ners an oppor­tu­ni­ty to strike deals, though he also said the bond mar­ket was “very tricky.”

    Hielke­ma said prob­lems could sur­face in less vis­i­ble parts of the mar­ket such as those involv­ing hedge funds or pri­vate cred­it, accord­ing to peo­ple famil­iar. They added firms using non-sov­er­eign secu­ri­ties as col­lat­er­al could face liq­uid­i­ty con­straints in the future.

    While reg­u­la­tors said the mar­kets were func­tion­ing appro­pri­ate­ly for now, there was a pick up in mar­gin calls for enti­ties with long deriv­a­tives expo­sure to equi­ties and for firms pay­ing fixed rates and receiv­ing float­ing rates, accord­ing to anoth­er per­son famil­iar with the dis­cus­sion. Hedge funds reduced their high-yield and pri­vate equi­ty posi­tions.

    ...

    The region’s bank­ing sec­tor has been affect­ed by the tur­bu­lence, but it can weath­er the volatil­i­ty thanks to the cap­i­tal buffers it has built up over the years, accord­ing to the peo­ple. At the same time, the Euro­pean Bank­ing Author­i­ty plans to focus on geopo­lit­i­cal ten­sions in its next stress test, they said.

    A rep­re­sen­ta­tive for the bloc’s mar­kets reg­u­la­tor, the Euro­pean Secu­ri­ties and Mar­kets Author­i­ty, said the cur­rent peri­od of upheaval could bring an oppor­tu­ni­ty to curb the dom­i­nance of US finan­cial and mar­ket play­ers, the peo­ple said. A rep­re­sen­ta­tive for ESMA con­firmed that the reg­u­la­tor par­tic­i­pat­ed in the meet­ing, while declin­ing to com­ment on what was dis­cussed.

    ————

    “Europe’s Finan­cial Watch­dogs Ques­tion Trea­suries’ Haven Sta­tus” By Jorge Valero and Lau­ra Noo­nan; Bloomberg; 04/17/2025

    “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:

    ...
    The strik­ing assess­ment at a closed-door meet­ing hints at some of the ner­vous­ness about Trea­suries, which have served as the world’s ‘risk-free’ asset and act as col­lat­er­al for tril­lions of dol­lars of lend­ing a day. While there’s no indi­ca­tion that Euro­pean reg­u­la­tors are tak­ing any con­crete action yet, the com­ments under­score how quick­ly the world’s per­cep­tion of Trea­suries has changed in the span of a few weeks.

    The Trea­sury mar­ket has endured vio­lent swings, with the 10-year yield surg­ing the most in two decades last week as Pres­i­dent Don­ald Trump’s sweep­ing tar­iffs threat­en to upend glob­al trade and send the econ­o­my into a reces­sion. Investors have snapped up alter­na­tives, like gold, Ger­man bunds and the euro.
    ...

    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:

    ...
    Hielke­ma said prob­lems could sur­face in less vis­i­ble parts of the mar­ket such as those involv­ing hedge funds or pri­vate cred­it, accord­ing to peo­ple famil­iar. They added firms using non-sov­er­eign secu­ri­ties as col­lat­er­al could face liq­uid­i­ty con­straints in the future.

    While reg­u­la­tors said the mar­kets were func­tion­ing appro­pri­ate­ly for now, there was a pick up in mar­gin calls for enti­ties with long deriv­a­tives expo­sure to equi­ties and for firms pay­ing fixed rates and receiv­ing float­ing rates, accord­ing to anoth­er per­son famil­iar with the dis­cus­sion. Hedge funds reduced their high-yield and pri­vate equi­ty posi­tions.
    ...

    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:

    ...
    The region’s bank­ing sec­tor has been affect­ed by the tur­bu­lence, but it can weath­er the volatil­i­ty thanks to the cap­i­tal buffers it has built up over the years, accord­ing to the peo­ple. At the same time, the Euro­pean Bank­ing Author­i­ty plans to focus on geopo­lit­i­cal ten­sions in its next stress test, they said.

    A rep­re­sen­ta­tive for the bloc’s mar­kets reg­u­la­tor, the Euro­pean Secu­ri­ties and Mar­kets Author­i­ty, said the cur­rent peri­od of upheaval could bring an oppor­tu­ni­ty to curb the dom­i­nance of US finan­cial and mar­ket play­ers, the peo­ple said. A rep­re­sen­ta­tive for ESMA con­firmed that the reg­u­la­tor par­tic­i­pat­ed in the meet­ing, while declin­ing to com­ment on what was dis­cussed.
    ...

    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:

    Finan­cial Times

    Ger­man bonds rise with euro as investors head for Europe’s haven

    Fund man­agers say ‘break­down’ in usu­al mar­ket dynam­ics sug­gests glob­al flight to Euro­zone safe asset

    Ian Smith in Lon­don
    Pub­lished
    Apr 19 2025

    The simul­ta­ne­ous surge in the euro and Ger­man gov­ern­ment bonds this month sug­gests a “cap­i­tal flight” to Eurozone’s bench­mark debt as a haven from trade war tur­moil, say investors.

    Ger­man bonds and the euro typ­i­cal­ly move in oppo­site direc­tions, because opti­mism about the econ­o­my — which boosts the cur­ren­cy — hurts demand for the debt that is the euro bloc’s de fac­to safe asset. That pat­tern held after the country’s his­toric spend­ing deal last month, which saw the euro surge and Bunds sell off.

    But this month the euro has jumped about 5 per cent against the dol­lar, even as a transat­lantic gap in bond yields widened, increas­ing the addi­tion­al rate pro­vid­ed by Trea­suries. Two-year US bor­row­ing costs are now about 2 per­cent­age points above those of Ger­many, up from about 1.7 per­cent­age points in ear­ly March.

    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.

    The simul­ta­ne­ous slump in US Trea­suries and the dol­lar, which nor­mal­ly move in oppo­site direc­tions, jan­gled nerves on Wall Street. But in Europe investors have been sim­i­lar­ly struck by the surge in Ger­man Bund prices and the euro.

    “Cur­ren­cy mar­kets no longer care about inter­est rate dynam­ics,” said Benoit Anne, a strate­gist at MFS Invest­ment Man­age­ment, adding that a big rel­a­tive rise in US mar­ket inter­est rates “tra­di­tion­al­ly would trig­ger a strong­ly bull­ish sig­nal [for the dol­lar]”.

    “There seem to be some glob­al asset allo­ca­tion shifts hap­pen­ing, with glob­al investors look­ing at diver­si­fy­ing away from the US and look­ing at Europe and the rest of the world as a more attrac­tive place to invest,” he added.

    ...

    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,” said April LaRusse, head of invest­ment spe­cial­ists at Insight Invest­ment.

    She point­ed to the height­ened volatil­i­ty of Trea­suries in recent years. The Ice BofA Move index, a gauge of bond investors’ expec­ta­tions of future volatil­i­ty in Trea­suries, has remained at ele­vat­ed lev­els since the 2022 bond mar­ket sell-off. Last week, it touched its high­est in more than a year dur­ing the Trea­suries rout.

    But there remain big bar­ri­ers to Ger­man Bunds replac­ing Trea­suries as the glob­al safe asset of choice, with the mar­ket just a frac­tion of the almost $30tn US gov­ern­ment bond mar­ket. The his­toric scarci­ty of Bunds has seen them trad­ing for long peri­ods with a sub-zero yield.

    Trea­suries’ sta­tus as the glob­al reserve asset of choice is also tied to the dollar’s dom­i­nant role in glob­al finance and trade, even if com­men­ta­tors are say­ing this is being test­ed by a cri­sis of con­fi­dence in US pol­i­cy­mak­ing.

    Steven Major, glob­al head of fixed income research at HSBC, said claims of a sec­u­lar shift away from Trea­suries miss that “the mar­gin­al buy­er of Trea­suries has increas­ing­ly been domes­tic investors” as some for­eign investors pare back their hold­ings.

    But there are signs, fund man­agers say, that big glob­al investors are indeed look­ing to diver­si­fy their safe asset hold­ings, with Bunds one of the key ben­e­fi­cia­ries as Ger­many increas­es issuance to fund its spend­ing plans.

    Short-term Bund yields tight­ened fur­ther on Thurs­day as the Euro­pean Cen­tral Bank cut rates and traders bet on more cuts to come. The euro was lit­tle changed.

    ...

    ————

    “Ger­man bonds rise with euro as investors head for Europe’s haven” by Ian Smith; Finan­cial Times; 04/19/2025

    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:

    ...
    Ger­man bonds and the euro typ­i­cal­ly move in oppo­site direc­tions, because opti­mism about the econ­o­my — which boosts the cur­ren­cy — hurts demand for the debt that is the euro bloc’s de fac­to safe asset. That pat­tern held after the country’s his­toric spend­ing deal last month, which saw the euro surge and Bunds sell off.

    But this month the euro has jumped about 5 per cent against the dol­lar, even as a transat­lantic gap in bond yields widened, increas­ing the addi­tion­al rate pro­vid­ed by Trea­suries. Two-year US bor­row­ing costs are now about 2 per­cent­age points above those of Ger­many, up from about 1.7 per­cent­age points in ear­ly March.
    ...

    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:

    ...
    The simul­ta­ne­ous slump in US Trea­suries and the dol­lar, which nor­mal­ly move in oppo­site direc­tions, jan­gled nerves on Wall Street. But in Europe investors have been sim­i­lar­ly struck by the surge in Ger­man Bund prices and the euro.

    “Cur­ren­cy mar­kets no longer care about inter­est rate dynam­ics,” said Benoit Anne, a strate­gist at MFS Invest­ment Man­age­ment, adding that a big rel­a­tive rise in US mar­ket inter­est rates “tra­di­tion­al­ly would trig­ger a strong­ly bull­ish sig­nal [for the dol­lar]”.

    “There seem to be some glob­al asset allo­ca­tion shifts hap­pen­ing, with glob­al investors look­ing at diver­si­fy­ing away from the US and look­ing at Europe and the rest of the world as a more attrac­tive place to invest,” he added.

    ...

    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,” said April LaRusse, head of invest­ment spe­cial­ists at Insight Invest­ment.

    ...

    Short-term Bund yields tight­ened fur­ther on Thurs­day as the Euro­pean Cen­tral Bank cut rates and traders bet on more cuts to come. The euro was lit­tle changed.
    ...

    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:

    ...
    She point­ed to the height­ened volatil­i­ty of Trea­suries in recent years. The Ice BofA Move index, a gauge of bond investors’ expec­ta­tions of future volatil­i­ty in Trea­suries, has remained at ele­vat­ed lev­els since the 2022 bond mar­ket sell-off. Last week, it touched its high­est in more than a year dur­ing the Trea­suries rout.

    But there remain big bar­ri­ers to Ger­man Bunds replac­ing Trea­suries as the glob­al safe asset of choice, with the mar­ket just a frac­tion of the almost $30tn US gov­ern­ment bond mar­ket. The his­toric scarci­ty of Bunds has seen them trad­ing for long peri­ods with a sub-zero yield.

    Trea­suries’ sta­tus as the glob­al reserve asset of choice is also tied to the dollar’s dom­i­nant role in glob­al finance and trade, even if com­men­ta­tors are say­ing this is being test­ed by a cri­sis of con­fi­dence in US pol­i­cy­mak­ing.

    Steven Major, glob­al head of fixed income research at HSBC, said claims of a sec­u­lar shift away from Trea­suries miss that “the mar­gin­al buy­er of Trea­suries has increas­ing­ly been domes­tic investors” as some for­eign investors pare back their hold­ings.

    But there are signs, fund man­agers say, that big glob­al investors are indeed look­ing to diver­si­fy their safe asset hold­ings, with Bunds one of the key ben­e­fi­cia­ries as Ger­many increas­es issuance to fund its spend­ing plans.
    ...

    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.

    Posted by Pterrafractyl | April 25, 2025, 8:36 pm

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