Defence spending and the future of EU finances: The ReArm Europe Plan

In the current geopolitical context, it seems pretty obvious that the EU Member States will be increasing their defence spending quite significantly. But how is this to be financed? And should the resources come from the EU or the national level?

The European Commission recently unveiled its ReArm Europe Plan. The plan aims to mobilise up to €800 billion to help EU countries increase their defence spending. There are two main strands to this plan, which will now be examined in turn.

First, the plan aims, as noted by the President of the European Commission, Ursula von der Leyen, in her press statement, “to unleash the use of public funding in defence at national level”. The EU would allow Member States to spend more for their defence needs. To this effect, the European Commission will propose activating the ‘national escape clause’ in the new Stability and Growth Pact. Escape clauses allow Member States to deviate from their fiscal targets, thereby increasing public spending beyond what would otherwise be allowed by the EU’s fiscal rules, provided that this does not endanger fiscal sustainability over the medium term.

Apart from the ‘general escape clause’, which could be activated ‘in the event of a severe economic downturn in the euro area or the Union as a whole’ (Regulation 2024/1263, Article 25), the new EU fiscal framework also provides for ‘national escape clauses’. Following a request from a Member State and acting on a recommendation by the Commission, the Council of the EU could allow a Member State to deviate from its fiscal targets “where exceptional circumstances outside the control of the Member State have a major impact on the public finances of the Member State concerned” (Regulation 2024/1263, Article 26). As argued elsewhere, this clause could be utilised in the current geopolitical context to allow a Member State – or a number of Member States – to increase their defence spending for a period of time to be specified – and, if necessary, extended – by the Council, provided that this would not endanger fiscal sustainability in the medium term. As noted by the Commission President: “If Member States would increase their defence spending by 1,5% of GDP on average this could create fiscal space of close to EUR 650 billion over a period of four years”. This is to assume, of course, that the Member States would have the fiscal space available to make such investments in defence.

Second, the plan proposes a new financial instrument, which would provide up to €150 billion of loans backed by the EU budget to the Member States for defence investment in pan-European capability domains. This new instrument would be based on Article 122 TFEU, which creates legal uncertainties of its own (see also the expert analysis by Paul Dermine) and would sideline the European Parliament in decision-making. According to the plan, the Member States would be spending together and accelerate joint procurement. The two parts of the plan mentioned thus far are interrelated: as noted in the Commission President’s letter to the EU leaders, the loans provided under the new instrument would benefit from the national escape clause under the Stability and Growth Pact.

Such loans would lead to an increase in national debt, but they would be financially advantageous to those Member States whose borrowing costs are higher than those of the EU. It should be stressed that the EU has borrowed money before, also prior to the COVID-19 crisis, except on a very different scale of course. Details are scarce at the moment of writing, but this proposal is reminiscent of the EU’s response to the economic effects of the COVID-19 pandemic, with the European instrument for temporary Support to mitigate Unemployment Risks in an Emergency (SURE) and the EU’s recovery plan, at least as regards its loans component. Even the name of the new plan (ReArm Europe) clearly evokes the changes made to the Recovery and Resilience Facility in response to the energy crisis – under the label ‘REPowerEU’. Importantly, there is no suggestion that the Member States jointly issue debt, nor that, say, the Netherlands assumes the debt or the commitments of another Member State for its defence-related expenditure. This plan is not akin to issuing ‘Eurobonds’, whereby each Member State’s debt would be guaranteed by all the others. Member States borrowing money from the EU or on the capital markets would still be responsible for their own debts.

There are also other elements to this plan, such as redirecting existing funds from the EU budget, notably cohesion funds, towards defence-related investments. As noted in more detail elsewhere, expenditure on Union programmes fully matched by revenue from Union funds and national expenditure on co-financing of programmes funded by the Union are excluded from the calculation of the Member State’s fiscal expenses according to the EU’s budgetary framework. This means that national expenditure on such programmes could be increased without affecting compliance with the EU fiscal rules, and without any need to amend them. The Commission also proposes making more progress towards a Savings and Investment Union, which would attract, it is hoped, more private capital. The European Investment Bank could also change its lending policy in that regard, which could motivate, as reported, commercial banks to invest more in defence.

The latest state of play is as follows. In its conclusions on European defence on 6 March 2025, the European Council ‘took note’ of the Commission’s intention to propose a new EU instrument to provide Member States with loans backed by the EU budget of up to €150 billion and invited the Council of the EU to examine this proposal as a matter of urgency. The EU leaders also welcomed the other elements of the Commission’s plans that were outlined above. As regards next steps, the European Commission has undertaken to present detailed legal proposals before the next European Council meeting. It will present a White Paper on the Future of European Defence, laying out its strategy for the bloc to rearm, elements of which were already leaked to the press. Time is of the essence, and there are still more questions than answers. It is hoped that the EU and the Member States will rise to the challenge and successfully navigate what is indeed a complex legal and political terrain.

Dr. Menelaos Markakis is Associate Professor at Erasmus University Rotterdam and Scientific Coordinator of the Erasmus Center for Economic and Financial Governance. His latest publications on this topic are: ‘The New EU Economic Governance Framework: Principle, Policy, and Enforcement’ (2024) 49 European Law Review 478-505 and ‘Could increased defence spending be accommodated within the EU’s fiscal rules?’ on EU Law Live.