As the EU lays out its first joint defence strategy, could Eurobonds become a reality?

The European Commission on Tuesday unveiled the first-ever European Defence Industrial Strategy to reinvest in the Continent’s military capabilities at a time of rising threats in Europe and abroad.
The Ground Master 200 Multi-Mission Compact radar (GM200 MM/C) during a demonstration at the Artillery Shooting Camp.

By Gabriele Rosana

Gabriele Rosana is a Brussels-based journalist and policy analyst writing about EU affairs

05 Mar 2024

Back in 2020, common EU debt was the very essence of the EU six-year €800bn spending plan known as Next Generation EU. A mix of loans and grants that was unanimously agreed by the bloc’s 27 countries, it was meant to help EU nations recover from the economic effects of the COVID-19 pandemic. Seen as Europe’s own “Hamiltonian moment,” it marked the first true attempt to create common EU public finances to address mutual priorities.

The joint bonds issued by the European Commission and underwritten by all 27 EU member states were billed as a one-off exercise. The promise was that these Eurobonds would resolve the economic fallout of a symmetric shock.

Next Generation EU was swallowed by the EU’s more fiscally orthodox capitals – a cohort led by Germany and the Netherlands, and complemented by mostly Scandinavian and Baltic nations. They insisted on one key assurance before agreeing to the plan – that Next Generation EU would not be prolonged after the cut-off date of June 2026.

But times are changing, and so has the stance of some capitals.

With wars in Ukraine and the Gaza Strip, growing international tensions over the Red Sea shipping crisis and the spectre of military conflict in the Taiwan Strait, joint debt issuance could make a splashy return to the EU political scene, this time to boost the EU’s defence capabilities.

The European Commission on Tuesday presented the blueprint for its first European Defence Industrial Strategy to boost the production of military equipment in the EU. It includes a proposal for the establishment of a dedicated investment fund and encourages countries to jointly purchase military equipment – similar to the bloc’s joint procurement of Covid-19 vaccines during the pandemic – through incentives such as VAT exemptions.

Unlike during the health crisis, however, the Commission hasn’t gone as far as calling for joint EU borrowing to finance its new arms ambitions. But some EU heads of state have.

Kaja Kallas became the first prominent national leader to float the idea of joint EU bonds to finance increased military expenditure in March 2023. The Estonian prime minister, widely seen as a potential pick to be the EU’s next diplomatic chief, has since become the most vocal supporter of defence bonds – and her proposal has been backed by political heavyweights like French president Emmanuel Macron.

In doing so, the Baltic leader has broken ranks with the fiscal responsibility cohort. At the same time, her plea has been backed by those who have always been in favour of a successor to the Next Generation EU scheme, including European Commissioner for Economy Paolo Gentiloni. Poland, France and Estonia recently also pencilled a joint paper calling on the Commission to work out concrete solutions – which include Eurobonds – to fund the EU’s defence ramp-up before the next budgetary cycle.

With Europe and the world in geopolitical turmoil, fiscal policy has also become intertwined with a growing debate around the need for the EU to act independently from traditional allies like the United States – particularly if Donald Trump, who has shown deep scepticism around transatlantic relations, were to be re-elected president in November.   

After joint procurement of weapons to both send to Ukraine and replenish EU stocks, “it is reality itself that gives new impetus to the idea” of a new wave of EU joint borrowing to buttress the bloc’s defence industry, Gentiloni said, speaking on the margins of an EU finance ministers meeting in February. In his view, the pandemic rescue fund “proved that the Commission is well-equipped to borrow €100bn a year.”

National budgets for defence are simply not expanding as they should.

Gentiloni will, nevertheless, have to convince his boss – the current, and likely next, president of the EU’s executive body, Ursula von der Leyen. A strong advocate of defence as a top priority for the Commission’s next mandate, she has still refused to support the issuance of common EU debt when asked about the prospect of defence bonds during a recent press conference in Berlin. The prospect of common EU defence bonds continues to be a sensitive issue in her native Germany – where von der Leyen previously served as defence minister – as well as for the centre-right camp from which she hails. 

Previous plans to establish an EU treasury have not only run afoul of ideology. There are also steep legislative hurdles. The process to greenlight an EU joint borrowing programme is complex. First, it requires unanimity in a European Council that has become increasingly fractured. Under many member states’ constitutions, the issuance of any Eurobonds would also need to be signed off by national parliaments. Without both these go-aheads, the EU cannot turn to financial markets to raise cash and capitalise on its solid AAA rating as a borrower, an assessment that denotes the absence of credit risks for an investor.

Still, some think a reversal of policy could be in the cards. “National budgets for defence are simply not expanding as they should,” Jean-Pierre Darnis, a defence expert at the Université Côte d'Azur and an associate fellow at the Paris-based think-tank Fondation pour la Recherche Stratégique, tells The Parliament.

Before Russia’s full-scale invasion of Ukraine, “European militaries were ready for a post-Cold War scenario, with relatively small operations abroad from time to time. They were clearly not prepared for the level of confrontation” seen today, he says.

Yet time and a long-term vision are key to boosting the bloc’s traditional armament production, Darnis says, and this is where public finances come in. “While industries have increased the pace of deliveries, they need multiannual planning in order to expand their manufacturing capacity,” he explains.

The EU industrial defence strategy unveiled Tuesday should address such headaches in the Commission’s view. But officials haven’t gone as far as saying that the needed funds should be raised through Eurobonds, instead stating vaguely that the EU’s executive aims to “mobilise” up to €1.5 billion by 2027. The Commission's strategy suggests that groups of individual member states would be able to issue debt titles as a tool to help finance arms procurement, but that falls short of issuing joint EU debt.  

Meanwhile, the EU’s ordinary seven-year budget runs until that year and has just been revised upwards to find €17 billion in additional non-repayable subsidies to protect Ukraine’s public finances from bankruptcy. As a result, there is little margin in EU coffers to inject fresh money into an EU industrial strategy for defence.

But for Darnis, “borrowing together for defence will likely [become] a non-deferrable option.”

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