How to finance Europe’s long-overdue rearmament has dominated political discourse of late, particularly since the Munich Security Conference in February where the message from the United States was clear: Europe must assume greater responsibility for its own defence.
The initial response has been fiscal. The European Union has championed ReArm Europe — a rearmament programme worth €150 billion of direct investment in defence and a temporary exemption from deficit rules that could unlock a further €650 billion in additional national defence spending.
Germany has pledged further investment, alongside other countries. Together, these moves mark a potential shift in the continent’s strategic posture and its financial architecture.
The debate has so far focused almost entirely on fiscal policy, but what’s missing is a parallel conversation about the role of monetary policy, specifically the role of the European Central Bank (ECB), in supporting this transformation.
Fiscal space, political caution
The EU’s decision to suspend certain fiscal constraints between 2025 and 2029 is a welcome one. But this alone may not deliver the investment needed. Many member states remain wary of increasing debt levels, even when permitted, particularly amid volatile bond markets and constrained national budgets.
There’s also a structural mismatch: while the exemption runs until 2029, national governments are currently preparing budgets for the 2026–2030 period. Decisions taken now will affect spending well beyond the exemption’s expiration, leading to a natural hesitancy in planning long-term defence outlays.
Even with formal fiscal space, countries may struggle to send the right signal to markets. In an environment where EU governments have committed to gradual debt reduction, investors may punish states that simultaneously increase defence spending.
History shows that eurozone members are acutely aware of their exposure to bond markets and ratings agencies, and will act cautiously as a result.
The danger is that this caution will leave Europe under-equipped. In today’s security environment, abstract financial commitments aren’t enough. What matters is delivery: air defence systems, munitions, logistics, and personnel readiness.
If these do not materialise within the next budget cycle, it will be a historic policy failure rooted not in political intent but in institutional misalignment.
A case for monetary alignment
In crisis moments, monetary policy has historically been the EU’s first responder. When Covid-19 hit in early 2020, the ECB launched its Pandemic Emergency Purchase Programme (PEPP) even before any fiscal mechanism like NextGen EU was agreed. Along with the suspension of the Stability and Growth Pact, this move calmed markets and created the space for policy coordination.
The swift action reaffirmed the ECB’s ability to act pre-emptively and pragmatically — even when uncomfortable with the perception of “closing spreads.” It also reminded policymakers of the central bank’s secondary mandate: to support the general economic policies of the EU.
If the EU’s defence buildup now represents a defining economic and political goal, the ECB should consider how it can support this objective within its mandate. It is not difficult to imagine a scenario in which yields begin to rise for member states investing heavily in defence.
The ECB must be prepared to act decisively in such a situation, both to stabilise markets and to preserve the integrity of a shared strategic agenda.
Tools and political will
The ECB already has mechanisms at its disposal. The Transmission Protection Instrument (TPI), created in 2022 to prevent unwarranted fragmentation in bond markets, could be adapted or deployed in defence-related contexts. Alternatively, targeted asset purchase programmes or conditional refinancing mechanisms could be considered — especially if national spending spikes are perceived as temporary and tied to broader European objectives.
In its current form, the ECB does face certain limitations to its power. The body primarily has a focus on price stability and cannot directly finance member state governments. There have been attempts in the past to challenge the rights of the ECB to participate in the secondary bond markets.
The entire standing of the institution depends on its insularity from politics and policy goals that may be perceived as temporary. Thus, the real challenge may be political, not technical.
While the ECB has demonstrated flexibility during previous crises, aligning monetary policy with defence goals raises questions about its institutional positioning. Can the ECB’s authority be used in service of a shared strategic imperative? Or will it remain structurally decoupled from one of the most important transformations in Europe’s post-Cold War history?
Toward institutional coherence
The current moment presents a rare opportunity to rethink long-standing boundaries between fiscal and monetary policy. A genuine military threat to Europe is one of the few scenarios where mutual debt issuance, capital pooling, and centralised procurement can — and should — be legitimised at scale.
The same logic must apply to the ECB. Its actions need to be coordinated with the continent’s political objectives, especially in the defence realm. If fiscal policy marches ahead while monetary policy lags behind, Europe risks building castles on sand.
Rearming Europe is not just a budgetary exercise: it’s a test of institutional coherence. For this project to succeed, all major EU instruments must move in alignment. That includes the central bank.
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