Understanding the debate on the financing of European defence and its political implications

For several weeks now, discussions on the financing of European defence have been in full swing. They are regularly fuelled by new technical proposals from all sides, at the risk of creating a degree of confusion and sometimes even tension. Yet the debate on the subject is far from being purely technical. Behind each proposed solution lie divergent political visions and geopolitical choices about Europe’s role in the world, and more particularly the European Union’s role in military affairs. The latest proposal, to create a European rearmament bank outside the Union, is emblematic of this.

Until now, issues relating to the financing of European defence could be divided into three groups: those concerning direct EU funding of military-industrial cooperation, those concerning the incentives the EU can offer Member States to increase their own national defence budgets, and those concerning measures to encourage public and private financial institutions to support the defence industry. In addition to these three areas of action, the new proposal to create a rearmament bank has been added to the list.

1. Direct EU funding via the Community budget

Firstly, the EU must negotiate, within the next Multiannual Financial Framework (2028-2034), the refinancing of programmes managed by the Commission to subsidise defence industrial cooperation (such as the European Defence Fund and the future European Defence Industry Programme). But dual programmes supporting strategic areas in sectors such as space (the IRIS² constellation of low-earth orbit satellites for strategic communications), semiconductors and critical raw materials will also need to be replenished.

Budgets for these initiatives could come from the following four options:

• An increase in Member States’ contributions to the EU’s ordinary budget,
• The reallocation of amounts from other EU budget lines to the defence sector, 
• Loans raised and repaid directly by the EU on the market (Eurobonds),
• The introduction of own resources by the EU (this option seems more complicated as it could require a change to the Treaties).

Over the coming months and years, the Member States will have to decide between these four options.

2. EU incentives for Member States to increase their national military budgets

The EU also intends to facilitate increases in Member States’ defence budgets by activating the “escape clause” provided for in the Stability and Growth Pact, and by implementing a €150 billion programme of loans to Member States, known as SAFE (Security Action for Europe). The EU should also encourage Member States to use structural funds for the defence industry. To date, almost 40% of the 2021-2027 programming (corresponding to more than €500 billion) remains unused.

3. Measures to encourage public and private financial institutions to support the EDTIB

Finally, the EU intends to push the European Investment Bank (EIB) to extend its scope (currently limited to dual use) to the European Defence Technological and Industrial Base (EDTIB). The EU also intends to adopt measures to make the EDTIB more attractive to private savings.

A fourth source of funding? The idea of a “rearmament bank” outside the EU

As mentioned above, the fourth proposal that has been added to the negotiating table for financing European defence is the creation of a kind of rearmament bank outside the EU framework, which would include countries such as the UK and even Switzerland. While this idea has been circulating for some time, it has begun to be seriously discussed more recently, thanks in particular to the diplomatic activism of the United Kingdom and Poland. Discreet meetings were held in Brussels between British and European diplomats to analyse the issue. Poland then asked the Bruegel Institute, a Brussels think-tank specialising in economic and financial issues, to carry out a study to examine the feasibility of such an ambition.

On 7 April, the Bruegel Institute published an article[1] proposing the creation, through a new intergovernmental treaty, of a European Defence Mechanism (EDM) that would build a common defence market not administered by the EU and the Commission. According to the Bruegel Institute, the EDM “would undertake joint procurement and plan for the provision of strategic enablers in specified areas, with a capacity to fund these roles. It could own strategic enablers and charge usage fees to EDM members, reducing the budgetary impact of rearmament. EDM membership would entail prohibition of both state aid and procurement preferences that benefit national defence contractors at the expense of contractors from other EDM members[2]“. This proposal, presented to finance ministers on 11 and 12 April at an ECOFIN meeting in Warsaw, has at least two specific aims: to enable the UK to participate in European defence industrial programmes and to remove part of military expenditure from the calculation of ordinary public budgets and their deficits.

There are, however, questions surrounding these two objectives. The EU is already in the process of introducing tools designed to give Member States greater budgetary flexibility (“escape clause”). Above all, it also intends to create a system of loans to Member States investing in defence (SAFE programme). The SAFE programme is also open to the UK, since the Commission is proposing that all countries that have signed a security agreement with the EU should be able to participate, and the UK and the EU are currently negotiating such an agreement.

Finally, it should be remembered that the legislative procedure for adopting the SAFE programme should be rapid, given that it is based on Article 122 of the TFEU (emergency financial aid to Member States), and that the European Parliament plays no role in it. The SAFE programme could therefore be adopted as early as mid-May, whereas the creation of a rearmament bank would take much longer.

In the light of these considerations, it is hard to understand the point of creating a new institution to finance European defence. Unless the underlying political aim of the European Defence Mechanism is simply to bypass the Commission and short-circuit the process of European integration in the military-industrial sector.

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[1] Wolff, Guntram, Armin Steinbach and Jeromin Zettelmeyer. “The governance and funding of European rearmament”, Bruegel, 7^th April 2025.

[2] Ibid.