The proposal would allow the EU to borrow €150bn to lend to member states for military spending. The funds would be restricted to purchases from EU-based arms manufacturers and select European nations, including the UK, Norway, and Switzerland.
Von der Leyen stated that the objective is to strengthen Europe’s defence industry while ensuring a rapid increase in military readiness. France has pushed for strict limitations on US-made weapons, while Germany has sought greater flexibility due to defence industry supply chains that involve non-EU partners.
Purra stressed that Finland should be considered a frontline country in the allocation of funding. She also noted the discussion on loosening EU fiscal rules to accommodate increased defence spending, a move that could allow member states to bypass standard budgetary constraints.
“No one objected to the need for flexibility in defence spending,” Purra said. “However, it is equally important to maintain credibility in debt sustainability and fiscal rules.”
The Commission will present a legal framework for the funding plan next week, requiring approval from a qualified majority of EU nations.
Rising defence costs raise concerns
Former Finnish Finance Ministry official Peter Nyberg has warned that increased military spending could come at a significant economic cost. Writing in a recent analysis, he noted that defence funding must be financed either through debt, tax hikes, or budget cuts.
“The production of arms boosts employment but does not improve the supply of civilian goods or services,” Nyberg said. “This could lead to inflation and a decline in real incomes.”
He highlighted estimates suggesting that defence spending could rise to 3-5% of GDP across EU nations, amounting to between €520bn and €860bn annually. Last year, EU defence spending stood at 1.9% of GDP, or €326bn.
Nyberg also warned that growing debt levels pose a challenge, as many EU nations are already highly indebted. He noted that additional borrowing for defence would increase interest payments and potentially fuel an arms race.
He further predicted that nuclear deterrence could become part of Europe’s military strategy in the coming decades. This could lead to either a deeper EU security union built around France’s nuclear arsenal or individual states acquiring their own nuclear weapons.
Nyberg raised concerns about the distribution of defence investments, arguing that the bulk of new military projects would likely be located in core EU countries rather than in border states like Finland.
“Border states, including Finland, will be expected to contribute to funding these projects, even if they do not benefit equally,” he said.
With debt sustainability a growing concern, Fabio Panetta, a board member of the European Central Bank (ECB), has cautioned against excessive military spending through additional borrowing.
“Defence investments should not come at the expense of long-term economic growth,” Panetta said, warning that excessive debt accumulation could strain public finances.
HT