Spending Our Way Out of a Crisis? The Challenges and Benefits of ReArming Europe

CSDS POLICY BRIEF • 4/2025

By Daniel Fiott

5.3.2025

Key issues

• The European Commission has announced a €800 billion increase in defence spending, but this figure masks the challenges facing Europe’s defence market.
• The injection of €150 billion worth of loans for defence raises questions about the real needs of Europe’s defence.
• The European Commission is set to introduce a raft of new measures to support European defence, but this will be a test of true political solidarity within the European Union (EU).

Introduction

Who holds the cards? The events that occurred in the Oval Office between President Trump and President Zelensky on 1 March 2025 exposed in real-time some of the critical dilemmas associated with ending Russia’s war on Ukraine. A war that has dragged on for three years, and which has seen significant loss of life and destruction, has become the key focus of the current Trump administration. A promise made during his campaign to swiftly end the war has seen President Trump position the United States (US) as some kind of mediator between Ukraine and Russia. An initial US mineral deal, designed to extract Ukrainian rare earth resources for continued US support, was rejected by Ukraine because Kyiv deemed it did not contain any meaningful security guarantees. President Zelensky has subsequently changed his mind and signalled his intention to seal the deal, but the underlying tension of calling for a US security guarantee for Ukraine remains. And this is the heart of the matter: is the US prepared to provide any security guarantee to Ukraine?

This question must have been asked by European leaders when meeting in London on 2 March 2025, but the Summit instead ended with a call for Europeans to do the heavy lifting on Ukraine but with ‘strong US backing’. This was a European attempt to signal continued solidarity with Ukraine, but leaders insisted on a US security guarantee that still does not appear to be forthcoming. In London, Europeans did not want to omit the US security guarantee for Ukraine and Europe in their deliberations, not least because of a fear that it might give way to a self-fulfilling prophecy of US abandonment. Ultimately, only the US holds the cards when it comes to what security guarantee Washington wants to provide Ukraine and Europe – and these two questions (guarantees to Ukraine and Europe) appear increasingly linked today. Still, diplomatic language and sentiment is one thing, but the other is reality: what could the Europeans do for Ukraine and their own defence in the absence of a US security guarantee?

Pondering why the Trump administration does not want to give a security guarantee to Ukraine is the subject for another reflection, although theories currently range from this being an attempt by President Trump to threaten the Europeans to up their game in defence, to an American grand strategy of peeling Russia away from China’s clutches (the so-called “reverse Nixon”). What is perhaps safe to say is that America’s impatience appears driven, in part, by a real aversion to being embroiled in so-called “forever wars”. Regardless of the ultimate reasons behind the Trump administration’s stance on Russia and Ukraine, there remain questions about how prepared European states are – mentality and materially – for their doomsday scenario of a significant downsizing, or even full retraction, of the US security guarantee in Europe. The French president has yet again signalled his readiness to discuss nuclear deterrence for Europe, and the new German Chancellor, Friedrich Merz, has expressed an interest in discussing nuclear questions with France and the United Kingdom (UK). President Macron has also publicly called for Europe to spend 3% of GDP on defence. Additionally, the possible future German governing coalition has agreed to exempt defence investments from the federal debt brake rules, potentially paving the way for a €500 billion special fund for infrastructure and defence. Not to be outdone, on 4 March 2025 the European Commission unveiled an €800 billion “ReArm Europe Plan” for defence.

Therefore, it seems as though the prospect of an absence of a US security guarantee for Europe and Ukraine is stimulating bolder actions on defence in Europe. As this CSDS Policy Brief will argue, however, the devil is always in the detail on European efforts to boost defence. Obviously, an injection of fresh investment in defence is welcome, but investment is only part of the equation. We need to assess the intricacies of new financing tools and ask whether this investment will make a real difference to European defence. Here, we specifically look at the “ReArm Europe Plan” and we probe its shape and objectives, plus we will assess some of the opportunities and challenges associated with the European Commission’s new plan. To be sure, the EU member states are still to provide their political backing to the “ReArm Europe Plan”, and so we await the 6 March 2025 Special European Council to see how capitals want to boost European defence.

Rearming Europe

Announced at a special press meeting on 4 March 2025, European Commission President Ursula von der Leyen presented a new plan for defence investment in the EU. The “ReArm Europe Plan” has been created to respond to the worsening security situation in Europe, and the idea of boosting defence investments comes fast on the heels of a growing recognition that Europe may need to fend for itself. The Plan is comprised of five individual parts. First, to ease more national spending on defence by providing capitals with the fiscal space needed to do so. In practice, this means a relaxation of the Stability and Growth Pact (SGP) rules for defence expenditure. Here, the Commission calculates that if all member states invest 1.5% of GDP on defence, they would create €650 billion in fiscal space over a four-year period. Second, the Commission has proposed a new loan scheme of €150 billion for defence investment. Third, the Commission wants to use unused funds in the EU budget for defence-related investments. Fourth, the Commission seeks to help better tap private capital for defence purposes. Finally, it wants to help mobilise the European Investment Bank.

Overall, the European Commission has stated that these five measures could result in more than €800 billion in additional investment for defence in the coming years. Again, we await to see what the EU member states think about such proposals. Interestingly, the accounting behind the ReArm Europe Plan serves political purposes. The figure of €800 billion is likely to resonate with D.C.. What is more, the figure of €800 billion also fulfils internal European political signalling, with figures such as €100 billion and €500 billion having been touted in the recent past by senior European officials. Yet, we need to be clear in viewing the ReArm Europe Plan as but one element of a wider EU attempt to boost defence investment. Indeed, there has not – as yet – been an agreement on the European Defence Industry Programme (EDIP), which aims to kick-start joint defence procurement efforts in the EU via grants rather than loans. The EU will also need to agree on a new Multi-Annual Financial Framework (MFF), including important decisions on how much to dedicate to defence as part of the EU budget each year. Ideas independent of the EDIP and MFF, such as “European Defence Bonds”, should also not be excluded.

Early critics of the ReArm Europe Plan will certainly zoom-in on the figure of €650 billion, which is built upon projections of what national governments could additionally generate on defence in the next four years with Commission support. The reality is that, even without EU support, member states will more than likely increase their defence investments anyway. These are national decisions guided by evolving threat perceptions that are made independently of European Commission efforts. While it may therefore look like a deft marketing/communications strategy to claim credit for a potential €650 billion in additional defence investment, the reality is that the Commission is only proposing to help incentivise this additional national spending via a relaxation of the SGP rules for defence. This is welcome. What is clear, however, is that with the removal of the SGP excessive deficit procedure for defence member states can no longer hide behind it as an excuse for maintaining low levels of defence investment. The Commission is effectively encouraging the member states to take up their national responsibilities in spending more on defence. Again, this is welcome all while acknowledging that this additional €650 billion does not, in fact, exist today.

Aside from the €650 billion, however, the ReArm Europe Plan proposes €150 billion in loans for defence. Yet here there are questions. Do all member states really need access to loans when they can already borrow from markets? Here, the ReArm Europe Plan proposes to make borrowing for defence more efficient by having loans backed by the EU budget. How will the loans be issued? To which member states and for what capabilities? These and other questions will need further thought.

Defragmenting Europe?

The proposed ReArm Europe Plan raises core questions about defence in the EU. It will always be challenging to develop new initiatives to meet short-term goals, while also addressing some of the structural deficiencies of Europe’s defence market. We have already discussed the proposed €650 billion in public funding under the Plan, and shown how this figure will materialise only if and when national governments increase their defence spending in the coming years. However, the second pillar of the Plan that relates to the proposed €150 billion in loans, also needs further reflection. On the face of it, these loans could be useful in stimulating investments in critical capability domains such as air and missile defence, artillery, missiles and ammunition, drones and anti-drone systems, strategic enablers, critical infrastructure protection, space, military mobility, cyber, artificial intelligence and electronic warfare.

Despite the seeming merits of this pillar, however, there emerge several noteworthy issues. First, how will ReArm Europe loans be dispersed in the EU over the next decade? What are the selection criteria and will certain military capabilities be given preference? How much of these loans will go towards defending EU member states on the one hand, and supporting Ukraine on the other hand? Will all member states really need loans, even with admittedly preferential conditions? Indeed, loans need to be repaid, so an emphasis on defence projects that can provide a viable return on investment would be given preference. Furthermore, loans may be most effective for those member states that cannot immediately inject investment from their own sources. The likeliness is that a large number of member states will indeed have available financial resources in the coming years, which perhaps lowers the need to apply for loans under ReArm Europe. Bear in mind that through the European Defence Fund (EDF) the Union has been in the business of issuing grants rather than loans, and this is what governments and industry have gotten used to.

Another key challenge associated with loans is how best to ensure a European added-value. It is unclear today how the Commission will decide on what projects to provide loans to, and, by extension, there is the question of how best to use these loans to stimulate cross-border cooperation in the EU. The details will no doubt emerge in time. However, one of the key objectives identified in the European Defence Industrial Strategy is to strengthen the European Defence Technological and Industrial Base (EDTIB) through more collaboration between member states. It will, therefore, be interesting to see how these loans will be managed. There is an opportunity for groups of member states and industries without ready access to finance to work together on military technologies and capabilities through the Plan. And here, we should not underestimate the fact that loans can be useful in creating the investment needed to fill industrial and manufacturing capacity gaps in Europe.

Yet, a balance will need to be struck between supporting cooperative efforts and investing in the military capabilities the EU needs for its defence. Arguably, those member states that may be tempted to apply for loans under ReArm Europe – so those with smaller financial resource bases – could be too small in scale to make any tangible difference to European defence. Given the deteriorating security situation in Europe, now is the time for mass common defence projects that serve to deter Russia from even thinking about expanding the war beyond Ukraine – and such investments will help prepare Europe in case Russia tears up any future “peace deal” with Ukraine, the US and Europe. Here, the EU can learn from the collective mistakes made under existing initiatives such as Permanent Structured Cooperation (PESCO), where there are simply too many projects that do not address the specific needs of European defence. Again, there is a very real need to ensure that any new EU initiatives do not merely serve to reinforce national fragmentation in Europe.

Finally, the proposed ReArm Europe Plan also raises questions about the future governance of defence at the EU level. ReArm Europe will become but one element of a broader EU approach to defence in the coming months and years to include EDIP, a hopefully expanded MFF, a greater role for the European Investment Bank and more. We still await the finalisation of the EDIP and there are existing initiatives on the table such as the EDF and PESCO. We should not forget that there will also be a need to reconfigure the EU’s MFF so that it is ready to support defence efforts more effectively over the 2028-2034 period. Time will tell whether EU member states truly view defence as a European public good under the MFF. Spain, for example, has already usefully called for a larger proportion of the MFF to be dedicated to defence, and for the MFF to be increased overall to allow for these and other strategic investments at the EU level.

In its proposal for the €150 billion loan mechanism, the Commission utilises Article 122 of the Treaty on the Functioning of the EU (TFEU), which allows the Union to provide financial assistance in cases of ‘severe difficulties’ and ‘exceptional occurrences’ following a Council mandate. Such an Article has been likened elsewhere to “autonomous executive powers”, as they are non-legislative in nature. This evidently raises questions for the role of the European Parliament, even if such a legal basis was used for the NextGeneration EU recovery scheme. Some will perceive such steps as evidence of the Commission’s self-aggrandisement, but, in fact, none of the Commission’s proposals relegate the importance of member states. Indeed, it could be argued that ReArm Europe only really empowers the member states. Here again, however, there is the risk that EU efforts only serve to reinforce national fragmentation without creating a genuine EDTIB that can deliver on Europe’s military capability needs and create balanced economies of scale in the EU.

Conclusion

With the Special European Council Summit on 6 March 2025, there is yet again an opportunity for EU leaders to take bold actions on defence – most, if not all, agree that the time for words is over. Such actions include continued support to Ukraine and measures aimed to truly shock the EDTIB into action. The battle-lines between EU member states are well-known, and there will remain pockets of resistance to the EU playing a greater role in defence. With grave questions about the nature and extent of US security guarantees, the EU is seeking to find its way on defence industrial matters. Loans might be a start, but this is not the end of the affair. In the coming months and years, there will be a need to address the longer-term financing of defence in the EU. This includes the MFF and the EDIP, which should pave the way for joint defence procurement in the EU. However, a risk today is that the fresh injection of money will only reinforce market fragmentation and the nationalisation of defence supply chains. To borrow from the Union’s own mantra, the EU seems destined to “spend more” on defence, but whether the Union “spends better and together” remains to be seen.

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