European countries need to raise at least an additional \u20ac1 trillion to meet their NATO commitment to\u00a0raise core defence spending to 3.5% of GDP by 2035 and an additional 1.5% for defence-related\u00a0infrastructure and resilience. While some allies are racing ahead, several major European nations are\u00a0falling behind because of national fiscal constraints. There is, hence, an urgent need for more resources\u00a0than many EU countries\u2019 budgets can provide at a time when government borrowing costs have risen to\u00a0multi-decade highs.<\/p>\n
According to NATO estimates for 2026, Poland and the three Baltic states have already reached, or are\u00a0close to, 5% of GDP on core defence expenditure alone. The four Nordic allies and Greece are above or\u00a0apprLeaoaching the 3.5% core military spending target. Germany, Europe\u2019s largest economy, has\u00a0announced plans to achieve that goal by 2029 through an unprecedented surge in defence expenditure,\u00a0funded by a special national borrowing programme. By contrast, some highly indebted European allies,\u00a0notably the United Kingdom, France, Italy and Spain, are struggling and lack the leeway to increase\u00a0national borrowing or raise taxes significantly. Slashing welfare or pension spending is not politically\u00a0feasible. Spain has a healthier growth rate, but its government rejects the NATO target. The others have\u00a0suffered several years of relative economic stagnation.<\/p>\n
The EU can contribute significantly to Europe\u2019s defence surge<\/a> and has already become an important\u00a0pillar for European security and resilience. There are different options for the \u201chow\u201d, and political\u00a0hurdles will need to be overcome to organise majorities.<\/p>\n The first-best solution, call it Plan A, would be to considerably increase funding for joint arms\u00a0procurement in the EU\u2019s Multiannual Financial Framework (MFF), the seven-year budget currently\u00a0under negotiation for the period 2028-2034. However, the fivefold increase to \u20ac131 billion in joint\u00a0spending on defence and space proposed by the European Commission<\/a> is unlikely to be approved in full\u00a0by member states, given national lobbying for traditional agricultural and regional spending and a drive\u00a0by frugal net contributors to curb the overall EU budget. And it only kicks in from 2028.<\/p>\n The contribution of the future EU budget to defence could be complemented by a new joint borrowing\u00a0initiative along the lines of the NextGenerationEU economic recovery fund launched during the\u00a0COVID-19 pandemic, this time dedicated to defence. However, so far, the frugal EU countries with the\u00a0highest national credit ratings, Germany, the Netherlands, Austria and Finland, have rejected joint\u00a0borrowing, or indeed a continuation of NextGenerationEU, which expires in 2026.<\/p>\n A second option is the scope for a significant role in defence financing for the European Investment\u00a0Bank, which has a triple-A credit rating. The EIB has widened its mandate to allow more defence-related\u00a0lending, but uptake has been slow. It lent \u20ac4.5 billion for defence and security projects in 2025,\u00a0roughly 5% of its total financing, up from \u20ac1.2 billion in 2024. But this share is still small.<\/p>\n Although the EIB cannot finance weapons, ammunition, or purely military assets, its contribution to\u00a0NATO targets would come in financing the 1.5% \u201cbroader defence and security\u201d category \u2014 especially\u00a0dual-use infrastructure, cyber resilience, critical infrastructure, and defence industrial expansion \u2014\u00a0thereby freeing national budgets to focus on the 3.5% core defence requirement. The EIB can also\u00a0usefully complement the Commission\u2019s \u20ac150 billion Security Action for Europe (SAFE) loans by cofinancing\u00a0defence-related projects in line with its mandate.<\/p>\n This would create a euro-denominated safe asset, European defence bonds, that would strengthen the\u00a0international use of the euro and offer cheaper credit to member states. However, using the EIB in a\u00a0more ambitious way could sidestep concerns about new joint borrowing, especially if the 27 EU member\u00a0states, whose finance ministers are governors of the bank, agree to a capital increase.<\/p>\n An alternative to a new NGEU-type initiative would be for a coalition of willing governments to create a\u00a0Special Purpose Vehicle by treaty that would borrow on capital markets with a joint-and-several\u00a0liability guarantee. This could also enable non-EU nations such as the UK, Canada, Norway and T\u00fcrkiye\u00a0to participate. However, to achieve a AAA rating, such a mechanism would need some of the most\u00a0solvent European nations to join. There may also be a role for the existing European Stability\u00a0Mechanism (ESM) that was created during the eurozone debt crisis as a conditional rescue fund for euro\u00a0member states that lost market access but was never used for that purpose. This would, however,\u00a0require an amendment to the ESM treaty to allow it to lend for defence, and it would only cover Eurozone\u00a0members.<\/a><\/p>\n A third option is to raise the money through a dedicated defence bank. Efforts in this direction took a\u00a0step forward at NATO\u2019s Ankara summit when nine nations, Albania, Belgium, Canada, Greece, Latvia,\u00a0Luxembourg, Romania, T\u00fcrkiye, and Ukraine, announced support for a new Defence, Security and\u00a0Resilience (DSR) bank led by Ottawa, to be structured as a multilateral financial institution with\u00a0member nations inputting core capital and holding in reserve callable capital. Their borrowing quota\u00a0would be linked to their capital stake, with partners putting in Ukraine\u2019s capital share. Leveraging a\u00a0strong credit rating, the bank aims to provide long-term, low-cost financing for defence, security, and\u00a0resilience initiatives across supply chains, helping governments and small and medium-sized\u00a0enterprises address critical financing gaps.<\/p>\n It will provide guarantees to commercial banks that increase the availability of affordable capital, while\u00a0also offering loans to member countries for priority investments. The aim is to have the bank\u00a0operational in 2027. However, none of the European G7 countries has yet agreed to participate.\u00a0Germany\u2019s Finance Ministry has so far rejected joining the DSR bank, although its own defence\u00a0industries\u2019 association backs the idea.\u00a0<\/p>\n