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EU countries are discussing a €500bn joint fund for common defence projects and arms procurement, tapping bond markets to boost spending in anticipation of Donald Trump’s White House return.
Trump’s threat to withdraw US security guarantees from underspending Nato allies has spurred European capitals to explore more radical defence funding options, including joint borrowing that has traditionally been ruled out by fiscal hawks in Germany, the Netherlands and Denmark.
Senior European officials discussing the plan are now focused on setting up a financing vehicle for defence, which would issue bonds backed by national guarantees from participating countries rather than the EU as a whole.
The financing model, which would be open to non-EU states such as the UK and Norway, is gaining traction among a key group of EU member states, six people involved in the talks told the Financial Times. While the precise borrowing target is still to be agreed, those involved in negotiations said it would need to be more than €500bn.
Europe has long been wrestling with how to step up defence spending to both sustain support for Ukraine and prepare for the US president-elect Trump, who earlier this year warned “we’re not going to protect” Nato allies “if they are not going to pay”.
The EU has explored myriad ways to finance additional projects, and the intergovernmental fund has emerged as the single most ambitious option under consideration.
The plans have been raised with the UK but London has yet to commit to any involvement, according to European officials involved in the discussions. One senior British official aware of the initiative welcomed the ambition as an “encouraging” sign of resolve.
The European Investment Bank would be asked to play a technical role, helping to administer the special purpose vehicle (SPV) and manage treasury functions.
Unlike the past proposals to issue “Eurobonds” for defence — joint borrowing that fiscally conservative EU countries opposed — participation in the fund would be voluntary and open to non-EU states.
EU restrictions on using common funds for military purposes would therefore not apply, and military-neutral member states such as Austria, Malta, Ireland and Cyprus would be able to opt out without vetoing the plan.
Greek Prime Minister Kyriakos Mitsotakis, who championed Eurobonds for defence earlier this year, told the FT there was a shift in sentiment among EU leaders. While his proposals were initially met with a “lukewarm response”, Mitsotakis now sensed “a renewed sense of urgency” given Europe’s security challenges and Trump’s return to power.
“There is a growing consensus that we need to spend more on defence, and perhaps it’s time to establish a joint European mechanism to finance projects of common interest,” he said.
“Germany and France would obviously benefit from more European spending on defence,” Mitsotakis said, adding that Italy and Spain are also “big players” in the industry that stand to gain from this initiative.
Poland’s deputy finance minister Pawel Karbownik also said that “Europe has no other choice” than to increase its defence investments. “We need to be able to defend ourselves in the worst-case scenario,” he told the FT.
“Trump 2.0 is likely to act as a catalyst for the EU to do more for Ukraine, as well as for its own security and defence,” said Mujtaba Rahman of Eurasia Group.
Under the new plans, the EIB would help manage national guarantees underpinning the SPV and play an administrative role in capital markets, the people involved in the talks said. Under its current lending policy, the EIB is banned from directly funding arms investments. A spokesperson for the EIB said: “We have not been seized of any such plans.”
The Netherlands, Finland and Denmark are broadly supportive of the idea, the people familiar with the discussions said. Germany’s stance is uncertain and will depend on its federal elections in February.
“We are in very well-advanced discussions,” said one senior EU diplomat involved in the talks. “But it is still not clear exactly how Berlin sees it.”
Talks are continuing about the size of the fund but the goal is to raise at least €500bn, a figure European Commission president Ursula von der Leyen has told leaders will be the minimum required over the next decade to meet the continent’s security needs, five of the people said.
The money could be used to support joint defence projects, such as common air defences that Poland and Greece have proposed and which alone would cost €500bn, according to EU defence commissioner Andrius Kubilius.
Brussels hopes funding for joint arms purchases will spur defence contractors to make long-term investments. But there remains much to be resolved over how the funds will be used.
“We’re not opposed to providing more money for defence,” said one senior official involved in the discussions. “[But] the priority needs to be defining exactly what this will be spent on.”
Additional reporting by Lucy Fisher in London