According to a report on March 26, the European Commission recently launched a 'Re-arm Europe' plan, which includes providing 150 billion euros in loans to EU member states for defense investment. However, France, Italy, and Spain have rejected this plan. These countries hope that the EU will provide donations instead of loans to avoid increasing their national debt burdens. This is a major setback for efforts to strengthen European military autonomy.
The policy formulated by the European Commission also includes an emergency clause to relax EU fiscal rules, allowing member states to increase defense spending by up to 1.5% of their GDP over four years. Last week, EU Economic Commissioner Valdis Dombrovskis predicted that 'a large number of countries will activate this exemption clause'.
The plan underestimates a key problem: although the EU can borrow at a lower cost than most member states, the loans it issues are still counted in the total national debt - this is a red flag for highly indebted countries worried about triggering market panic or fiscal penalties. A senior EU diplomat said, 'Some countries seriously doubt the feasibility or even the possibility of taking on such a high level of debt.'
Italian Prime Minister Meloni told lawmakers last week that 'Von der Leyen's plan is almost entirely based on national debts.' After that, the European Commission also admitted that it is necessary to cut other parts of the national budget to cope with rising defense costs - this is a difficult political proposition in countries where citizens are more concerned about immigration and climate change. Meanwhile, two EU diplomats said that France has indicated that it does not plan to activate the emergency clause. France's debt-to-GDP ratio exceeds 110%, so it is worried about triggering market panic or endangering its credit rating - a key factor in determining its borrowing costs.
In contrast, Germany is expected to activate the emergency clause to fund its massive 500 billion euro defense upgrade. But like other AAA-rated countries such as Denmark and the Netherlands, Germany is unlikely to accept the European Commission's loans because it can raise the funds at a lower cost on its own.
A diplomat from a non-southern European country said that the European Commission's plan risks failing, 'This could pave the way for defense bonds.' It is reported that southern European countries with high debt levels are increasing their demand for so - called defense bonds - these bonds are financed through joint borrowing by the EU in the capital market and must be unanimously approved by all 27 EU member states. Von der Leyen has not supported this idea so far because fiscal hawks such as Germany and the Netherlands may oppose it, fearing that it could set a precedent for debt mutualization.
The current deadlock may also undermine the EU's plan to transport more weapons from Europe to Ukraine.
