European Commission President Ursula von der Leyen on Tuesday unveiled an €800 billion ($842 billion) plan to boost European defence by extending new loans and easing budgetary rules to allow countries to increase their spending.
The announcement came shortly after the US paused all military aid to Ukraine in an attempt to pressure Ukrainian President Volodymyr Zelenskyy into engaging in peace talks with Russia.
“A new era is upon us,” Ms von der Leyen said, issuing a five-point plan named “Rearm Europe” to the bloc's 27 leaders ahead of an emergency meeting on Ukraine on Thursday in Brussels.
“Rearm Europe could mobilise close to €800 billion of defence expenditure for safe and resilient Europe,” she said. “We're living in the most momentous and dangerous of times … this is Europe's moment and we must live up to it.”
Europe stares into the abyss as the US threatens to pull out of its leading role in the continent's defence amid a change in its Ukraine policy.
Mr Zelenskyy said a rift with US President Donald Trump was “regrettable”, and “it is time to make things right” as he promised on Tuesday to “work under President Trump's strong leadership to get a peace that lasts”.
UK Prime Minister Keir Starmer spoke to the Ukrainian leader to encourage reconciliation after the White House announced the suspension of US military aid.
“It was vital that all parties worked towards a lasting and secure peace for Ukraine as soon as possible,” Downing Street said. “Turning to President Zelenskyy’s most recent calls for further diplomatic efforts to achieve the swiftest possible end to the war, the Prime Minister welcomed President Zelenskyy’s steadfast commitment to securing peace.”
The UK and European powers view Russia's invasion of Ukraine as an existential threat. Mr Trump's attacks against Mr Zelenskyy and disregard of Nato have caused panic in European capitals.
Structural adjustments
The first part of Ms von der Leyen's plan would allow European countries to spend more on defence without causing excessive deficit procedures, including a deficit threshold of 3 per cent of GDP.
“This could create fiscal space of close to €650 billion over a period of four years,” Ms von der Leyen said, assuming EU countries increase their defence spending by 1.5 per cent of GDP on average. Countries would be able to increase expenditure by up to 1.5 per cent of GDP and keep it at that level for four years.
“We see a need to increase defence expenditure, but we should also ensure that we do not blow our public finances completely out of the water,” a senior EU official said. “This additional expenditure over time will have to be accommodated in national budgets, either by raising taxes or reducing expenditure. There is essentially no way around it.”
There have been heated debates in EU countries about how to increase defence spending. The Bundesbank on Tuesday said Germany should raise its scope for structural borrowing to 1.4 per cent from its current level of 0.35 per cent of GDP, provided the debt ratio is below 60 per cent. Economists advising German parties estimate as much as €500 billion is needed for infrastructure and €400 billion for defence, after years of underinvestment in roads and railways.
The second proposal put forward by Ms von der Leyen is to extend €150 billion in loans to member countries over the next decade. It would be based on demand from member countries.
“We're talking about pan-European capabilities domains like, for example, air and missile defence, the artillery systems, missiles and ammunition drones and anti drone systems, but also to address other needs, from cyber to military mobility,” Ms von der Leyen said. “With this equipment, member states can massively step up their support to Ukraine.”
The proposal also includes eliminating restrictions for support to large defence companies and mobilising capital from the European Investment Bank. It is expected Ukraine would benefit from the increased spending. “What happens is that the member states will actually place orders,” another senior EU official said. “This will lead to equipment being delivered. And, of course, part of this equipment can then be shipped on to Ukraine.”
European leaders are expected to assess their preferred ideas and mandate the commission – which is the EU's executive arm – to work further on them before concrete proposals are put forward as early as their next gathering on March 21 and 22, according to sources who spoke on the condition of anonymity.
Cutting red tape
Many EU countries, including France and Italy, face delicate budgetary situations and do not have much fiscal capacity to dramatically increase borrowing. But the EU bloc and the UK have been increasingly co-ordinating in the past weeks to boost their defence and become less reliant on Washington.
Baltic states, which share a long border with Russia, have sounded alarm bells for Europe to fill the gap left by the US. “Europe must increase military aid to Ukraine to allow Ukraine to continue fighting for a just and lasting peace,” Estonian Foreign Minister Margus Tsahkna said. “We call on all supporters of Ukraine to increase their aid as soon as possible.”
The UK, an important ally of Ukraine but not an EU member, is also planning to increase defence spending and cutting red tape to quicken procurement of military equipment. Trade organisation ADS, representing 1,300 SMEs, described the announcement as “hugely welcome”, telling AFP that such companies “are a vital part of the UK's defence sector”.
