Europe races to set up €500bn defence fund

EU countries are discussing a €500bn joint fund for ordinary defence projects and arms procurement, tapping predictable returns markets to boost spending in expectation of Donald Trump’s White House yield.

Trump’s threat to withdraw US safety guarantees from underspending Nato allies has spurred European capitals to explore more radical defence financing options, including joint borrowing that has traditionally been ruled out by financial hawks in Germany, the Netherlands and Denmark.

elder European officials discussing the schedule are now concentrated 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 throng of EU member states, six people involved in the talks told the monetary Times. While the precise borrowing target is still to be agreed, those involved in negotiations said it would require to be more than €500bn.

Europe has long been wrestling with how to step up defence spending to both sustain back 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 alternative 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 elder British official aware of the initiative welcomed the aspiration as an “encouraging” sign of resolve.

The European resource lender would be asked to play a technical role, helping to administer the special purpose vehicle (SPV) and manage treasury functions.

Unlike the history 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 ordinary 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 schedule.

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 safety challenges and Trump’s yield to power.

“There is a growing consensus that we require to spend more on defence, and perhaps it’s period to establish a joint European mechanism to finance projects of ordinary gain,” he said.

“Germany and France would obviously advantage from more European spending on defence,” Mitsotakis said, adding that Italy and Spain are also “large players” in the industry that stand to boost from this initiative.

Poland’s deputy finance minister Pawel Karbownik also said that “Europe has no other selection” than to boost its defence investments. “We require 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 safety and defence,” said Mujtaba Rahman of Eurasia throng.

Under the recent plans, the EIB would assist manage national guarantees underpinning the SPV and play an administrative role in fund markets, the people involved in the talks said. Under its current lending policy, the EIB is banned from directly financing 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 concept, the people familiar with the discussions said. Germany’s stance is doubtful and will depend on its federal elections in February.

“We are in very well-advanced discussions,” said one elder EU diplomat involved in the talks. “But it is still not obvious exactly how Berlin sees it.”

Talks are continuing about the size of the fund but the objective is to raise at least €500bn, a figure European percentage president Ursula von der Leyen has told leaders will be the minimum required over the next decade to meet the continent’s safety needs, five of the people said.

The money could be used to back joint defence projects, such as ordinary air defences that Poland and Greece have proposed and which alone would expense €500bn, according to EU defence commissioner Andrius Kubilius.

Brussels hopes financing 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 elder 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