Faced with the disengagement of the United States and growing defense needs, Europe must find new sources of funding. The plan proposed by the European Commission in early March is a first step, but will probably not be enough. At a time when several European countries have limited budgetary leeway, the question of a common loan is once again on the table.
This time, we're there. Long announced, the American disengagement from Europe seems to be taking shape since Donald Trump's return to the White House. A situation that is forcing European countries to take their defense into their own hands. Since the end of the Cold War, many of them had relied heavily on the United States for their security. As a result, Europe is now faced with an immense need for investment to make up for decades of underfunding of its armies. And although military budgets have already risen sharply in recent years, there is still a long way to go.
Source: European Defence Agency
In early March, the President of the European Commission, Ursula Von Der Leyen, presented the "Rearming Europe" plan. This initiative will mobilize up to €800bn. In detail, the plan is divided into two parts. Firstly, a €150bn, underwritten by the Commission, to be lent to the Member States to finance their purchases of military equipment. Secondly, €650bn, which is an estimate of what could be mobilized by the states by excluding defense spending from the calculation of the deficit for 4 years, and allowing a reallocation of cohesion funds.
An insufficient plan
€800bn is therefore a theoretical amount. Firstly, because a country like Germany would be better off borrowing in its own name, to benefit from more favorable financing conditions. It is therefore unlikely that Germany would request the €150bn envelope. Secondly, the most heavily indebted countries, led by France, have no more budgetary leeway. So it's not because they're allowed to borrow more that they will. Or at least not in the proportions suggested by the commission's calculations.
And even imagining that the full €800bn would be mobilized, it probably wouldn't add up. Zonebourse's macro research teams have made their calculations. In 2024, according to the European Defense Agency, the 27 EU countries spent €326bn on defense, or 1.9% of GDP. If we add to this €200bn per year (€800bn over 4 years), we arrive at 2.9% of GDP. NATO's new spending target is expected to be over 3% of GDP. This new target will be set in June, at the next Atlantic Alliance summit in The Hague.
Hence the idea of a common loan, contracted by the European Commission, which would then give rise to subsidies granted to member states. France is pushing for this, as is Poland. Countries once considered frugal are also in favor. These include Denmark and Finland. For the time being, only the Netherlands has clearly expressed its opposition. It remains to be seen how Germany will position itself. For the moment, however, Friedrich Merz is busy negotiating the formation of his future coalition.
Next Generation EU: a model... and reimbursements
Such a project will require the impetus of the famous "Franco-German couple" - an expression which, let's not forget, is only used on this side of the Rhine. A couple that has been in crisis since Olaf Scholz came to power at the end of 2021. And even though Emmanuel Macron paid him a heartfelt tribute at the end of the last European Council, it's not fooling anyone. The two men have never got along. On substance, Paris and Berlin have never seemed to be aligned for three years. And when it comes to form, you only have to put Emmanuel Macron and Olaf Scholz in the same room to see that they don't see eye to eye.
With the arrival of Friedrich Merz, the relationship could therefore improve. Particularly as the likely future chancellor seems determined to shake things up. Having broken the taboo of the debt brake, the common loan is another. Even though, in reality, the latter has already fallen. That was in May 2020. At that time, after several weeks of confinement throughout Europe, Emmanuel Macron and Angela Merkel launched the idea of a European loan to finance a recovery plan. The idea came to fruition a few weeks later, following an extraordinary European Council meeting. The plan, dubbed Next Generation EU (NGEU), raised €750bn (€360bn in loans and €390bn in grants).
A precedent that shows the way and proves that political obstacles can be overcome. But it's also a loan that will soon have to be repaid. From 2028, NGEU repayments will take up 15%-20% of the EU budget. This further increases the need for new financing, and therefore for a joint loan. In the words of Emmanuel Macron after the last European Council: "You don't have to be a rocket scientist to know that this is a debate that will come up very quickly".
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