The problem of missing European public goods from the ReArm Europe plan

The European Commission’s €800 billion ReArm Europe plan, issued 4 March, seeks to stimulate defence and security spending by European Union countries in two ways. First, it offers countries that spend more on defence extra flexibility within the EU fiscal governance rules. Second, it establishes a new financial instrument that would channel EU loans to countries. What it doesn’t do, however, is include any form of genuine European public goods (EPGs) with EU-level delivery in the areas of defence and security.

Most of the additional European defence capabilities (worth up to €650 billion over four years, if all EU countries increase their defence spending by 1.5% of GDP) would be financed and delivered at national level. This raises risks related to varying national fiscal capacities. Under the EU’s fiscal framework, public debts should be kept on a sustainable path. But defence spending increases will be engineered via a so-called ‘national escape clause’ that allows EU countries to apply for an exception to the normal rules, though several low-debt countries will not need to do this.

By urging countries to support this additional defence expenditure all at national level, the EU takes the risk that fiscally weaker countries will simply not implement the higher spending on defence, if they lack the necessary fiscal and political room. Alternatively, the security crisis posed by the war in Ukraine could escalate into a fiscal crisis for countries with precarious finances.

Either outcome – failing to reach even this moderate spending target or putting high debt ratios on a downward trajectory – could undermine the European project. Furthermore, relaxing the EU fiscal rules does not incentivise member states to take into account the positive effects for the security of other EU countries from investing more in defence, nor does it incentivise them to coordinate their defence investments.

The second component of ReArm Europe is a financial instrument, Security Action for Europe (SAFE) via which the EU will provide member countries with up to €150 billion in loans for defence spending. Details on this are scarce. Its added value will be linked to the Commission’s ability to convince national governments to use the loans to finance cross-country projects. If SAFE loans are used as part of a broader strategy of demand aggregation, they could achieve significant results through a small component of EU support in the form of the interest-rate reduction that joint borrowing carries over national borrowing.

To make a difference macroeconomically and avoid stigmatisation, a critical mass of countries will need to jointly apply for both the national escape clause and SAFE.

EU leaders have indicated a number of EU-level projects that could be implemented – including air and missile defence, drone systems and cyber capabilities – but without specifying how they would be financed. However, the lack of inclusion of EPGs in the Commission’s proposal means that neither EU-level provision of goods nor EU-level financing is currently envisaged. Some of the projects identified by the EU leaders can be  most efficiently and effectively delivered at EU level – air defence could be provided as an EPG, for example. Without treating defence as a genuine EPG, it is highly unlikely that money will be allocated optimally, in a way that will avoid duplication of redundant national capabilities while concentrating on much needed EU-wide projects.

Of course, what is being discussed now need not be the end of the road. The ultimate outcome could go beyond the experience of the response to COVID-19 five years ago, when EU fiscal rules were also effectively suspended. This was followed by a programme of loans to shore up national labour markets. Finally, the EU borrowed to finance post-pandemic recovery through the NextGenerationEU (NGEU) initiative – a major innovation because it involved financing via common debt (though NGEU failed to live up to its full potential because it focused on financing purely national projects). The challenge now is to plan for common borrowing to finance genuine defence EPGs, instead of offering transfers to member states. This will also help develop a mature EU defence industry via joint procurement.

Fitting all this into the EU framework will require institutional and legal imagination, for two reasons. First, defence is not part of EU economic coordination procedures. Second, what is taking shape is a coalition of the willing, involving non-EU countries such as the United Kingdom and Norway that are essential for collective military strength. Meanwhile, some EU countries might – for different reasons – stay outside the coalition. Different forms of agreements are likely to emerge. It will be up to the leadership of the Commission and of the European Council to keep these within orderly institutional boundaries. They will need to show great acuity.

We thank Ignacio García Bercero, Stephen Gardner, Heather Grabbe, Lucio Pench, Guntram Wolff and Jeromin Zettelmeyer for helpful comments.