Panorama 16.05.2025

Euranet Plus Panorama is a weekly news review that showcases our network’s wide-ranging coverage of EU-related stories.

Radio România, 19.05.2025, 21:49

Defence spending untethered

From this summer onwards, more than half of EU member states may be permitted to increase their debt in order to boost their defence spending.

The Commission is currently reviewing 16 requests, submitted ‘en bloc’ on 30 April, to activate the Stability and Growth Pact’s so-called escape clause.

EU defence industry to owe a debt of gratitude

The ReArm Europe plan, published in mid-March, set out a vision to rearm Europe that involves increased spending across the bloc.

To achieve this, Brussels put forward several tools designed to enable EU member states to mobilise funds for the defence sector over the next four years. Among these is the escape clause.

The measure in question is designed to allow member states to temporarily ‘overspend’ without fear of sanction.

Political scientist Ioannis Papafloratos, who teaches at a number of military colleges in Greece, gives our colleagues at Skai a succinct description of the mechanism.

Ioannis Papafloratos, Political Scientist and Military Professor (in Greek):

“Let’s begin with the fact that the escape clause is not a new mechanism. Essentially, it’s a tool provided by the European Union that allows member states to deviate from the Union’s strict fiscal rules – but only in the case of exceptional circumstances that demand increased spending. Up to now, this mechanism has mostly been used during times of economic crisis and during the COVID pandemic. What’s new is that it’s now being proposed specifically for defence spending.”

As EPP MEP Andrey Novakov told BNR in Strasbourg last week, in the context of a wider discussion about the EU budget, he is in favour of this mechanism as it means that money will not have to be redirected from other important areas to fund an increase in defence spending.

Andrey Novakov, Member of the European Parliament – EPP, Bulgaria (in Bulgarian):

“The instrument that will finance defence in the EU is more of a debt instrument. I am against money that was originally used for building schools, water pipes and roads being put towards missile launchers – not because these are unimportant, but they are not the only thing that matters.”

This additional defence spending would be capped at 1.5 per cent of GDP per year over four years – a level that, according to the Commission, could release some 650 billion euros. Yet such a cap would be difficult to enforce when it comes to highly indebted nations that may feel the need to go beyond the 1.5-per-cent ceiling.

And, as Commission spokesperson Balazs Ujvari explained at a press conference at the end of April, it does not give member states carte blanche to spend at will. There are strings attached.

Balazs Ujvari, European Commission Spokesperson (in English):

“If a member state is to activate the National Escape Clause, of course, on the one hand, it’s going to give them more fiscal space to spend more – on defence in this case. But this is to be reconciled with a disciplined fiscal policy. It needs to be ensured that public debt remains sustainable, preferably on a downward trajectory. And that later on, following the four-year period, because here we are talking about a period of four years between 2025 and 2029, the spending levels can be maintained by way of reprioritising the budget.”

While countries on the Eastern flank welcome the move as a step towards greater flexibility, some Western European politicians warn of potential financial risks: rising interest rates, rapid debt accumulation, and even the risk of a repeat Greek-style debt crisis.

While not going quite this far, Belgian PM Bart De Wever says that, although he is seeking activation of the escape clause, he will certainly be taking a cautious approach to it. RTBF shares his comments.

Bart De Wever, Prime Minister of Belgium (in French):

“A little bit of accounting flexibility from Europe could be helpful, but we can’t go overboard because money is money, and at the end of the day, someone has to pay. It would be irresponsible, given our budgetary situation, with a national debt that is far too high, for us simply to say: ‘Let’s use 100 per cent of the escape clause that Europe has provided’.”

Economist Marius Dubnikovas, vice-president of the Lithuanian Business Confederation, asserts that there is no reason to worry that more flexible borrowing for defence could lead to serious financial risks. On the contrary, he tells Žinių Radijas, Europe should use this as an opportunity to strengthen its economy.

Marius Dubnikovas, Economist (in Lithuanian):

“If we look at the last 10 years, the United States has increased its gross domestic product by 50 per cent, China by 70 per cent, while the EU – or more precisely the eurozone – only grew by seven per cent. That means we are talking about complete stagnation. And these investments directed toward defence could act as a catalyst that, far from raising interest rates, actually revive the European economy by generating public orders that simply haven’t existed until now.”

Spend, spend, spend

On average, in 2023, EU member states’ government expenditure on defence amounted to just 1.3 per cent of GDP. This fell way short of NATO’s target of at least two per cent.

Even in 2024, seven member states came in below this NATO threshold: Belgium, Croatia, Italy, Luxembourg, Portugal, Slovenia and Spain.

Several of these countries have recently committed to reaching the two-per-cent mark by the end of this year, as opposed to several years down the track as previously forecast. Luxembourg for one. The country’s prime minister, Luc Frieden, tells 100,7 that peer pressure contributed to his government’s change of heart.

Luc Frieden, Prime Minister of Luxembourg (in Luxembourgish):

“You saw that Belgium, Slovenia and Italy – other countries in a similar position – have all recently announced that they will reach two per cent. This means we are under pressure from the NATO community. So this is what led us to this decision, as well as the conviction that we have to show solidarity by doing our bit to make sure that we can live in peace and freedom in Luxembourg.”

Indeed, it would not look good for the EU country with the highest per-capita wealth to be one of the only ones failing to do its bit. And Luxembourg obviously feels it has enough wriggle room to do so without the need for the escape clause.

At the opposite end of the spectrum, four member states have even surpassed the three-per-cent mark. In ascending order: Greece, Latvia, Estonia and Poland.

All four of these countries have requested activation of the escape clause. You might be wondering, since their defence spending is already high, why they even need it.

Well, Latvia, for instance, has expressed a desire to push for five per cent in 2026 and will certainly require some ‘flexibility’ in the system if it is to achieve this goal. And Ioannis Papafloratos, who opened this podcast, explains that the clause will offer Greece some much-needed slack.

Ioannis Papafloratos, Political Scientist and Military Professor (in Greek):

“In the past – especially during the years of the bailout programmes – we faced harsh criticism for spending too much on defence. As many ministers at the time explained, increasing defence spending for our country has never really been a political choice. It is essentially a geographical necessity. In other words, we have always been obliged to spend in order to defend ourselves and safeguard our sovereign rights. And now, countries in Western Europe – including those that used to be so critical of us, like Germany – are beginning to accept that such an escape clause is necessary […] Of course, we’ll have to see how this develops, because we are already considered to have exceeded the spending target for this year. Nevertheless, it will still provide fiscal flexibility […] So for countries like Greece, which have already been accused of breaching budgetary limits, this mechanism is extremely important.”

Even though many countries are still falling short by NATO’s standards, almost all European countries increased their military spending in 2024 – with some seeing unprecedented rises.

Romania’s military spending, for example, shot up by a staggering 43 per cent last year. Poland saw a 31-per-cent hike, meaning that its defence spending now represents more than 4 per cent of its GDP – far and away the highest level among EU member states today.

And Germany’s defence spending increased by 28 per cent between 2023 and 2024 to reach almost 80 billion euros, making it the biggest spender in Europe in absolute terms, and the fourth biggest in the world after the US, China and Russia. This said, it is still only just about meeting NATO’s two-per-cent goal.

Meanwhile, Germany’s decision to reform its constitutional debt brake marks a major departure from its traditional fiscal policies. The radical reform permanently exempts military spending from borrowing limits.

Speaking to his party on the subject of the compromises made to form his new coalition, new chancellor Friedrich Merz defended his support for the change in policy, highlights AMS.

Friedrich Merz, Chancellor of Germany (in German):

“When it came to the debt brake in particular, we had to stray a long way from our own position. I understand the disappointment of many voters in Germany all too well. But the situation in Europe, the risks of the transatlantic partnership and the danger of our country becoming politically incapable of action at this point in time left me, left us, with no other choice.”

While this move does risk undermining EU-wide fiscal coordination, it also marks the most momentous shift in Berlin’s attitude towards defence spending since the end of World War II. As Alar Karis, president of Estonia, points out in an interview with Kuku Raadio, times have certainly changed.

Alar Karis, President of Estonia (in Estonian):

“We can now see that Germany is prepared to invest much more in its defence than it was before. I spoke to President Steinmeier, who referred to his speech in Brussels: a poorly armed Germany is a greater threat to Europe than a strongly armed Germany. Europe seems to have got the message, but Germany itself needs a certain degree of proof and courage in order to contribute more to defence.”

And it seems that it is getting braver fast. In breaking news, Berlin announced on Thursday that it had accepted Washington’s request to up its defence spending to five per cent of GDP by 2032. This would be along the lines of the compromise suggested by NATO secretary general Mark Rutte last week.

Essentially, what this means is 3.5 per cent in direct military spending, and 1.5 per cent on ‘defence-related infrastructure’, such as reinforced bridges. Which may, of course, be a handy workaround for countries – including Germany – with ailing infrastructure to update.

In the meantime, the Commission has begun the process of assessing the 16 clause-activation requests. In particular, it will be checking that a budgetary derogation is not likely to jeopardise a country’s financial stability.

The Brussels executive will then prepare recommendations for the Council, with a view to the latter body voting to activate (or not) the national escape clauses before the summer.