NATO nations are rapidly boosting their defense expenditures

Poland will prioritize joint defense financing during its upcoming EU presidency, in light of concerns stemming from the Ukraine conflict and the potential return of NATO-skeptic Donald Trump to the White House, according to Finance Minister Andrzej Domanski.

In response to Russia’s invasion of Ukraine, European countries, including Germany, are urgently increasing their defense budgets. Trump’s warning that he may withhold support from European nations under attack unless they allocate at least 2% of their GDP to defense has further intensified this urgency.

Domanski emphasized the need for Europe to take the eastern threat from Russia seriously, stating that a return to previous norms is not an option. He highlighted the necessity for a unified strategy rather than the current fragmented approaches. “From discussions with fellow finance ministers, there is a strong consensus that Europe must significantly enhance its defense efforts,” he remarked.

Poland will assume the rotating six-month presidency of the EU in January. The European Commission has projected that enhancing EU defense capabilities could cost around 500 billion euros ($525 billion) or more over the next decade, leading to the establishment of a new defense commissioner position.

In April, EU finance ministers are scheduled to convene in Warsaw to explore potential financing models, as Domanski noted. While he refrained from specifying the exact funding required, he pointed out that substantial initiatives, such as a European air defense system, hinge not only on financial resources but also on collaboration among nations.

He emphasized the necessity for increased efficiency, labeling Europe’s 12 distinct tank systems as “insane.” Any collaborative financing model would likely involve new joint EU borrowing, a contentious concept in Germany that encounters legal hurdles regarding shared debt. Diplomats indicate that these legal challenges could be circumvented if the new borrowing is framed as a one-time emergency response, similar to the measures taken after COVID-19.

Diplomatic discussions are reportedly focused on two primary approaches: one that would utilize the EU’s long-term budget as collateral for new borrowing, akin to the EU’s 800 billion euro recovery fund established post-COVID.

The alternative involves creating a special purpose vehicle (SPV) with contributed capital that would secure loans against that capital, modeled after the European Stability Mechanism (ESM), which has the capacity to lend up to 500 billion euros. The EU budget option presents greater challenges, as it necessitates unanimous agreement from all 27 EU member states, including Hungary, which maintains strong relations with Moscow. This approach would also restrict participation to EU members and place the European Commission in charge, a scenario that some nations are hesitant to accept in the realm of defense policy.

Establishing an SPV would allow the EU to include other countries such as Britain and Norway, maintain governmental oversight rather than Commission control, and keep the incurred debt off national balance sheets. “There are several potential solutions being considered. It is too early to determine which will be selected,” Domanski remarked.

The extent of the EU’s financing requirements will become clearer following the release of a report by the new EU Defence Commissioner, Andrius Kubilius, expected by early March. Currently, discussions regarding financing options are still in their infancy. “We might be putting on our shoes before we even reach the starting line,” noted one EU diplomat.