The Ministers of Economy and Finance of the euro zone are increasingly aware of the need to increase defense expenditure, but they disagree on how to achieve this goal. Some countries, including Spain, advocate for a new joint debt instrument, similar to the Next Generation EU funds that were launched to cope with the pandemic. However, countries like Germany and the Netherlands, who are proponents of financial orthodoxy, oppose this idea.
The European Commission is aware of the lack of consensus and will propose different flexibility modalities included in the stability and growth pact in the coming weeks. After the pandemic, new fiscal norms were introduced in 2024, allowing each country to agree with the European Commission on a personalized path of deficit reduction and public debt. The new stability and growth covenant admits that the adjustment period can be extended to four to seven years if a country invests in areas such as energy and digital transition or defense. Additionally, the new regulations allow for the activation of an “escape clause” for countries facing exceptional circumstances outside their control that impact their public finances.
This escape clause was previously only applicable to all euro zone countries as a whole, as was the case during the pandemic. The president of the Eurogroup, Paschal Donohoe, has defended the use of this flexibility for countries in difficulty, without compromising compliance with fiscal norms. Spain, for instance, does not want to increase its defense expenditure from its national budget and instead favors European instruments, such as a new European debt issuance or using the European Investment Bank to finance defense.
According to Minister Carlos Body, common financing will be a “fundamental leg” in financing the defense project, and the defense expense in the common European GDP is still relatively low at 2.5%. However, not all countries share the same opinion. The Minister of Finance of the Netherlands, Eelcco Heinen, stated that countries must make difficult decisions about their budgets and prioritize their spending, as “money is not free.” He also opposes a new joint debt issuance, saying that a strong defense requires a strong economy and currency.
Similarly, the German Minister of Finance, Jörg Kukies, emphasized that increasing defense expenditure should not rely on common financing or Eurobonds, but rather on modifying European standards to allow for new objectives in defense spending at the national level. He also expressed concern that an increase in debt could lead to higher financing costs for states in financial markets. The disagreement among euro zone countries highlights the challenges in finding a consensus on how to increase defense expenditure while maintaining fiscal discipline.