Budgetary Politics in Times of War

Introduction

At the extraordinary European Council meeting of 6 March 2025, in response to Russia’s ongoing war of aggression, political leaders stressed the need for Europe ‘to become more sovereign, more responsible for its own defence, and better equipped to act’. They consequently called for a substantial increase in expenditure on security and defence. Days earlier, Commission President Von der Leyen had announced a plan – ‘ReArm Europe’, later rebranded as ‘Readiness 2030’ – to realize that ambition. Through a joint financial effort of the EU and the member states, as much as €800bn in public investment should be mobilized to ramp up defence capabilities in the years ahead.

‘Readiness 2030’ is illustrative of how Russia’s invasion of Ukraine, followed by the US withdrawing from its role as guarantor of European peace and security under Trump, has forced the states of Europe to take ownership of their own security. The consequences of this new reality are not confined to defence but reach far into other policy domains, not least Europe’s economic and monetary union (EMU). Originally geared to secure the stability of the single currency, the EMU now needs to serve the stability of the continent too. This requires the EU to look at budgetary politics from a new perspective.

Budgets play a crucial role in any polity’s system of government. Given their importance for the exercise of power and authority, both the executive and parliament have a stake in them. For the executive, a budget underpins its capacity to act in service of the polity. For the parliament, it forms a crucial instrument to control that executive action. Historically, this control function has been dominant in EU budgetary politics. The economic and monetary union was designed to rein in (national) budgetary power for the benefit of (European) monetary stability. The other function of budgetary politics has come to the fore only recently. The euro crisis, the pandemic and now the Ukraine war have demonstrated that the EU requires serious budgetary powers, if it is to develop a capacity to act, that are a prerequisite for survival at times of war and to chart a path into the future.

Funding through joint borrowing

To develop its defence capacity, the EU requires sufficient financial resources. ‘Readiness 2030’ seeks to boost both public and private investment in defence spending. With regards to public investment, it has recently resulted in the adoption by the Council of a €150bn loan programme called ‘Security and Action for Europe’ (SAFE). Observers have noted that SAFE is still rather modest in terms of its legal design and mode of operation. In some respects, it looks like the EFSM, a temporary support facility created at the start of the euro crisis. In others, it resembles SURE, an instrument to combat unemployment that was put in place early in the pandemic. But just as the EFSM ultimately paved the way for the permanent assistance mechanism ESM, and SURE for the Covid-19 relief fund NextGenerationEU, it is clear that more far-reaching measures are needed after three decades of under-investment in defence. The Commission has already announced in that it ‘will continue to explore additional funding sources for defence at EU level’ going forward.

Although public financial resources can be mobilised through tax increases or spending cuts in other areas, in view of both political and economic constraints the debate will likely focus on debt financing. Not only on an individual basis but also collectively. Various proposals for joint borrowing have already been circulating in policy circles, but – no doubt due to the topic’s technicality and political sensitivity – the fundamental implications of such a move for the EU’s constitutional order have not yet been properly thought through or spelled out.

Past experience shows that EU Treaties can accomodate joint borrowing. The Ukraine war provides a new impetus, with some even calling for Eurobonds. What sets the current situation apart, is that debt financing not only needs to serve the currency union, or even EU citizens, but Europe as a whole.

Key questions to be addressed are:

• If SAFE is considered to be equivalent to the EFSM during the euro crisis, or SURE during the pandemic, what would a full-blown ESM or NextGenerationEU in the area of defence look like?
• How can joint borrowing happen under national and European constitutional law?
• Can and should third states, within and outside Europe, be involved in joint borrowing?

Spending for Europe’s defence

Although the EU is taking on a greater role in security and defence, member states will remain critical players, not least because they are unlikely to cede competence in this domain. Most defence spending will be at the national level. This is reflected in the numbers currently under discussion in the context of Readiness 2030. From the total €800bn in public funds, €150bn should be mobilised by the SAFE instrument through EU loans. The remaining €650bn comes from member state investment, with the budgetary space expanded thanks to an adjusted fiscal rulebook. The challenge is to ensure these funds are spent in a way that serves not just the defence needs of individual states, but those of Europe as a whole, to the extent this distinction can be made (for instance when France spends on its nuclear arsenal or Poland on its territorial defence).

This challenge is especially pressing given the present state of the European defence industry. It is fragmented along national lines and suffers from limited production capacities. This hampers efforts to close certain critical capability gaps, for example in air and missile defence or in satellite-based secure communication.

Questions to consider are:

• Whether it is possible and desirable to distinguish between national and European needs in the context of defence spending.
• What are the criteria that should guide the identification of European capability gaps?
• Which capability gaps should be prioritized in the context of defence spending and whoshould decide on this?
• How can national spending, of both the proceeds of joint borrowing and the funds made available through a loosening of the fiscal rulebook, be organized in a way that ensures capability gaps are actually closed, now and in the future?

Executive leadership in budgetary politics

Instruments for joint borrowing and spending alone do not develop financial capacity for action. To decide when and how to use the funds, the EU requires executive leadership. The original constitutional arrangement of the economic and monetary union offered little room for such leadership, as it was feared that this would interfere with the ECB’s ability to control inflation. Budgetary competence instead remained in the hands of member states, which had to exercise them within strict legal parameters.

This set-up fitted the EU’s traditional mode of operation, which assumed that policy problems are best tackled through depoliticization, technocracy and the administration of legal rules. Although this system has proven its worth, it is ill-suited for Europe’s current defence challenges. To keep the European polity safe in an increasingly hostile world, the EU requires executive leadership to steer the new budgetary instruments into action.

Over the past fifteen years, in response to first the euro crisis and then the Covid-19 pandemic, the EU has started to develop such leadership. Yet, it mainly served to respond to existential challenges as and when they occurred, to engage in ‘emergency spending’. Russia’s war of aggression forces the EU to take things one step further. Keeping Europe safe not only requires that it spends now, but also that it invests in the future. Such ‘strategic spending’ calls for a different kind of leadership, characterized by an ability to determine Europe’s defence needs many years hence, and to set budgetary priorities accordingly.

Points for reflection include:

• Which forum, EU-based or otherwise, has the requisite authority to set spending priorities, also taking account of recent experiences with the European Political Community or improvised configurations such as the Paris Summits?
• How does the EU ensure alignment between finance and defence departments, at the European and national level, in the context of setting spending priorities?
• What role can the EU’s long-term budget, or multiannual financial framework, play in facilitating strategic spending?
• What other changes, if any, to the EU’s broader system of government are required to translate executive leadership into budgetary action?