Financing Europe’s defence:

I. Introduction

The European Union is currently navigating the most dangerous episode in its history.¹ Russia’s invasion of Ukraine, followed by Trump’s return to the White House, has pulled the rug from under Europe’s post-war security architecture. These events herald a new historical era, one in which Europe must look to provide for the financing of its own defence.

The fall of the Berlin Wall in 1989 ushered in a similar epochal transformation for Europe,² leading to the reunification of Germany and paving the way for the Maastricht Treaty, which in turn laid the basis for today’s EU. From being a polity whose main task was to regulate a market, it became responsible for security, defence and a currency union, all deeply political matters. At the time, the profundity of this shift was not fully realized.³ The events of 1989 were not only considered to have brought an end to the Cold War but (thanks to Fukuyama) to history itself. As the virtues of liberal democracy were expected to spread across the globe, the need for the Union to engage in political action appeared to wane.

The acceptance of this narrative even affected the legal construction for the monetary union that was put in place by the Maastricht Treaty. Predominantly concerned with price stability through the control of inflation, it equipped the European Central Bank with independence and sought to rein in the budgetary powers of member states by placing limits on their deficits and debt.⁴ That times might arise when it is not just the stability of the single currency that is at stake but that of the entire European continent, and when financial instruments might be needed to enable political action in the face of imminent danger, did not cross the minds of the treaty’s authors. Their assumption seems to have been that history proceeds along predictable lines.

A similar ahistorical mindset permeates the Union’s budget.⁵ Since 1988, EU budgetary policy takes place within multiyear cycles. These long-term budgets, or Multiannual Financial Frameworks (MFF), have proved their value as they have bestowed budgetary policy with predictability and helped ease negotiations over annual budgets, which were previously prone to conflict.⁶ However, this has come at the expense of the EU budget’s agility, its ability to respond to unforeseen events and to steer the European polity through difficult times. The future simply cannot be predicted seven years in advance.

History returned to the continent with a vengeance. Two weeks after the Russian invasion of Ukraine, on 11 March 2022 at their Versailles summit, Europe’s heads of state and government stressed the need for the Union ‘to take more responsibility for its own security’, not least by substantially increasing defence expenditure.⁷ Four years into the war, this BIG Report takes stock of the progress so far. It argues that the challenge for the Union and its member states is not only to spend more money on defence, but also to use their budgetary powers with greater flexibility and strategic foresight. This requires a shared understanding of Europe’s defence needs and the requisite political authority to steer these budgetary powers into action. With the political negotiations on the EU’s next long-term budget on the horizon, the time to mobilize that authority is now.

Since the start of the war, a plethora of instruments have been introduced to ramp up defence spending in support of Ukraine, the EU and Europe as a whole. Focusing on the bigger picture, this Report singles out several key instruments and discusses them across three spectrums: the EU budget (section II), collective debt financing (section III) and national defence spending (section IV).⁸ It concludes with a reflection on the governing arrangements that are necessary if the EU is to act on its budgetary potential (section V).

II. The EU budget at the service of defence

The paradox that the states of Europe decided to join forces in a political union at a time when political action itself no longer seemed urgent is also evident in the Treaty arrangements for security and defence. While the EU is expected to develop a common security and defence policy, it can use its budget for that purpose only to a limited extent. Article 41(2) of the Treaty on European Union determines that ‘expenditure arising from operations having military or defence implications’ cannot be charged to the budget. In other words: the Union is given some responsibility for security and defence, yet its financial capacity to act on that responsibility is curtailed.⁹

Since the start of Russia’s full-scale invasion of Ukraine, the EU has nonetheless mobilized significant financial resources in support of Europe’s defence through a combination of off-budget and on-budget instruments. For the next Multiannual Financial Framework, set to begin in 2028, the challenge for the Union will be to build on that experience and use the budget with a different mindset, one that recognizes its potential as a strategic tool to further Europe’s security and defence interests.

Military assistance

Over the recent past, the EU is estimated to have given €69.3bn in military support to Ukraine.¹⁰ This mostly consists of bilateral aid by member states, yet the EU itself has provided support too. Although legally barred from using its budget for defence operations, it has managed to assist Ukraine militarily through the European Peace Facility (EPF). This is an off-budget instrument funded by the member states according to a gross national income distribution key.¹¹ Military assistance for Ukraine comes in two forms: the Facility finances the provision of military equipment, lethal and non-lethal; and it funds the EU Military Assistance Mission (EUMAM) mandated to train Ukrainian armed forces (85,000 Ukrainian soldiers since its launch).¹²

When the Peace Facility was established in 2021, its financial ceiling was set at €5.69 billion. Since the start of the war, this has been raised several times and now stands at €17 billion, with the last increase in March 2024, when the Council of Ministers sanctioned a further €5 billion for the creation of a dedicated Ukraine Assistance Fund. In total, €11.1 billion in financial assistance has now been allocated to Ukraine through the EPF.¹³

Due to its intergovernmental nature, the EPF is susceptible to national vetoes. In recent years, Hungary has repeatedly blocked assistance for Ukraine, resulting in several billion undisbursed euros so far.¹⁴ This highlights the difficulty of developing an EU defence policy on the basis of this off-budget instrument.

Supporting the defence industry

Beyond Ukraine, Russia’s war of aggression underscores the need to bolster Europe’s defences at large. After the Cold War, most European states scaled back their defence expenditure, resulting in reduced armies and depleted weapon stocks. The task now is not only to replenish these stocks by ramping up defence spending but to do so in a way that benefits the European defence industry. As Mario Draghi has pointed out, this industrial sector is heavily ‘fragmented’ along national lines, with defence companies producing for their own domestic markets.¹⁵ This limits the development of economies of scale, negatively affects the standardization and interoperability of military equipment, and ultimately hampers efforts to enhance the EU’s autonomy in security and defence.

Even before 2022, the EU had taken steps to strengthen the European defence industry. The European Defence Fund was created in 2021 and now has a budget of €9.45 billion.¹⁶ It supports collaboration in research and the development of defence products and technologies. Efforts have been stepped up since then and in 2023, the EU adopted the Act in Support of Ammunition Production (ASAP, €500m), which sought to ramp up Europe’s ammunition and missiles production capacity.¹⁷ That same year, it also introduced the European Defence Industry Reinforcement through Common Procurement Act (EDIRPA, €300m), which incentivized Member States to procure critical defence equipment jointly.¹⁸ As the ASAP acronym and amounts allocated to the programmes suggest, these measures were short-term. What should replace them is the European Defence Industry Programme (EDIP, €1.5bn), which was signed into law at the end of 2025.¹⁹ Extending the logic of ASAP and EDIRPA, one of its goals is to provide EU funding for activities that increase production capacity and precipitate common procurement. The EDIP is intended to underpin the broader European Defence Industrial Strategy (EDIS) that the Commission and the High Representative published in March 2024.²⁰

None of these measures are based on the EU’s competences on security and defence. Instead, they have been adopted with the help of other competences, such as those in research and technology, the internal market and industry policy. The EU consequently seeks to establish itself as a defence actor by leveraging its powers in other policy areas.²¹ By taking this approach, it is possible to use the EU budget for defence purposes. The amount allocated to measures like ASAP, EDIRPA or even EDIP is currently modest, but the next long-term budget offers the opportunity of setting new spending priorities.

Looking ahead: strategic spending

In this era of resurgent geopolitics, the EU must free itself of its ahistorical mindset and approach budgetary policy with greater strategic awareness. The budget is not just an instrument to boost economic growth; it is a tool to be put at the service of geopolitical objectives, not least in the area of security and defence.²² For the budget to become a strategic tool, it must not only increase in size, but also allocate financial resources in ways that align with the EU’s defence interests.

The Commission proposals for the next Multiannual Financial Framework, covering 2028 to 2034, demonstrate a strategic turn in the use of the budget.²³ Plans are to spend as much as €116 billion²⁴ on the defence and space industry in the context of a new ‘European Competitiveness Fund’, a sizeable increase compared to the current budget. Further defence spending can happen under other budgetary programmes, such as the ‘Connecting Europe Facility’, which sets aside nearly €16 billion for military mobility, and ‘Horizon Europe’, whose financial envelope of €155 billion can also be used to invest in dual-use actions.

This increase in defence spending comes at the expense of budgetary items that traditionally consume a large chunk of the budget, such as income support for farmers and cohesion policy.²⁵ In addition to a reallocation of funds, the overall size of the budget is expected to grow to €1,763 billion. Measured in terms of the EU’s Gross National Income, this means the budget is set to increase from 1.12% to 1.26%. An impressive number, but much of this increase will be used to service debts that the EU incurred during the pandemic. Estimates suggest this will require around €149 billion, or 0.11% of EU GNI, during the upcoming budgetary cycle.²⁶

With only a modest increase in funds, the Commission is consequently able to significantly boost the strategic dimension of the EU budget. However, its proposals are only the starting point of what will likely be a protracted and difficult negotiation. Many national governments are reluctant to hand over more money to the EU and are driven by ‘net balance’ considerations. As former UK Prime Minister Thatcher put it: ‘I want my money back’. Yet, in a world in which the EU must look after its own security, there is less scope for such compensatory logic. Keeping Europe safe requires spending on common goods that benefit the EU as a whole, particularly defence.

In addition to increasing funds and addressing new spending priorities, the EU budget must become more agile. For the 2028–2034 Multiannual Financial Framework, the Commission is proposing more options to shift financial resources within and between budget programmes, a higher proportion of unallocated funds and dedicated flexibility tools. The reality is, however, that even a more flexible budget cannot anticipate everything the future holds. As history accelerates and the world enters a new, more dangerous era, the EU needs to be able to respond to unforeseen events, to act in times of existential threat. This requires a capacity to borrow, and the power to draw on that capacity as the situation demands.

III. Collective debt financing

Over the past two decades, in response to first the euro crisis and then the Covid-19 pandemic, the EU has started to develop a capacity to borrow. This has raised the question of whether Europe is experiencing a ‘Hamiltonian moment’ – after America’s first Secretary of the Treasury, Alexander Hamilton, who federalized the United States in the 1790s by brokering a deal that converted the suffocating debts of the former war-torn colonies into joint obligations of the Republic.²⁷ Just as the American states argued fiercely over the federalization of their debts, so too the member states of the EU, divided as they are over whether and how to engage in collective debt financing. This discussion is bound up with the negotiations on the 2028–2034 Financial Framework and will have a serious impact on the EU’s financial capacity to act for European security.

Borrowing for lending or for spending

The EU’s first major experience of collective debt financing occurred in May 2010, when Greece was on the verge of bankruptcy and the risk of financial contagion loomed large. In a move away from the no-bailout clause in Article 125 of the Treaty on the Functioning of the European Union (TFEU) – long considered to rule out anything close to a ‘eurobond’ – it established the European Financial Stabilisation Mechanism (EFSM).²⁸ This mechanism was based on Article 122(2) TFEU, an emergency provision that allows the Union to grant financial assistance. The EFSM could provide loans to Member States in need and it enabled the Commission to contract borrowing for that purpose. Its assistance capacity was limited to the margin or ‘headroom’ available under the ‘own resources ceiling’. This ceiling is laid down in the Own Resources Decision (ORD), a legal act that governs the EU’s system of revenue and is usually negotiated in parallel to the Multiannual Financial Framework. It determines the maximum amount that member states may have to contribute to the EU budget in any given year. The headroom is the difference between this maximum amount and actual planned spending under the budget. Back in 2010, the budgetary headroom capped the EU’s borrowing capacity at €60 billion, a substantial figure but not nearly enough to guarantee the continued existence of the monetary union. Euro area member states therefore ventured outside the EU Treaties to establish additional rescue funds: the European Financial Stability Facility (€440 billion) in 2010,²⁹ followed by the European Stability Mechanism (€500 billion) in 2012.³⁰ These intergovernmental instruments demonstrated how the EU’s financial capacity to act was constrained in the face of unexpected events by its own budgetary framework.³¹

Collective debt financing received an important upgrade during the Covid-19 pandemic. To address the economic fall-out, the European Council decided in July 2020 to establish the €750 billion relief fund NextGenerationEU.³² This fund changed EU borrowing in two important ways. First, it empowered the Commission to borrow on the markets for amounts that far transcended the headroom under the regular long-term budget. Second, it assisted member states not only with loans but also with grants. In fact, most of the assistance – around €390 billion – took the form of non-repayable support. In other words: the EU engaged not only in ‘borrowing for lending’ but also in ‘borrowing for spending’.

Contrary to the euro crisis, during which the member states still felt compelled to make use of intergovernmental mechanisms, NextGenerationEU was entirely based on the EU Treaties.³³ The Own Resources Decision played a crucial role in its legal design.³⁴ It contained the Commission’s power to borrow, set the deadline for the repayment of funds on 31 December 2058, and provided for an exceptional and temporary increase in the own resources ceiling by 0.6 percentage points of EU GNI to cover all liabilities connected to the borrowing operation. In this way, the ORD both embedded the borrowing operation in the EU’s constitutional framework and reassured fiscally conservative states, like Germany, that it could not be automatically repeated, since the decision requires ratification by all member states.³⁵

NextGenerationEU pushed the boundaries of what was legally possible under the EU Treaties. In December 2022, the German Constitutional Court nonetheless approved the fund on the condition that it was ‘a one-time instrument in reaction to an unprecedented crisis’.³⁶ Like the government in Berlin, the judges in Karlsruhe considered it a one-off operation, not a Hamiltonian moment permanently changing the nature of EU borrowing.

Readiness 2030 and EU borrowing

After Trump’s return to the Oval Office, the question of EU collective debt financing resurfaced. At its meeting of 6 March 2025, the European Council recalled its Versailles Declaration and reaffirmed its commitment ‘to substantially increase expenditure on Europe’s security and defence’.³⁷ This was followed by the publication of the Commission’s ‘Rearm Europe’ plan, later rebranded as ‘Readiness 2030’.³⁸ It envisages additional public defence investments of at least €800 billion over the next four years, to be realized through a joint financial effort of the EU and the member states.

Subsequently, the Council of Ministers adopted the ‘Security Action for Europe through the Reinforcement of the European Defence Industry Instrument’ (SAFE), again using the emergency clause in Article 122 TFEU as a legal basis.³⁹ With this instrument, the EU returns to borrowing for lending. Given the budgetary headroom, the Commission is empowered to borrow on the markets to finance loans for member states up to the amount of €150 billion. This makes SAFE assistance less attractive than the non-repayable support of NextGenerationEU. By the end of August 2025, the entire financial envelope of €150 billion had nonetheless been applied for by nineteen member states.⁴⁰

Member States can use SAFE assistance for the joint procurement of two categories of defence products, addressing spending priorities set earlier by the European Council.⁴¹ The first category consists of weaponry like ammunition, missiles and small drones, whereas the second concerns more complex equipment such as air and missile defence systems and strategic enablers.⁴² To make sure that assistance benefits the European defence industry, joint procurements need to comply with certain eligibility requirements, such as the rule that the costs of components originating from outside the EU, states that are members of both the European Economic Area and the European Free Trade Association (EEA/EFTA) or Ukraine cannot exceed 35% of the estimated costs of the final defence product.⁴³ More stringent requirements, intended to keep control over the design of military equipment, apply to the second category of products. Compliance with these conditions is verified by the Commission on the basis of European defence industry investment plans.⁴⁴ By the end of January 2026, the Commission had assessed the plans of Belgium, Bulgaria, Croatia, Cyprus, Denmark, Estonia, Finland, Greece, Italy, Latvia, Lithuania, Poland, Portugal, Romania, Slovakia and Spain.⁴⁵ The Council approved assistance for a first group of eight of these member states on 11 February 2026.⁴⁶

The SAFE instrument fits a broader trend whereby the EU governs not by means of rules and legislation but through the power of the purse.⁴⁷ In the area of security and defence, where the member states do most of the heavy lifting, this is a plausible strategy to follow. But success is not guaranteed. Member states will receive the assistance in instalments, subject to a positive assessment by the Commission of progress made in the implementation of their investment plans.⁴⁸ This puts the onus on the Commission, which has yet to establish its reputation in the area of defence, to verify that the assistance achieves its intended purpose.

Cooperation beyond the EU

As the war against Ukraine affects the security architecture of the entire European continent, the question is whether and how to involve defence partners outside the EU in collective debt financing. Recently, the idea has been floated of a ‘European Defence Mechanism’, modelled after the European Stability Mechanism that was established during the euro crisis.⁴⁹ Based on a separate international treaty, the mechanism would be open to the greater family of European states and engage in a range of activities, from the acquisition of key defence assets to the provision of loans to its members.

With the SAFE instrument, the EU has not gone down this road, at least for now. Instead, it opens up the possibility of involving strategic partners in common procurements that benefit from financial assistance. This possibility applies to states that are integrated in its internal market through membership of the European Economic Area (EEA/EFTA) and to Ukraine.⁵⁰ Participation is even open to acceding countries, candidate countries, potential candidates and other states with which the EU has concluded a security and defence partnership. Over the past two years, such partnerships have been entered into with eight states, including Canada, India, Japan, South Korea and the UK.⁵¹

At a time when the US is turning its back on the post-1945 international order, these partnerships are evidence of a growing realization that new alliances are needed to keep Europe safe, both on the continent and beyond. The prospect of participation in joint procurement may help forge such alliances. Much depends, however, on the terms of participation. Apart from Ukraine and EEA/EFTA states, countries first had to sign agreements with the EU setting out the conditions under which their defence companies may benefit from joint procurements financed by SAFE.⁵² Without such an agreement they are subject to SAFE’s standard regime, in which the costs of components of defence products originating from third states cannot exceed 35%.

These agreements required the EU to strike a balance between gaining strategic autonomy, which requires the build-up of its own defence industry and control over the design of military equipment, and cooperating with partner countries in an increasingly hostile world.⁵³ It was not prepared to sign them at any cost. It managed to reach a deal with Canada,⁵⁴ yet negotiations with the UK broke down in late November 2025. Views on what the UK would have to pay to obtain more beneficial terms of participation – Westminster offered millions, Brussels asked for billions – were too far apart.⁵⁵

From improvisation to preparedness

After the euro crisis and the pandemic, the war in Ukraine is yet another instance where the EU needs to engage in ad hoc borrowing to raise the finances to act. The question is whether it can move beyond improvising and equip itself with a permanent borrowing instrument, one that prepares it for future exigencies if and when they arise.

A modest step in that direction is taken by the Commission in its plans for the 2028–2034 Financial Framework. It points to ‘the frequency, severity and depth of severe crises’ that have befallen the EU over the past decade and argues that its budgetary capacity to respond to such events is limited.⁵⁶ It therefore proposes an ‘extraordinary and targeted crisis response tool’ of €350 billion that can be activated in case of an emergency throughout the upcoming budgetary cycle.

The idea behind the tool is to allow the Commission to borrow funds on the markets when the EU is hit by unforeseen events that cannot be addressed by regular budgetary programmes.⁵⁷ To ensure that there is sufficient budgetary headroom to facilitate the borrowing operation, the own resources ceilings are exceptionally increased by 0.25 percentage points of EU GNI. Borrowed funds can be used for loans to member states to help them deal with the emergency. This means the EU would again borrow to lend, not to spend. ‘Borrowing for spending,’ the Commission argues in its proposal, ‘should remain limited to the extraordinary and temporary nature’ of fighting the economic fall-out of the pandemic.⁵⁸ The prospect of a negative verdict from Germany’s Constitutional Court still hovers over Europe’s budgetary politics.

Even with war raging on its doorstep, and in a climate of heightened geopolitical uncertainty, a fundamental retooling of the EU’s borrowing capacity seemingly remains off the cards. Borrowing for spending is a constitutional red line that could be crossed once, but not a second time. At best, the EU is equipped with a semi-permanent instrument to engage in borrowing for lending, and even that has met with fierce criticism. After it was made public, fiscally conservative states were quick to voice their opposition, with a senior member of Germany’s government arguing that ‘we cannot have borrowing-funded programmes’.⁵⁹ Yet if recent history teaches one thing, it is that the EU requires a serious borrowing capacity to steer the European polity through uncertain times. Whether framed as a ‘euro bond’, ‘defence bond’ or otherwise, it is safe to predict this debate will not go away.

IV. National defence spending

Since the start of the war, EU member states have significantly stepped up their own defence expenditure. In 2024, their combined defence spending reached €343 billion, a 19% increase on the year before.⁶⁰ Measured in terms of purchasing power parity, however, some studies suggest that Russian defence spending risks surpassing total European defence expenditure.⁶¹ It is clear that more needs to be done to keep the continent safe and that difficult budgetary choices need to be made, even though national governments are aided in their efforts by the EU’s relaxation of its fiscal rulebook. The challenge is to use the new budgetary space in a way that aligns not just with national defence priorities but with those of Europe as a whole.

Adjusting the fiscal rulebook

Greater defence spending is not only necessary as a response to Russia’s war economy. It is also imperative given the growing uncertainty about American preparedness to guarantee European security. In the run-up to his re-election, President Trump argued that he would not defend NATO allies against Russia if they were not meeting their spending commitments. ‘You didn’t pay, you’re delinquent? . . . No, I would not protect you. In fact, I would encourage them to do whatever the hell they want.’⁶² Once elected, he demanded that NATO’s spending target be increased: ‘They can all afford it, but they should be at 5% not 2%.’⁶³

NATO leaders gave in to that demand at their June 2025 summit in The Hague, agreeing to lift defence spending to 5% of GDP by 2035.⁶⁴ Behind that headline figure, however, the picture is more nuanced, as 3.5% of GDP should be spent on ‘core’ defence requirements – troops and missiles – with the remaining 1.5% reserved for ‘militarily adjacent’ projects, such as critical infrastructure and civil resilience. Nevertheless, many NATO allies will have a hard time bringing defence spending into line with these new requirements. As Mark Rutte stressed shortly after taking office as NATO Secretary General, ‘spending more on defence means spending less on other priorities’.⁶⁵ Alternatively, taxes have to be raised. Either way, difficult budgetary choices must be made, choices that cannot automatically count on broad popular support, especially in states further away from Ukrainian battle lines.

To help EU member states meet the new spending target, the European Commission has decided to loosen its fiscal rulebook. As part of its ‘Readiness 2030’ plan, it has invited states to apply for activation of the ‘national escape clause’ in the Stability and Growth Pact.⁶⁶ This clause allows them to deviate from set expenditure paths in exceptional circumstances beyond their control, provided budgetary sustainability is not endangered over the medium term. The Commission now uses this clause to provide states with extra budgetary leeway of up to 1.5% of GDP until 2028, specifically to boost defence spending.⁶⁷ Sixteen member states have decided to make use of this escape clause, including Germany.⁶⁸ Its decision to request activation of the clause forms part of Germany’s broader U-turn in budgetary policy. Having adhered for years to a policy of self-imposed austerity, last year it changed its own constitutional debt brake to unleash major military investments. ‘Such debt can only be justified under very specific circumstances’, the chancellor-in-waiting Friedrich Merz argued. ‘The circumstances are determined above all by Putin’s war of aggression against Europe.’⁶⁹

However, the escape clause offers only temporary relief. While the Council of Ministers, in ECOFIN composition, could in theory decide to extend its application beyond the current four-year horizon, states will ultimately have to accommodate greater defence spending within regular fiscal constraints. It means they will have to rearrange their budgets in ways they have not managed to do since the end of the Cold War. But in the face of Russian aggression, and mounting uncertainty about American security guarantees, the era of the peace dividend is over.

Setting spending priorities

Activation of the escape clause should generate as much as €650 billion in additional defence investments.⁷⁰ But contrary to the €150 billion available through SAFE, the other leg of ‘Readiness 2030’, this is an aspirational figure. Achieving it ultimately depends on the willingness of national governments to request activation of the clause and to conduct budgetary policy accordingly. Still, the plan has the potential to free up significant budgetary resources. What means are available for ensuring that this money is not only spent, but spent well?

Answering that question requires political judgment. Depending on their location on the European map and their political ideology, national governments will set different spending priorities. Take Spain, which ranks near the bottom in NATO spending and is under pressure to increase it. In 2025, Prime Minister Pedro Sánchez pointed out that the defence needs of his country differed from those of northern and eastern Europe. ‘For any eastern European or Nordic or Baltic country,’ he said, ‘the threat demands a response in which deterrence relies primarily on defence investment.’ ‘But in Spain that is not the case. Our threat is not Russia bringing its troops across the Pyrenees.’⁷¹ He consequently called for a broader understanding of defence, one that recognized the dangers his country faced, such as terrorism and global warming.

For loans that member states receive under the SAFE instrument, common spending priorities have been set by the Council. But such legal steer is missing in relation to national deficit-financing of defence investments. The Commission has determined that only ‘defence spending’, defined in accordance with Eurostat statistics, may benefit from the escape clause. Beyond that, states are free to determine how to use the budgetary flexibility offered to them. For instance, they are merely ‘invited to privilege European industry and service providers’ when investing in their militaries to strengthen the EU’s strategic autonomy.⁷²

This approach puts the spotlight on the EU Treaty rules for budgetary policy. They were designed to rein in national budgets, not to set spending priorities. That makes sense from the perspective of national budgetary sovereignty, an important consideration when the Treaty of Maastricht was drafted. Yet, in the current context it creates the risk that the new budgetary space is used in a way that exacerbates industrial fragmentation and fails to close Europe’s most critical capability gaps.⁷³ It would undercut the Commission’s own ambition to not just invest more in defence, but to do so ‘better, together, and European’.⁷⁴

To prevent this, member states will need to align their defence spending as much as possible. Realization has set in among political leaders that the European Defence Agency (EDA), established in 2004 to help EU Member States collaborate in the field of armaments, can prove instrumental in this respect. The European Council has recently called for the EDA to be strengthened ‘so that it can fully play its role in the field of defence capability development, research and acquisition’.⁷⁵ That role will be key as long as both budgetary policy and defence largely remain the prerogative of member states.

V. Strategic defence spending: who decides and controls it?

As the joint budgetary powers of the EU and the member states take on a greater strategic dimension, this raises the question of political leadership. After all, budgetary instruments alone will not keep Europe safe. Ultimately, political authority is required to steer them into action, if necessary, among a vanguard group of states and subject to adequate parliamentary control. The negotiations on the next long-term budget, which will play out over 2026 and potentially into 2027, provide an opportunity to mobilize that authority.

Executive authority

Although the EU is unlikely to become a hard military power itself anytime soon, recent events do show that it can draw on its budgetary powers to help finance Europe’s defence. As a result, EU budgetary policy gets drawn out of the realm of technocracy and into that of strategic decision-making. This means it cannot be left solely to ministers of finance in the ECOFIN Council. Skilled in the world of economics and finance, they lack the military and foreign policy know-how to make strategic judgements about budgetary policy and defence. Nor can this task be entrusted exclusively to the Commission. Although it has strengthened its defence profile over recent years, not least with the establishment of a Directorate-General for Defence Industry and Space and the appointment of a dedicated commissioner, it lacks the political authority to take the lead in this area. This was on display last October, when, together with the High Representative, it presented its ‘Readiness Roadmap 2030’, outlining concrete defence objectives and milestones for the next few years.⁷⁶ Its four flagship projects – the Eastern Flank Watch, the European Drone Defence Initiative, the European Air Shield and the European Space Shield – failed to be endorsed by the European Council.⁷⁷ President Costa instead emphasized that member states would be ‘in the driving seat to push our joint efforts forward, with a bigger role for the ministers of defence and the European Defence Agency’.⁷⁸

The drafters of the Treaty of Maastricht sought to limit the involvement of the national leaders in the European Council in economic policymaking, out of fear that such a gouvernement économique (economic government) would interfere with the independence of the European Central Bank.⁷⁹ But at the current juncture it is the heads of state or government assembled in this executive institution who are best positioned to decide on major initiatives spanning budgetary and defence policy.⁸⁰ Since the start of the all-out war in Ukraine, the European Council has already thrown its weight behind several plans to step up defence expenditure. Yet the negotiations on the next Multiannual Financial Framework provide an opportunity to fundamentally reflect on the EU’s budgetary set-up and its mobilization for defence purposes. The EU Treaties stipulate that the long-term budget is adopted by the Council of Ministers after the European Parliament has given its consent,⁸¹ yet in practice key decisions are taken by the European Council. Or to put it in the words of its former president, Herman Van Rompuy: ‘It is customary in the Union that the top three questions – How big the pot? Whence the money? Whither the spending? – are set by the heads of state or government.’⁸²

These decisions can extend beyond the Multiannual Financial Framework as such. More than a year into the negotiations on the current long-term budget (2021–2027), the COVID-19 pandemic hit Europe. This led the European Council not only to determine the size and spending priorities of the Financial Framework, but also to cut the aforementioned deal on the unprecedented relief fund NextGenerationEU. The negotiations on the next Financial Framework are taking place at a time when war is raging at the EU’s eastern border, and they may result in European Council decisions on the EU’s budgetary toolkit that go well beyond what is currently on the table, especially on the issue of collective debt financing. As Greece’s Prime Minister Mitsotakis argued in October, ‘There is an elephant in the room. We don’t openly talk about it, but could we envision a scenario where we have a joint European borrowing facility that is targeted to support European defense projects?’⁸³

Moving ahead with fewer than 27

Recent events have demonstrated that a limited group of states may take the lead in such budgetary innovations. Having debated for months about whether to seize Russia’s frozen assets of €210 billion to finance support for Ukraine’s ailing economy, the European Council decided at its December 2025 meeting not to take the plunge. Risks for the euro’s credibility were too large; political opposition was too widespread. Belgium’s Prime Minister Bart De Wever, whose country is home to the financial firm Euroclear which holds most of the assets, feared repercussions by the Kremlin. ‘[W]ho believes that Putin will calmly accept the confiscation of Russian assets? Moscow has let us know that in the event of a seizure, Belgium and I personally will feel the effects for eternity.’⁸⁴

Instead of seizing the assets, the European Council decided at the last moment that the EU will take out a loan on the markets to the tune of €90 billion and lend the proceeds to Ukraine.⁸⁵ Follow-up proposals by the Commission indicate that two-thirds should be used for military purposes, with rules governing the extent to which procurements should be made from the defence industries of the EU, Ukraine and EEA/EFTA states, and the remainder for macroeconomic support.⁸⁶ Ukraine will have to repay the money only if and when reparations are received.⁸⁷ Until such time, Russia’s assets will remain frozen, and the EU reserves the right to use them to repay the loan.

The technical features of the borrowing operation are not groundbreaking. Using the budgetary headroom, the EU will engage in borrowing for lending, as it has done so often in the recent past. The novelty resides in the fact that it is an instance of enhanced cooperation, an instrument foreseen in Article 20 of the Treaty on European Union whereby a limited number of states carry forward in case action by the EU-27 proves impossible. This option is now used to ensure that the borrowing operation will not affect the financial obligations of three member states: the Czech Republic, Hungary and Slovakia.⁸⁸

This move may be regarded as a sign of political weakness, but it opens up the possibility of a vanguard group of states pursuing closer fiscal integration within the EU, an option that may be explored in the context of the negotiations on the next long-term budget.

Parliamentary control

As the EU develops a financial capacity for action in defence, it is vital this is matched by adequate parliamentary control. A polity’s financial capacity for action historically has two dimensions: the capacity to spend and the capacity to control that spending.⁸⁹ The more the EU mobilizes its budgetary powers to bolster European defence, the greater the need to check these powers on behalf of the taxpayer.

Control over the long-term budget, and the money that flows into it, is largely exercised by national parliaments. This is for good reason, as most of the EU’s own resources consist of member states’ GNI-based contributions. The EU Treaties offer two moments for national parliamentary control.⁹⁰ The first is when the Council of Ministers adopts a decision on the EU’s own resources. As this requires unanimity, national parliaments can exercise control over the adoption of the decision through ‘their’ minister in the Council. Following adoption, the Own Resources Decision needs to be approved by member states in line with their constitutional requirements, which forms a second opportunity for parliamentary scrutiny. This ‘double lock’ on the system of own resources gives national parliaments a firm grip on EU revenues.

The European Parliament finds itself in a weaker position. It has no formal say on the EU’s own resources. And whereas it needs to consent to the Multiannual Financial Framework before the Council of Ministers can adopt it, key decisions are taken at an earlier stage by the European Council. This traditionally angers the European Parliament, which feels sidelined from budgetary decision-making.

The proposals for the next long-term budget also give it reason to press for greater involvement. To ease the burden on member states to finance the budget, the Commission is seeking to introduce several new revenue sources, such as a ‘Tobacco Excise Duty’ and a ‘Corporate Resource for Europe’ that consists of lump-sum contributions by companies with a turnover exceeding €100 million. In combination with adjustments to the EU’s existing own resources, this is estimated to generate €58.2 billion per year.⁹¹ Whereas national parliaments can speak on behalf of their citizens, whose taxes are used to fund member state contributions to the budget, their representative capacity is weaker in the case of budgetary revenues with a greater European pedigree. Here, the European Parliament may claim a role for itself too.

In the absence of Treaty amendment, a long and dreadful process that garners little support among EU capitals, this role will not take the form of greater decision-making powers. Instead, the European Parliament could leverage the powers it already has, especially its power of consent concerning the Multiannual Financial Framework, to insert itself at an early stage of the budgetary negotiations, before key decisions are taken by the European Council. The first signs of such a strategy were visible last November, when the Commission felt compelled to adjust its budget proposals after the Parliament’s centrist parties had sent a letter to President Von der Leyen urging change.⁹² It shows that the European Parliament can have a greater say on the EU’s long-term budget than its formal Treaty powers suggest.

VI. Conclusion: a time for leadership

Europe finds itself in a new era, one in which rules-based politics has been swept aside in a fierce struggle among great powers for influence and territory, even war. As the world order rapidly fractures, and the US retreats to its own hemisphere, the EU must learn to look after its own defence. The alternative is that European security is left to the mercy of other powers. Or as Canada’s Prime Minister Carney put it in his Davos speech: ‘[I]f you are not at the table, you are on the menu.’⁹³ That does not mean the EU needs to become a hard military power itself. Rather, it must use its existing competences, including over its own and national budgets, for the benefit of European defence.

This will not be easy. The EU’s budgetary machinery dates back to a time when it could be entrusted to the realms of finance and technocracy. It now needs to function in a different reality, one that requires a financial capacity to act. First steps have been taken to retool its mechanisms. Competences have been leveraged in support of the defence industry, ad hoc borrowing instruments have been put in place, fiscal rules have been loosened. Going forward, however, a more fundamental reflection on Europe’s budgetary politics is needed. What share of the EU budget should be allocated to defence? Which collective debt financing mechanisms are required in the long run? How should national defence spending be guided? As this Report has argued, these are deeply political questions that require more than just more money or new instruments. They call for strategic leadership and start with the negotiations on the 2028–2034 Financial Framework.