Southern
Europe rebuffs von der Leyen’s debt-based defense plan
France,
Italy and Spain are seeking to boost military spending based on grants rather
than loans to avoid increasing their debt loads.
The
resistance, led by France, Italy and Spain, deals a significant setback to
Commission President Ursula von der Leyen’s drive to boost Europe’s military
autonomy. |
March 26,
2025 4:30 am CET
By Gregorio
Sorgi and Giovanna Faggionato
BRUSSELS —
Southern European states are rebuffing a European Commission plan to
turbocharge defense spending with cheap loans, fearing it would add to their
already heavy debt burdens.
The
resistance, led by France, Italy and Spain, deals a significant setback to
Commission President Ursula von der Leyen’s drive to boost Europe’s military
autonomy.
Her
proposal, which includes a €150 billion loan package and an emergency clause to
loosen EU fiscal rules, was intended to unlock major new investments in defense
and reduce the bloc’s reliance on U.S. protection.
But the
stalemate now risks derailing Brussels' plan to funnel more weapons from Europe
to Ukraine.
“Some
countries have serious doubts on the feasibility or even the possibility of
indebting [themselves] to these levels,” said a senior EU diplomat.
The
diplomat, like others in this story, was granted anonymity to speak freely
about the plan and potential developments.
Heavily
indebted countries in the south of Europe are instead ramping up demands for
so-called defense bonds — grants financed through common EU borrowing in
capital markets that must be unanimously approved by the bloc's 27 countries.
“There’s
this risk [of a fiasco] which could pave the way for defense bonds,” said a
non-Southern EU diplomat.
Von der
Leyen has thus far stopped short of backing the idea given the likely pushback
from fiscally hawkish northern states such as Germany and the Netherlands,
which fear it could set a precedent for debt mutualization.
“No
Eurobonds,” Dutch Prime Minister Dick Schoof reiterated after a gathering of EU
leaders last week.
A third EU
diplomat signaled that the optics of Southern countries turning down loans
would undermine support for defense bonds among fiscally conservative
countries.
“No
Eurobonds,” Dutch Prime Minister Dick Schoof reiterated after a gathering of EU
leaders last week. |
“If they
argue that defense is an existential challenge that justifies joint debt, then
they need to take the loans first,” said the diplomat, who hails from the
fiscally conservative bloc.
Club Med
wants more
With Donald
Trump threatening to cut off U.S. support for Ukraine and scolding Europe over
its military reliance on Washington, von der Leyen moved swiftly following the
U.S. president's Jan. 20 inauguration to devise a plan to reinforce the EU’s
defense capabilities.
The
resulting strategy included allowing member states to temporarily raise defense
spending by 1.5 percent of GDP over four years — and borrowing €150 billion on
behalf of the EU to support joint weapons procurement and Ukraine assistance.
The
Commission hoped the loan-based scheme would be embraced, particularly by
larger southern economies like Italy and Spain that fall well short of NATO’s
2-percent-of-GDP defense spending target.
As recently
as last week, Economy Commissioner Valdis Dombrovskis predicted “a large number
of states activating this escape clause.”
But the
Commission underestimated a crucial sticking point: While it can borrow more
cheaply than most member states, the loans it extends still count against
national debt levels — a red flag for highly indebted countries wary of
spooking markets or triggering fiscal penalties.
“Von der
Leyen’s plan is almost exclusively based on national debt from states,” Italian
Prime Minister Giorgia Meloni told lawmakers last week.
The
Commission has since acknowledged that national budgets would need to be cut
elsewhere to accommodate rising defense costs — a tough political sell in
countries whose citizens are more preoccupied with migration and climate change
than Russian tanks.
Italy and
Spain specifically have pushed to widen the definition of defense spending that
can be exempted from EU fiscal rules — with Madrid proposing that border
control, cybersecurity and infrastructure resilience be included.
So far,
however, neither Rome nor Madrid has confirmed whether they’ll invoke the
emergency clause. Some EU officials speculate they’re stalling in the hope that
von der Leyen will soften her stance on defense bonds ahead of the next
leaders’ summit in June.
“We should
have more time [to decide],” Meloni told reporters last week, adding that the
proposed April time frame to activate the mechanism was “a bit too close.”
“Von der
Leyen’s plan is almost exclusively based on national debt from states,” Italian
Prime Minister Giorgia Meloni told lawmakers. |
France,
meanwhile, has indicated it does not plan to activate the clause, according to
two EU diplomats. With a debt-to-GDP ratio above 110 percent, Paris is wary of
spooking markets or endangering its credit rating — a key factor in how much it
pays to borrow.
Germany, by
contrast, is expected to activate the clause to help fund its mammoth €500
billion defense upgrade. But like other triple-A rated states such as Denmark
and the Netherlands, Berlin is unlikely to accept Commission loans it could
raise more cheaply on its own.
That has
compounded anxiety among more vulnerable member states, which fear that by
stepping up first to request EU loans they might signal financial weakness to
the markets — triggering higher borrowing costs.
Fragmentation
among the EU’s 27 countries “makes a difference on the market perception, which
might be negative,” said the senior EU diplomat.
“If everyone
doesn’t [submit the request] at the same time, the market will set the limit”
of how much you can spend, they added.
But fiscally
conservative states are not buying that argument, with the third EU diplomat
accusing Southern states of “playing politics.”
Jacopo
Barigazzi contributed to this report.
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