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The EU is considering redirecting €93bn in untapped pandemic recovery funds into its defence sector as part of efforts to increase investment and military spending after the Trump administration warned it could withdraw US security support from the continent.
European Commission president Ursula von der Leyen mentioned the financing option at a meeting of the centre-right European People’s party on Tuesday, according to four people with knowledge of the discussion.
The bloc’s additional financing needs for defence are estimated at about €500bn over the next decade.
The EU could also repurpose regional development funds, von der Leyen said and mentioned “common European financing” as another option being explored, according to one of the people familiar with the matter.
European officials have been discussing a plan in recent months to set up an inter-governmental financing vehicle for defence, potentially including the UK and Norway, rather than the EU as a whole. This option would circumvent the veto of neutral or Russia-friendly countries that are not in favour of using joint debt for defence.
European borrowing could also be more palatable in capitals including Berlin where the prospect of another round of joint EU debt is highly contentious, particularly with German federal elections taking place on Sunday.
In the UK, a group of experts have proposed a “rearmament bank” modelled on the European Bank for Reconstruction and Development, where participating governments would supply its capital — a suggested pot of €100bn — but pay only 10 per cent up front. The bank would borrow the rest in the capital markets, helped by a strong credit rating.
In the absence of consensus on fresh joint borrowing, EU capitals have pushed for the commission to tap all unspent funds under its control.
The €93bn in leftover borrowing capacity from its post-pandemic Recovery and Resilience Facility (RRF) represents untapped funds from a total of €800bn in grants and loans agreed by the EU to be raised jointly to stimulate their economies after the pandemic. Several capitals, including Berlin, only agreed to the post-pandemic fund provided that joint borrowing was a one-off.
Tapping the unused RRF financing would require changes to the fund’s rules, which would need to be backed by a majority of EU countries and the European parliament, a commission spokesperson said.
The remaining funds, which would be disbursed as loans, could be used to invest in research and development projects, as well as for investments in so-called dual-use infrastructure such as airports, which have both civilian and military applications.
Another option the commission is exploring is to repurpose so-called cohesion funds that are allocated to the least-developed EU regions.
“Based on the new approach, in addition to dual-use investments, cohesion policy can now support the defence sector, treating it to a large degree as any other industry,” according to a note from the commission’s regional funds department, seen by the Financial Times.
“Investments in R&D directly aiming at developing new technologies for the military or . . . investments strengthening defence production capacities would now be eligible to contribute to regional development,” the note read.
EU countries will also be allowed to increase their national defence budgets without incurring sanctions under the bloc’s fiscal rules, von der Leyen announced at the Munich Security Conference over the weekend.
A spokesperson for von der Leyen did not immediately respond to a request for comment.