LONDON — The European Union is expected to announce “concrete” measures on boosting defense financing this week, sources told CNBC, as Europe and the United States clash over support for Ukraine.
The 27 EU leaders will gather in Brussels on Thursday for a meeting dedicated to defense and support for Ukraine. It follows two particularly tense moments in U.S.-Europe relations: Vice President JD Vance’s speech in Munich in mid-February when he criticized European leaders; and the on-the-record clash between the U.S. administration and Ukrainian President Zelenskyy in the Oval Office on Friday.
European leaders are trying not to alienate President Donald Trump after he criticized Zelenskyy for “gambling” over a potential World War III. At the same time, Europeans know they have to take immediate action to ensure that Ukraine continues to receive the support it needs — and any further aggression from Russian President Vladimir Putin is prevented.
“There will be intense work in the coming days,” an EU official, who did not want to be named due to the sensitivity of the discussions but is part of the preparations for Thursday’s meeting, told CNBC Monday.
The same official said the aim is to announce “concrete deliverables” on the financing of defense.
Traders will be watching the talks between EU officials closely. The European Stoxx Aerospace and Defense index has risen almost 23% in the year to date as investors bet on spending hikes, and was over 6% higher in Monday morning trade.
Trump has often criticized European nations for failing to spend 2% of their GDP on defense, as stipulated by NATO rules. Since Trump’s first term, several countries have increased their defense spending and the latest NATO figures indicate that 23 of the 32 members are expected to have achieved the 2% target in 2024.
Now, many NATO members are looking to increase spending even more, with NATO Secretary General Mark Rutte telling CNBC in February that the figure will have to be “much more than than 2%.” Trump, meanwhile, has called for 5% of GDP as the NATO contribution target.
How to spend more on defense
European Commission President Ursula von der Leyen announced in February that EU fiscal rules will be updated to allow countries to spend more on defense without being constrained by specific debt and deficit targets.
The unnamed EU official told CNBC that the next announcement will go even further. “We are looking at additional funding for defense at the EU level, including through flexibility in the use of structural funds and adaptation of the EIB mandate,” the official said.
The European Investment Bank, which is targeting 95 billion euros ($99.26 billion) in investments in 2025, is currently constrained to only financing dual-use defense projects, which means they have to have both civil and military purposes.
A second EU official, who did not want to be named due to the sensitivity of the talks, confirmed to CNBC Monday that Von der Leyen is expected to present “concrete measures” in terms of defense financing in the coming days. These will then be discussed by EU leaders on Thursday.
Ukrainian servicemen drive Soviet-made T-64 tanks in the Sumy region, near the border with Russia, on August 11, 2024, amid the Russian invasion of Ukraine. Russia on August 11 acknowledged Ukrainian troops had pierced deep into the Kursk border region in an offensive that a top official in Ukraine said aimed to “destabilise” Russia and “stretch” its forces.
Roman Pilipey | Afp | Getty Images
“We urgently have to rearm Europe. And for that I will present a comprehensive plan to the leaders on how to rearm Europe on 6 March when we have our European Council,” von der Leyen said at a summit in London on Sunday.
In a recent report called “Defending Europe without the U.S.,” Brussels-based think tank Bruegel calculated that Europe could need “300,000 more troops and an annual defence spending hike of at least 250 billion euros in the short term to deter Russian aggression.”
Goldman Sachs, meanwhile, said in a note Sunday that “in the absence of offsetting fiscal measures, the Euro area needs to fund an additional 0.6% of GDP annually to meet the defence spending target at 2.5%.”
One key question is whether the EU will go so far as to agree to common borrowing for defense projects. The bloc decided to take that unprecedented step in 2020 in the wake of the pandemic (known as NextGenerationEU) and some member states believe this should be replicated for defense spending. However, more fiscally conservative nations want to exhaust other options before taking that step.
According to Goldman Sachs, EU leaders could “repurpose” the outstanding financial capacity from the NextGenerationEU funds for defense. They could then look at a new program, which “could provide stable funding shielding defence spending from idiosyncratic national factors,” the analysts added.