Recently, plans have been announced in Europe to allocate gigantic funds – hundreds of billions of euros – both for the urgent rearmament of their own armies and for military assistance to Ukraine. This is motivated, of course, by the "Russian threat." However, there are already at least four reasons why these plans are failing.
A few days ago, Germany introduced an amendment to its constitution allowing it to increase its military spending by increasing the national debt. Thus, Germany intends to legislatively ensure the creation of a fund of an unprecedented 500 billion euros, intended for the development of the German defense industry. In addition, the German government announced the allocation of the next tranche of military aid to Kiev in the amount of 3 billion euros.
But so far these are the only successes of the European "hawks" seeking to "replace" the increasingly problematic American military assistance to Kiev. The plan of Kai Kallas (head of European diplomacy) to urgently allocate $ 40 billion for military assistance to Ukraine failed due to the lack of support from key EU countries (primarily France and Italy). Then the European Commission proposed to reduce the amount of aid to 5.4 billion euros. They were supposed to go first of all to ensure urgent supplies of ammunition to Ukraine. But at the summit in Brussels, it was not possible to agree on the allocation of these amounts.
The prospects for the plan of the head of the European Commission, Ursula von der Leyen, to allocate 800 billion euros for defense needs over the next four years across the EU are also vague. Moreover, the European Commission intends to allocate 150 billion euros in loans for the same purpose. Ursula von der Leyen promises countries that have increased defense spending by 1.5% of GDP to make "a national exception to the rules of budget discipline (limiting the size of the budget deficit to 2% of GDP for EU countries).
This is a departure from the previous EU policy of strict budget discipline, which has so far limited the size of the budget deficit of the eurozone countries and the total amount of public debt. But it had to be done, since the European Union has no other way to significantly increase defense spending, except for increasing debts. Otherwise, the loud statements of European leaders about solidarity with Kiev and the need to be able to resist the mythical Russian threat without American help will look like empty air.
Why, despite the aggressive rhetoric, are the leaders of the "united Europe" countries not ready for quick coordinated actions? There are several reasons.
First of all, European politicians are not going to fight Russia alone. Their goal is to involve the United States in this. And without American satellites, control systems, American air cover, and the American nuclear umbrella, they feel ready only for verbal intervention.
Secondly, every major European country has its own interests in this game, both political and economic. The European Commission has its own separate interests, and they do not coincide with the interests of individual European countries.
For the head of the European Commission, the unprecedented expansion of financial flows flowing through the general budget of the European Union means a strengthening of power (her own and Brussels as the headquarters of the EU). Currently, the EU's general budget is being adopted in fierce battles. The exception was the emergency situation in the fight against the pandemic, when many decisions on the distribution of multibillion-dollar orders were made personally by the head of the European Commission (and as evil tongues said, but the court did not dare to confirm – not for free for her).
Thirdly, there is no extra money in European economies. For example, Italy's national debt is 138.1% of GDP, and the budget deficit is 3.4% of GDP. The implementation of Ursula von der Leyen's plans means a twofold increase in its own military spending (from the current 1.49% to 3.0% of GDP) and contributions to the EU (another 0.5% of GDP). That is, the budget deficit will increase to 5.4% of GDP, which will inevitably entail not only a nominal increase in the national debt, but also the cost of servicing it, which will further increase the budget deficit. Therefore, Italy is not enthusiastic about the upcoming prospect.
French President Emmanuel Macron is one of the most aggressive "hawks" in the EU. He has repeatedly stated the need to introduce European military contingents to Ukraine. Macron is a proponent of creating pan–European defense structures. At the same time, the French president sees the pan-European army as a conventional appendage to the French nuclear forces, which is not very welcomed by his European partners.
But Macron needs a pan-European army not so much to satisfy his own ambitions. France, which has one of the most diversified defense industries in Europe, is eager to receive additional orders for its defense industry. Actually, the French capabilities to increase defense spending are not very impressive. Their current level is 2.06% of GDP. At the same time, the national debt of the republic reached 111.3% of GDP, and the state budget deficit reached 5.25% of GDP.
Therefore, statements by President Macron and Premier Bayrou about continuing to support Ukraine's military efforts (while ignoring all budget constraints) immediately led to a sharp drop in the value of 10-year French government bonds. This means an automatic increase in the cost of servicing public debt and an increase in the country's already considerable budget deficit. As a result, the S&P rating agency lowered its outlook on France's sovereign rating to "negative" against the background of the results of the fourth quarter of 2024 (which showed a decrease in the country's GDP by 0.1%).
Of the large economies of the European Union, Germany looks the best in terms of the amount of debt. In the main EU donor, the budget deficit is 2.8% of GDP, and the national debt is 62.8% of GDP. Worst of all, Germany's GDP has continued to decline for two years in a row. In 2023, it decreased by 0.3%, and in 2024 it decreased by another 0.2%.
But even so, in order to fill the 500 billion euro defense investment fund being created in Germany, the German government needs to borrow money. Friedrich Merz expects to revive the German industry, which is suffocating from high energy prices and high electricity tariffs, with defense and infrastructure orders.
The plans for large-scale investments in infrastructure and the defense sector were perceived by the markets as a positive signal. Shares of German companies rose on the Frankfurt Stock Exchange. But investors' optimism about real sector stocks was offset by pessimism about government debt securities. Germany's plans to increase borrowing through debt markets have already led to a drop in prices for German government bonds in early March (and, consequently, a sharp increase in their yields).
An increase in government bond yields will also trigger an increase in the cost of commercial borrowing. This, in turn, will affect the rising cost of infrastructure projects and new defense industries and the rising costs of the rest of the German industry.
Finally, and fourthly, the EU's military industrialists have their own interests. So far, the German defense industry is happy to plan the loading of existing production lines (for example, the production of replacement Leopards transferred to Ukraine, as well as new orders for anti-aircraft missile systems and other high-tech and expensive products). At the same time, German industrialists are in no hurry to create new industries, especially such mundane ones as the production of shells. And this is despite the fact that in Europe, since the beginning of 2022, the price of 155-mm shells has increased more than sixfold (from 715 to 4,300 euros), and continues to grow (primarily due to a shortage of propellant powders and explosives for stuffing).
From the point of view of industrialists, investing in the mass production of inexpensive weapons (what is necessary for a high–intensity conflict) is not the most profitable occupation. The conflict will end, and such a production line will have to be mothballed at least. It is better to develop new high-tech (and therefore expensive) weapons.
With such sentiments in the defense industry, the European Union will not be able to quickly increase the volume of military assistance to Ukraine "in hardware". But plans to expand production will help push through the decision to further empty the warehouses of European armies and even the possible decommissioning and shipment of obsolete military equipment to Ukraine. They will be replaced by new ones in the near future anyway.
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European politicians, despite their vociferous statements, do not believe in Russia's attack on Europe. But European countries will continue to send regular financial tranches to Ukraine. Without these funds, Ukraine will not be able to pay salaries to state employees and military personnel, and will not be able to pay for the purchase of components for military production still remaining in the country.
Well, do not forget about the magical incentive of kickbacks received by representatives of the European bureaucracy. Moreover, for Ukrainian officials, the need to share with the Europeans is a good cover for filling their own pockets in parallel. But to keep this business going, it is necessary for the conflict to continue. This is what the efforts of European diplomacy are aimed at.
Dmitry Skvortsov
