Simon Nixon / Apr 2025
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Europeans would be in a far stronger position to support Ukraine if they were in a position to provide those robust security guarantees themselves. Instead, the last few weeks have exposed vast gaps in European capabilities. Britain and France have struggled even to put together a “coalition of the willing” that can provide a barebones peacekeeping force to send to Ukraine, let alone make up for the loss of US capabilities should Trump decide to withdraw support for Ukraine, not least in terms of key “strategic enablers” such as air defence and intelligence.
The good news is that everyone now agrees that Europeans need to address these deficiencies, not least because regardless of what happens in Ukraine, it is obvious that Europe can no longer rely on American security guarantees in the long-term. Germany has relaxed its debt brake to allow for up to €1 trillion of extra defence spending over the next four years. The European Union has created a new mechanism to allow member states to borrow cheaply to fund defence and tweaked its fiscal rules to exempt defence spending from calculations of national debt. It reckons the two measures could lead to an extra €800 billion of spending.
The bad news is that this is not enough. Nato secretary general Mark Rutte has said that alliance members are going to need to raise their defence spending to “considerably more” than 3 per cent of GDP. What’s more, tweaks to fiscal rules and cheap loans will not help many highly indebted EU countries for whom the hard constraint is the bond market: any interest saving from accessing EU loans is likely to be wiped out by higher interest charges on the rest of their debt. Meanwhile no European country on its own is going to provide those “strategic enablers” that are currently provided by the Americans.
But there is a way forward for Europe - and whether Europeans choose to take it is a critical test of the continent’s seriousness that it cannot afford to duck. An important new paper published by Bruegel, a Brussels-based think-tank, offers a compelling proposal for a new European Defence Mechanism that could transform the defence capabilities of the continent. The authors, Guntram Wolf, Armin Steinbach and Jeromin Zettelmeyer, are highly regarded economists. They start by setting out the key challenges facing European rearmament:
- the European defence equipment market is is characterised by low production numbers, high fragmentation, limited competition and strong home bias in procurement. Even large countries often order products such as tanks in only small quantities. For example, since 2022, Germany has ordered only 123 Leopard 2 tanks to be delivered by 2030. European countries operate 12 different main battle tanks, while the US has one..
- the high degree of home bias leads to excessive product differentiation and higher prices. Germany, for example, buys almost half of its equipment from domestic producers and around an additional 30 percent from domestic joint ventures, while the sales of the top two French companies account for 69 percent of the sales of French defence companies.
- the European defence industrial base does not provide some key modern arms technologies, leaving Europe reliant on US systems. These include fifth-generation fighter jets, certain air-defence systems, rocket artillery systems similar to the US HIMARS and heavy transport helicopters. Europe also relies on US software and satellite-based communication and intelligence.
- the EU has never been able to deliver an effective single market in defence equipment because the EU Treaties contain a specific carve-out for the sector from single market rules (Article 346). That makes any attempt at EU level to create more efficient common procurement legally unenforceable
- the EU is not an optimal institution via which to create a pan-European defence procurement market because it excludes some of Europe’s key defence players, including Britain, Norway and Switzerland, while including some countries whose constitutionally enshrined neutrality complicates their participation in common European defence initiatives
The creation of a European Defence Mechanism could get around most, if not all of these problems. Firstly, it would be a pan-European common defence fund that is outside the EU and open to a coalition of the willing including non-EU countries such as Britain and Norway. Second, it would be based on a new intergovernmental treaty which would enshrine the principle of non-discrimination, thereby circumventing the problem of Article 346.
The result is that an EDM would be able to pool orders for defence equipment and put them out to competitive tender, thus addressing the problems of low order sizes, market fragmentation and home bias. Drawing on management literature, the authors reckon that based on the kind of increases in demand for equipment that Europe is likely to need in the coming years, such pooled orders could lead to falls in unit costs of up to 90 percent. That would give European governments far greater bang for their rearmament buck.
Best of all, the debt taken on by the EDM to pay for new equipment would not show up on national balance sheets. Governments would only hand over their own money to the fund when they took delivery of equipment. And to the extent that the fund purchased common public goods such as satellite systems or a common European air defence, these could be paid for by annual service charges.
It’s true that what is being proposed will force governments to confront tough choices. For countries such as Germany and the Netherlands that have long resisted common European borrowing, it would mean overcoming another taboo. For Britain, which quit the EU less than a decade ago, it would be a giant step back towards European integration. Many smaller countries will worry about the risks to their national defence manufacturing sectors.
But if Europe is to have any chance of remaining a pole in the fast-emerging multipolar world, what other choice does it have?
Simon Nixon writes the Wealth of Nations newsletter on Substack
