Europe's Defence Dilemma: Who Pays for Security in a Dangerous World?
Recent geopolitical shifts have thrust defence spending into the spotlight, forcing European governments to confront a critical question: how to fund security ambitions amid stretched budgets. The era of cheap security guarantees is over, yet threats to global peace persist, demanding urgent action.
The Fiscal Reality of Defence Ambitions
Western nations are grappling with historically high debt burdens post-pandemic, exacerbated by emergency spending packages and energy subsidies financed at now-vanished low interest rates. With borrowing costs structurally higher, growth anaemic, and fiscal headroom thin, defence plans must align with financial constraints. The UK exemplifies this tension, as senior military figures pressure the government to accelerate efforts, with NATO warnings of relegation in spending rankings.
Poland's rapid doubling of defence spending as a percentage of GDP over four years contrasts sharply with Britain's slide from NATO's third-largest to 12th-largest spender. Even commitments like Sir Keir Starmer's pledge to spend five per cent of GDP on defence reveal nuances, split between core defence and broader categories like infrastructure protection and innovation, risking fiscal sleight of hand.
Innovative Funding Solutions and Their Challenges
Across Europe, creative approaches are emerging to bypass fiscal limits. The eurozone has activated the "national escape clause" in the Stability and Growth Pact, allowing defence spending to skirt deficit constraints. More ambitiously, the EU's SAFE initiative proposes a €150 billion loan facility for defence investment and joint procurement, pooling borrowing to secure cheaper financing and encourage coordination.
However, these schemes expose tensions over national sovereignty, as defence remains a core function of nation-states. Questions arise over fund allocation, industry benefits, and capability priorities. Pragmatic solutions like the "two-speed" process, led by Germany and Poland, aim to deepen cooperation among willing states, irrespective of euro membership, suggesting monetary union isn't a prerequisite for security coordination.
The UK's Post-Brexit Conundrum
For Britain, post-Brexit integration into European defence arrangements poses awkward questions. Access to a pooled balance sheet anchored by Germany could be fiscally attractive, but political sensitivities around EU entanglement make it combustible. Alternative proposals include a Defence, Security and Resilience Bank, blending public and private capital to lower borrowing costs and unlock credit for smaller firms.
Yet, such schemes require time for negotiation and design, prompting calls for swifter action. A dedicated defence levy, modelled on the Health and Social Care Levy post-Covid, offers a direct route, framed as a time-limited response to strategic emergencies. While unpopular, it may be necessary given constrained fiscal options and the risks of unsettling markets with increased borrowing.
Honesty as the Ultimate Strategy
As geopolitical dangers escalate, defence cannot slip down the agenda. The debate has shifted from whether Europe should spend more to how candidly governments admit who will pay. Creative accounting has limits, and if defence is a genuine priority, transparency about costs may prove the most credible approach. The path forward demands tough choices, balancing security needs with economic realities in an increasingly perilous world.
