ReArm Europe: EU's ambitious plan to rearm Europe
In early March this year, European Commission President Ursula von der Leyen presented an ambitious plan to arm the 27 member states in the context of the turbulent security situation caused by Russia's imperial ambitions in Ukraine and the uncertain future of US military engagement in Europe. The plan is called ReArm Europe and aims to restore Europe's defense capabilities with €800 billion. It is undoubtedly one of the most ambitious plans in the EU's modern history. At the same time, it raises a number of questions, particularly regarding how the European Commission intends to raise the funds, how it plans to allocate them, and how it intends to amend the current taxonomy, for example in relation to the complicated lending to European arms companies due to ESG (environmental, social, and governance) rules.
Before we take a closer look at the overall context of the ReArm Europe plan, the question arises as to where the enormous sum of €800 billion came from. The underfunding of European defense has long been a topic of discussion in both the international and domestic security communities. Looking at the specific figures, we find that the so-called cumulative deficit over the last decade, relative to NATO's target of 2% of GDP for each country, amounts to approximately €850 billion – almost identical to the figure used by the European Commission.
If we look at Czech defense spending, for example, it fell dramatically after 2006 from 2% of GDP to a low of 0.91% in 2014. According to a recent study by the Peace Research Center Prague and the Center for Public Finance from April this year, the domestic defense debt amounts to CZK 265 billion with a 10% depreciation (i.e., a 10-year investment life and therefore the same "debt life"), which corresponds to approximately 3% of GDP in the case of current consumption expenditure and rapidly renewing assets. However, if we assume a 5% depreciation (i.e., a 20-year investment life), the study states that the internal debt would currently amount to approximately CZK 562 billion, mainly when taking into account the acquisition of military equipment and infrastructure renewal (i.e., more slowly renewed assets). The study further states that the Czech defense deficit could theoretically be eliminated with a target of 3% of GDP for defense by 2030. However, the authors of the study also admit that, given the current waiting times for the purchase and delivery of military equipment, it may not be realistic to eliminate the defense deficit by 2030.
Let us now return to the European context. The key question is how the European Commission intends to raise the necessary €800 billion. First, the Commission is proposing a joint loan of €150 billion on the financial markets through a new financial instrument called SAFE (Security Action for Europe). This loan would be guaranteed by the European Union as a whole, similar to the €750 billion joint loan for the post-COVID recovery of Europe. The EU would then allocate the funds to member states after they submit an investment plan for the European defense industry. This plan would have to include a description of the activities, expenditures, and measures for which the member state is requesting the loan, as well as the specific defense products it intends to purchase and, where applicable, Ukraine's planned involvement in the activities.
In connection with this proposal, there has been speculation as to whether countries whose defense spending does not reach 2% of GDP, such as Spain and Italy, will also be eligible for funding from the joint loan. The answer is not yet clear. Before the proposal was published, there was speculation that only countries spending at least 2% of GDP on defense would be eligible for this funding. However, the European Commission's final proposal does not address this issue. However, it can be assumed that the Commission will take into account any insufficient defense spending by individual member states when allocating funds. It is also important to note that the joint loan to strengthen defense was welcomed primarily by southern European countries and France. These countries, whose debt exceeds 100% of GDP (e.g., the Czech Republic has a public debt of approximately 42% of GDP), have difficult access to capital markets, and a joint loan would enable them to avoid strict lending conditions.
The loans should be allocated primarily to projects related to the joint procurement of defense equipment, including the development of production capacities and infrastructure. Investments should focus on seven key areas that correspond to the current priorities of the EU and NATO planning.
Specifically, these are:
- air and missile defense
- artillery systems, missiles, and ammunition
- drones and counter-drone technologies
- strategic capabilities and critical infrastructure protection (including space assets)
- military mobility
- cyber security capabilities
- artificial intelligence and electronic warfare
The aim of these measures is to strengthen Europe's defenses and achieve greater self-sufficiency in the areas of security and defense. The remaining €650 billion can be raised by EU member states increasing their defense spending by at least 1.5% of GDP over a period of four years. To make this happen, the European Commission is considering activating the so-called escape clause from the Stability and Growth Pact, a set of rules governing the budgetary policies of EU member states. Activation would temporarily relax budgetary rules for defense spending. For example, at the end of April this year, the Czech Ministry of Finance announced that it would ask the European Commission and the EU Council to relax the rules.
As defense spending increases, debates are also developing about where member states will find additional resources, apart from joint loans. There are three options. The state can consolidate public finances, i.e., cut some of its current spending (a very complicated debate in the Czech context), or increase its debt. Both options are extremely unpopular with part of the electorate. Politically sensitive cuts in public spending in areas such as healthcare, education, and pensions are particularly problematic. The third option is to increase state budget revenues, mainly by raising taxes, such as consumption taxes. However, this step would also be unlikely to meet with much public support, given that the population has faced COVID-19, high inflation, and an energy crisis over the past five years. Political consensus on how to proceed with defense financing is therefore absolutely essential.
According to the European Commission, additional funds could be obtained by mobilizing private capital (following the US model) and through investment incentives from the European Investment Bank. The role of this bank in the context of the arms industry is a particularly important issue. European arms companies have faced many challenges in the last decade, from deindustrialization to high energy prices. However, the key problem remains that banks are discriminating against lending to arms companies due to the EU's ESG taxonomy, as their production often does not meet ESG standards. This is related, for example, to the ban or restriction of certain chemicals in the production of ammunition, such as lead. There is therefore currently a debate as to whether arms manufacturers should be granted an exemption under ESG so that they can resume production at the required volume and quality – especially if Europe is to increase its share of domestic production and reduce arms imports from the US (currently around 64% of European arms imports come from the US).
Overall, it can be said that efforts to arm Europe and build autonomous defense capabilities are necessary in the current security and geopolitical context. At the same time, however, it should be added that dependence on US technology and military infrastructure has been ingrained in European defense strategies for decades, and any shift towards greater independence will be complex, costly, and time-consuming. Moreover, arming European armies is not just a matter of purchasing new equipment and weapon systems. It is no coincidence that it is said that if we buy new equipment, we must have someone to operate it. This opens up another difficult debate on increasing the personnel capacities of European armies. In the Czech case, it is clear that the increase in the number of professional soldiers (to 37,500) and reserve soldiers (to 10,000) is not proceeding as expected. The situation is similar in other EU member states. In this context, a debate on the reintroduction of compulsory military service is opening up in the Czech Republic, as elsewhere.
As the text shows, the ReArm Europe plan can undoubtedly be considered extremely ambitious and complex. Only time will tell how this plan will be implemented.
