An article from the German organisation Internationale Politik Quarterly has laid out the challenges for the continent in forming what could be ‘European Defence Bonds’.
The article, which has been republished by the Centre for European Reform (CER), comes after the recent remarks made at the Munich Security Conference by current US Vice-President JD Vance concerning the future of the new US administration’s direction away from providing military support to the continent. It is written by Sander Tordoir, chief economist at the CER.
Tordoir makes the case that any increase in military spending by nations around the continent will be an onerous project, with the issuing of bonds seen by the CER as one method to achieve this goal. Even then, he writes, hard choices will have to be made.
Tordoir stated: “Europeans must face up to the real trade-offs involved. First, defence spending will have to be financed by taxes, sooner or later. Whether done by underwriting joint debt or issuing nationally, the money will ultimately come from the same tax base as other government expenditures. Europe can ease, but not escape, the ‘guns or butter’ dilemma.”
He added: “Also, if the EU wants to issue additional bonds for defence, member states will have to provide new national guarantees. Alternatively, they will have to amend the EU’s own resource decision by unanimity— essentially committing more resources to the EU to guarantee the issuance of additional EU debt.”
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Other methods, according to Tordoir, such as re-directing existing EU spending programmes are not a solution. The EU’s budget, he said, is “nearly impossible to overhaul politically” while funds in other programmes are not intended for this purpose. Moreover, the new EU budget does not take effect for another two years.
Tordoir continued: “Second, member states underwriting the EU with more guarantees to enable it to provide loans offers an alternative that does not require tax revenues but will ultimately prove ineffective. Spending will expand the stock of military hardware and personnel that, ideally, Europe will never need to deploy. So, no productive asset is created to generate returns for repaying debt. That mostly excludes using loans, let alone leveraging private capital.”
The third factor, he concluded, are the political climates across the various nation states. While UK, he writes, is more aligned with Europe, even after Brexit, than Hungary, which is thought to be more amenable to side with the Kremlin.
He wrote: “That could work for coordinating their national spending, but not for issuing joint bonds. The reason is that only existing federalised institutions such as the EU or the ESM can issue debt in their own name and using them to launch a batch of defence bonds requires unanimous approval from member states. A new ad hoc special-purpose fund from a select coalition of countries could bypass a veto by Viktor Orbán, Hungary’s pro-Russian prime minister, but would not necessarily secure a triple-A rating.”
