The European Commission’s new “ReArm Europe Plan/Readiness 2030” outlines ambitious defence goals but overlooks key fiscal and structural challenges for member states. Without accounting for differences in economic capacity and industrial readiness, the plan risks becoming a financial burden rather than a unifying strategy.  

Fiscal policy belongs to the national domain of European Union (EU)  member states.  However, it is also subject to the Stability and Growth Pact (SGP)—the EU’s fiscal surveillance framework—which sets constraints on the member states’ public deficit and debt in relation to GDP.  Violating the SGP constraints triggers the so-called Excessive Deficit Procedure (EDP), while non-compliance with the recommendations of the European Council carries sanctions for the erring state.

The SGP was established in the mid-1990s. The fiscal constraints were set at three percent of GDP for the public deficit and 60 percent of GDP for the public debt.  Neither of these figures has any theoretical or empirical grounding. They are the products of political deliberations at the time. However, they remained unchanged to the present day.

Given the economic irrelevance of the SGP, it has had to be revised after every crisis, starting with the dot.com bubble in the late 1990s, the global financial crisis in the late 2000s, and the euro crisis of the 2010s. At the outburst of the pandemic crisis in 2020 it was simply suspended and it remained that way until the end of 2023, given the war in Ukraine.  In 2024, the SGP came back into force albeit in a revised form. Its revision concerned the surveillance process, while the above fiscal constraints remained in place.

On 19 March 2025, the European Commission presented the White Paper for “European Defence and the ReArm Europe Plan/Readiness 2030”  to deter future attacks from Russia and to become less dependent for security on the US. While it is difficult to think of any major political entity without its own defence capabilities, the Commission’s plan has many blind spots, which may become fiscal traps at least for some member states.

In particular, the Commission aims mobilise 800 billion euros ($870 billion) over four years, through the following means:

• Activating the national escape clause of the SGP, which allows increased spending by a member state in the event of exceptional circumstances outside the control of the member state with a major impact on its public finances, provided that it does not endanger fiscal sustainability over the medium term” (Art. 25, Reg. (EU) 2024/1263);
• exempting increased spending on defence up to 1.5 percent of GDP from the annual spending limits for four years, starting in 2025. After that time, national budgets will need to be adjusted, so as to comply with the SGP deficit and debt rules. The Commission estimates that the amount of 650 billion Euro will be thus procured;
• contracting new joint EU borrowing, amounting to 150 billion Euro, against the security of the EU budget to provide loans to member states. It is worth noting that joint borrowing on a far larger scale was part of the EU’s response to the pandemic crisis. The proceeds were passed on to member states by way of loans and transfers approximately in equal measure. The ReArm Europe plan contains no transfers;
• leveraging on the European Investment Bank, which has a AAA rating on the market;
• and launching a fresh push to integrate the EU’s capital markets. The so-called Savings and Investment Union (SIU) aims at tapping the savings accounts in banks.

In view of the significant divergences across the EU member states, the ReArm Europe plan may lead at least some of them into fiscal traps. A taste of such divergences is given in the table below, which shows selected indicators pertaining to (a) their current defence spending, (b) their fiscal capabilities, and (c) income per head in relation to the EU average.

As we can see, 13 member states are already spending on defence more than the EU average, which amounted to 1.3 percent of GDP in 2023. These include seven Central and Eastern European countries, three Scandinavian ones, two Southern European ones and one core country, France.

Of these, only the Scandinavian countries have a per capita income (GDP/capita) that exceeds the EU average. By contrast, all the CEE countries have a significantly lower income per head, as does Greece.  Rough as such an indicator may be, it provides an idea of the social and economic circumstances of the EU populations and the divergences across them.

It may be argued that the four-year fiscal leeway provided by the ReArm Europe plan may act as a form of “military Keynsianism,” boosting spending and thus the economy. However, this depends on whether a country is a producer or an importer of defence goods and services, on whether defence investment has a broader impact on the economy, and on how far public spending is switched from other uses to defence. These conditions will differ from country to country, with the weaker ones being closer to the losing end.

Equally, the fiscal capabilities of EU member states are far from uniform. Not only are their public debt and deficit levels different in relation to GDP, the market rates at which they can borrow are also significantly different. For example, Germany, a core country and a model of austerity, can get additional funding from the bond markets for comparatively lower rates. By contrast, highly indebted countries will find it more costly to borrow on the bond markets.

Conclusion

Overall, the blind spots and fiscal traps of the ReArm Europe plan include the following. 1) The fiscal leeway provided to member states is for a 4-year period, after which the full range of the SGP constraints.  Member states will need to apply enhanced austerity measures to return to the EU ‘fiscal normality’. 2)Since it is not easy or indeed possible to increase taxation as fast and as much as the ReArm Europe plan requires, governments are likely to switch funds from the social areas of their budget to defence and/or borrow from the European Commission as well as the bond market. On the expiration of the national escape clause, their public debt level will be significantly higher making adjustment under the SGP even more pressing. 3)The EU 2021-2027 Budget doesnot allocate substantial funds for defence. Part of it, the so-called cohesion funds, aim at equalising the standard of living across EU regions. It is likely that at least some of these funds will find their way to defence. 4)Although defence spending may indeed increase public spending in the EU, certain regions and sectors will benefit more than others. 5)Crucial policy areas such as energy, research, and ecological and digital transition are under-funded both on the national and on the European level. The focus on defence risks diverting attention from them and the urgency to act now.

It is said that a crisis presents an opportunity to redesign the future. Indeed, the accumulation of crises in Europe in the early part of the 21st century should be exploited to redesign its future in a changing and uncertain world. Such a future would include real solidarity among its member states, a reformulation of its fiscal policy framework, a real industrial policy that goes beyond defence purposes, means to promote its economic, and socioecological transformation.  Although uncertainty is part of life, being prepared for it reduces its impact.

Marica Frangakis is an independent researcher (frangaki@otenet.gr).  She is the co-chair of the EuroMemo Group (https://euromemo.eu) and a member of the Board of the Nicos Poulantzas Institute, Athens. 

This article is published under a Creative Commons License and may be republished with attribution.