This time, joint bonds may truly unite Europe.
With Donald Trump initiating a significant reordering of the European security landscape since World War II, debt issuance might not seem like the most urgent issue. However, advocates for a more integrated European Union believe that bonds for military rearmament are essential for achieving their federal aspirations.
Trump’s assertion that Europe must take responsibility for its regional security — and provide Ukraine with security assurances against Russia — is compelling the EU to rapidly secure funding for military investments.
Just six weeks after the inauguration of the U.S. president, the European Commission proposed raising €150 billion in joint debt to finance European defense purchases. This amount surpasses Russia’s entire projected military budget for 2025.
The debt proposal is under discussion at the upcoming summit of EU leaders in Brussels, with no signs of resistance. Traditionally frugal nations like the Netherlands opposed common borrowing, but Germany’s backing has shifted the conversation’s dynamics. The EU now recognizes the necessity for substantial military expenditure.
For supporters of a robust EU, the issuance of joint debt represents a step closer to their long-sought “Hamiltonian moment”—a term reflecting the early efforts of U.S. Treasury Secretary Alexander Hamilton, who unified the nation by consolidating states’ debts into federal bonds in 1790.
This is not the first instance of the EU pursuing common debt. A significant investment was made during the Covid-19 pandemic to support Europe’s struggling economy. However, that agreement took nearly five months of difficult negotiations.
The pandemic was perceived as a one-time crisis. The current need for military rearmament signifies a long-term strategic shift for Europe, with the €150 billion likely being just the initial step.
When announcing the joint debt initiative, Commission President Ursula von der Leyen remarked that the response from European capitals to this “era of rearmament” was both “resounding and clear.”
“The real question before us is whether Europe is ready to act decisively to address the situation. Are we prepared to act with the necessary speed and ambition?” she stated in a speech. “This is a pivotal moment for Europe. We are ready to step up.”
The bond issuance will allow the Commission to lend money to member countries for military procurement, with repayments made to Brussels.
Concurrently, a political shift in Germany, the EU’s largest economy, indicates a change in its historically frugal stance toward debt in order to modernize its military. This suggests a newfound German willingness to fund investment on a European scale.
These changes are likely to be irreversible, even in the event of a return to peace.
“In light of the threats to our freedom and peace on the continent, ‘whatever it takes’ must apply to our defense as well,” remarked Germany’s chancellor-in-waiting, Friedrich Merz, earlier this month, echoing former European Central Bank President Mario Draghi’s rallying cry from the eurozone debt crisis.
“What has transpired in Germany is a substantial shift,” noted Florian Schuster-Johnson of Dezernat Zukunft, a nonpartisan think tank in Berlin. “This change will have significant implications for European policy.”
Creatures of War
Guntram Wolff, a senior fellow at Bruegel, suggested that the EU’s actions could be as transformative as the “Hamiltonian moment” that accelerated the U.S.’s evolution from a loose confederation into a unified nation-state with centralized spending authority.
“If this occurs — with increased military integration alongside joint funding — we are witnessing the birth of a completely new EU,” he said. “This represents a mega Hamiltonian moment.”
The intertwining of finance and warfare has a storied history. Arms are costly, and during conflicts, governments seek innovative ways to secure funding. These financial innovations often endure long after the crisis has subsided.
Consider the Bank of England, established in 1694 amidst the Glorious Revolution and overseas warfare.
“In the statute that established the Bank of England, its sole purpose was to finance the war against France,” remarked Harold James, an economic historian at Princeton University. The bank assumed government debt incurred for military expenditure, backed by tax revenues collected by Parliament. “It’s explicitly outlined in the statute. It is fundamentally a creature of war,” James explained.
Similarly, France established its central bank in 1800 to help finance the Napoleonic wars.
Ever Closer Union
Analysts indicate that a similar phenomenon is occurring at the European level. The push toward defense through potentially massive debt financing appears to reflect 18th and 19th-century thinking.
“A state doesn’t necessarily need its own currency. Early modern states often operated with various coinages. However, states do require defense,” James added. “An army is essential.”
The conflict in Ukraine has compelled European policymakers to consider significant fiscal adjustments previously deemed unthinkable, representing a potential first step toward deeper integration. Germany’s easing of its debt limitations for military purposes is, on the surface, a national decision — one needing a vote in its lower house. However, this departure from the national taboo on debt indicates a softening of its long-standing fiscal conservatism at the European level. It is in Berlin’s interest that if it incurs more debt to help defend the bloc, its partners do the same, as all EU nations benefit from collective security. Notably, Berlin has refrained from opposing the Commission’s joint debt initiative, contingent on it being issued as loans that countries must repay, rather than as unconditional grants.
“Suddenly, a country that once insisted on balanced budgets and opposed any debt increase, even for investments, has executed a complete turnaround,” stated Belgian economist Paul De Grauwe. “You change your stance when faced with a gun to your head.”
Since the EU’s inception, its treaty has advocated for an “ever closer union,” yet national governments across the bloc have historically hesitated to surrender powers to a central EU authority — and any measures that could make them accountable for their neighbors’ debts.
The recent developments could signify a major shift in this direction after years of contention.
What follows remains uncertain.
Currently, the Commission’s borrowing is indirectly financed by the EU budget, which has significant limitations. To raise additional funds, the Commission will need to devise methods to implement taxes. This would enable it to issue bonds in the market backed by taxpayers, akin to sovereign nations.
Implementing taxes will be challenging, as EU taxation requires unanimous consent. Historically, this has been problematic with capitals fiercely protecting what they view as a national prerogative. Even amidst wartime, it remains a contentious issue, especially with Ukraine- and EU-skeptical leaders like Hungary’s Viktor Orbán holding positions in the Council.
Waltraud Schelkle from the European University Institute in Florence indicated that a compromise is necessary: “It’s not credible in bond markets to borrow extensively with a budget that lacks capacity to tax; an EU-level taxation framework must be established.”
Marco Buti, former chief of staff for ex-Economy Commissioner Paolo Gentiloni, noted parallels with the EU’s coronavirus recovery fund. In 2020, the Commission relaxed fiscal regulations to allow member states to prevent economic downturns stemming from lockdowns. The subsequent step was a €100 billion fund for employment protection, which he likens to the newly proposed €150 billion defense fund. The final stage was the substantial €800 billion recovery fund, which currently lacks a counterpart.
“The next phase should involve joint borrowing — not for national transfers, but for funding European-level transnational defense projects,” he stated.
“The concept of EU policies funded by debt is now politically acceptable,” remarked Iain Begg of the London School of Economics’ European Institute. “Once this idea is realized, it will be challenging to revert.”
