Southern Europe rebuffs von der Leyen’s debt-based defense plan

BRUSSELS — Southern European states are rebuffing a European Commission plan to turbocharge defense spending with cheap loans, fearing it would add to their already heavy debt burdens.

The resistance, led by France, Italy and Spain, deals a significant setback to Commission President Ursula von der Leyen’s drive to boost Europe’s military autonomy.

Her proposal, which includes a €150 billion loan package and an emergency clause to loosen EU fiscal rules, was intended to unlock major new investments in defense and reduce the bloc’s reliance on U.S. protection.

But the stalemate now risks derailing Brussels’ plan to funnel more weapons from Europe to Ukraine. 

“Some countries have serious doubts on the feasibility or even the possibility of indebting [themselves] to these levels,” said a senior EU diplomat.

The diplomat, like others in this story, was granted anonymity to speak freely about the plan and potential developments.

Heavily indebted countries in the south of Europe are instead ramping up demands for so-called defense bonds — grants financed through common EU borrowing in capital markets that must be unanimously approved by the bloc’s 27 countries.

“There’s this risk [of a fiasco] which could pave the way for defense bonds,” said a non-Southern EU diplomat. 

Von der Leyen has thus far stopped short of backing the idea given the likely pushback from fiscally hawkish northern states such as Germany and the Netherlands, which fear it could set a precedent for debt mutualization. 

“No Eurobonds,” Dutch Prime Minister Dick Schoof reiterated after a gathering of EU leaders last week. 

A third EU diplomat signaled that the optics of Southern countries turning down loans would undermine support for defense bonds among fiscally conservative countries.

“No Eurobonds,” Dutch Prime Minister Dick Schoof reiterated after a gathering of EU leaders last week. | Janos Kummer/Getty Images

“If they argue that defense is an existential challenge that justifies joint debt, then they need to take the loans first,” said the diplomat, who hails from the fiscally conservative bloc.

Club Med wants more

With Donald Trump threatening to cut off U.S. support for Ukraine and scolding Europe over its military reliance on Washington, von der Leyen moved swiftly following the U.S. president’s Jan. 20 inauguration to devise a plan to reinforce the EU’s defense capabilities.

The resulting strategy included allowing member states to temporarily raise defense spending by 1.5 percent of GDP over four years — and borrowing €150 billion on behalf of the EU to support joint weapons procurement and Ukraine assistance.

The Commission hoped the loan-based scheme would be embraced, particularly by larger southern economies like Italy and Spain that fall well short of NATO’s 2-percent-of-GDP defense spending target. 

As recently as last week, Economy Commissioner Valdis Dombrovskis predicted “a large number of states activating this escape clause.”

But the Commission underestimated a crucial sticking point: While it can borrow more cheaply than most member states, the loans it extends still count against national debt levels — a red flag for highly indebted countries wary of spooking markets or triggering fiscal penalties.

“Von der Leyen’s plan is almost exclusively based on national debt from states,” Italian Prime Minister Giorgia Meloni told lawmakers last week.

The Commission has since acknowledged that national budgets would need to be cut elsewhere to accommodate rising defense costs — a tough political sell in countries whose citizens are more preoccupied with migration and climate change than Russian tanks.

Italy and Spain specifically have pushed to widen the definition of defense spending that can be exempted from EU fiscal rules — with Madrid proposing that border control, cybersecurity and infrastructure resilience be included.  

So far, however, neither Rome nor Madrid has confirmed whether they’ll invoke the emergency clause. Some EU officials speculate they’re stalling in the hope that von der Leyen will soften her stance on defense bonds ahead of the next leaders’ summit in June.

“We should have more time [to decide],” Meloni told reporters last week, adding that the proposed April time frame to activate the mechanism was “a bit too close.”

“Von der Leyen’s plan is almost exclusively based on national debt from states,” Italian Prime Minister Giorgia Meloni told lawmakers. | John Thys/Getty Images

France, meanwhile, has indicated it does not plan to activate the clause, according to two EU diplomats. With a debt-to-GDP ratio above 110 percent, Paris is wary of spooking markets or endangering its credit rating — a key factor in how much it pays to borrow.

Germany, by contrast, is expected to activate the clause to help fund its mammoth €500 billion defense upgrade. But like other triple-A rated states such as Denmark and the Netherlands, Berlin is unlikely to accept Commission loans it could raise more cheaply on its own.

That has compounded anxiety among more vulnerable member states, which fear that by stepping up first to request EU loans they might signal financial weakness to the markets — triggering higher borrowing costs.

Fragmentation among the EU’s 27 countries “makes a difference on the market perception, which might be negative,” said the senior EU diplomat. 

“If everyone doesn’t [submit the request] at the same time, the market will set the limit” of how much you can spend, they added.

But fiscally conservative states are not buying that argument, with the third EU diplomat accusing Southern states of “playing politics.”

(Jacopo Barigazzi contributed to this report)