EU's 'Re-Arm Europe' Plan Faces Setbacks

Recently, the European Commission rolled out a 'Re-Arm Europe' plan, which includes offering 150 billion euros in loans to EU member states for defense investment. However, France, Italy, and Spain have rejected this plan. These countries prefer donations from the EU rather than loans to avoid increasing their national debt burdens.

The policy formulated by the European Commission also includes an emergency clause to relax EU fiscal rules. It allows member states to increase their defense spending by up to 1.5% of their GDP over four years. Just last week, EU Economic Commissioner Valdis Dombrovskis predicted that 'a large number of countries will activate this exemption clause'.

The plan underestimated a key issue: Although the EU can borrow at a lower cost than most member states, the loans it provides are still counted towards the national debt. This is a red flag for high - debt countries worried about triggering market panic or facing fiscal penalties. A senior EU diplomat said, 'Some countries seriously doubt the feasibility or even the possibility of taking on such a high level of debt.'

Italian Prime Minister Meloni told lawmakers last week that 'Von der Leyen's plan is almost entirely based on national debts'. After that, the European Commission also admitted that countries need to cut other parts of their budgets to cover the rising defense costs, which is a difficult political proposition in countries where citizens are more concerned about immigration and climate change. Meanwhile, two EU diplomats said that France has indicated it does not plan to activate the emergency clause. With a debt - to - GDP ratio of over 110%, France is worried about triggering market panic or endangering its credit rating, a key factor in determining its borrowing costs.

In contrast, Germany is expected to activate the emergency clause to fund its huge 500 - billion - euro defense upgrade. But like other AAA - rated countries such as Denmark and the Netherlands, Germany is unlikely to accept the European Commission's loans as it can raise funds at a lower cost on its own.

A diplomat from a non - Southern European country said that the European Commission's plan risks failure. 'This could pave the way for defense bonds.' It is reported that Southern European countries with high debt levels are increasing their demand for so - called defense bonds, which are financed through joint borrowing by the EU in the capital markets and require the unanimous approval of all 27 EU member states. Von der Leyen has not supported this idea so far, as fiscal hawks like Germany and the Netherlands may oppose it, fearing it could set a precedent for debt mutualization.