Rearmament cycle pushes Eurozone debt to 91.2%

Eurozone public debt will hit 90.2% of GDP this year and keep climbing to 91.2% by 2027, according to the European Commission's spring forecast. That trajectory is rising faster than Brussels predicted last autumn. The collision between Europe's rearmament drive and its fiscal limits is no longer theoretical. It is playing out in this year's budgets.

The scale of the risk came into sharper focus at an informal meeting of EU finance ministers in Nicosia last week. The IMF's Alex Pienkowski presented a scenario showing that if governments make zero fiscal adjustments, the average European country's debt would reach 130% of GDP by 2040 (Athens Times, Asharq Al-Awsat). That number is not a forecast. It is a cost-of-inaction warning, a mathematical projection of what happens when defence budgets expand and nothing else gives (Cyprus Mail).

The Arithmetic of Rearmament

The mechanism is well documented. IMF analysis of past defence build-ups, published in its April World Economic Outlook, finds a consistent pattern: when countries enter a sustained rearmament cycle lasting more than two and a half years, military spending rises by roughly 2.7 percentage points of GDP. About two-thirds of that increase gets financed through borrowing, not by cutting other spending. Public debt rises by around 7 percentage points of GDP within three years.

Europe's reformed fiscal rulebook, the Stability and Growth Pact (the set of deficit and debt limits that EU countries agree to follow), was supposed to manage these pressures. Last year, the EU created a "national escape clause" allowing countries to temporarily exceed spending limits by up to 1.5% of GDP per year for defence. So far, 17 member states have activated it, from Germany to Greece.

But the clause only works for countries that were close to the rules in the first place. France and Italy, Europe's second and third-largest economies, haven't applied. They want to spend more on defence, but the math won't allow it. France is running a deficit of roughly 5.5% of GDP; Italy around 7.4% (European Commission). Both are already under the EU's Excessive Deficit Procedure (a formal disciplinary process for countries breaching the 3% deficit ceiling). An extra 1.5 percentage points of headroom changes nothing when you're already double the limit.

Who Can Borrow and Who Can't

Germany, starting from a debt level of around 64% of GDP, can borrow for defence and stay within manageable bounds. Its debt is projected to reach only 68% by 2027 (European Commission). The Baltic states, Poland, and the Nordics are in similar positions.

France's debt, meanwhile, is projected to climb past 120% of GDP by 2027 (European Commission). Italy's will reach 139.2% (EUNews). Both countries have signed up for SAFE loans (Security Action for Europe, the EU's new mechanism that borrows €150 billion collectively and re-lends to member states for defence procurement at low rates (Council of the EU)). The terms are favourable. But the loans still count as national debt.

The fiscal rulebook leaves the most exposed states trapped, while rewarding those with existing headroom. As the ECFR puts it, this is the fiscal divide the EU hasn't resolved.

The Political Bill

The Nicosia meeting produced no agreement on joint EU borrowing for defence, no revision of fiscal targets, and no new tools for high-debt countries. The IMF itself suggested that defence, energy security, and innovation qualify as European public goods, hinting that collective financing makes economic sense. But it offered this as one option alongside structural reform and consolidation, carefully avoiding prescription.

The Bruegel think tank has already concluded that the reformed fiscal rules need reforming again. The OECD warns that defence spending gives a short-term economic boost but deepens long-term fiscal pressure without solving underlying growth problems.

The question Nicosia didn't answer will define Europe's next decade: who pays for security, and what stops getting funded when the bills arrive? Somewhere between the escape clauses and the deficit procedures, elected governments will have to decide which public services shrink. So far, none of them have been asked to say which ones.