Rearmament Drives Eurozone Debt To 91.2%

Europe is discovering that rearmament has a balance sheet. Eurozone public debt is now expected to reach 90.2% of GDP this year and rise to 91.2% by 2027, according to the European Commission's spring forecast. That is a faster deterioration than the Commission expected last autumn, and it leaves governments facing the question that has sat beneath every defence debate since Russia's invasion of Ukraine: what gives when security spending rises and fiscal rules remain in place?

The risk was put more starkly at an informal meeting of EU finance ministers in Nicosia last week. Alex Pienkowski of the IMF presented a scenario in which, if governments make no fiscal adjustments, the average European country's debt would reach 130% of GDP by 2040 (Athens Times, Asharq Al-Awsat). That was not a forecast. It was a warning about the arithmetic of inaction: defence budgets expand, borrowing fills the gap, and the debt stock keeps moving upwards (Cyprus Mail).

The Arithmetic of Rearmament

The mechanism is not mysterious. IMF analysis of earlier defence build-ups, published in its April World Economic Outlook, found a recurring 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 extra spending is financed through borrowing rather than cuts elsewhere. Within three years, public debt rises by around 7 percentage points of GDP.

The EU's reworked fiscal rules were meant to cope with precisely this kind of pressure. The Stability and Growth Pact, the framework that sets deficit and debt limits for EU countries, was revised to give governments more room to manage investment and consolidation over time. Last year, the EU added a "national escape clause" for defence, allowing countries to go above spending limits by up to 1.5% of GDP per year. So far, 17 member states have used it, including Germany and Greece.

The problem is that an escape clause helps most when you were near the door to begin with. France and Italy, the eurozone's second and third-largest economies, have not applied. Both want to spend more on defence, but the maths is already against them. France is running a deficit of roughly 5.5% of GDP; Italy's is around 7.4% (European Commission). Both are already under the EU's Excessive Deficit Procedure, the formal process for countries breaching the 3% deficit ceiling. Another 1.5 percentage points of headroom does little when you are already well beyond the limit.

Who Can Borrow and Who Can't

Germany starts from a different place. With debt of around 64% of GDP, it can borrow for defence and still remain within manageable bounds. Its debt is projected to reach only 68% by 2027 (European Commission). The Baltic states, Poland and the Nordics have similar room to manoeuvre.

France and Italy do not. French debt is projected to move past 120% of GDP by 2027 (European Commission). Italy's is expected to reach 139.2% (EUNews). Both have signed up for SAFE loans, Security Action for Europe, the EU's new scheme that borrows €150 billion collectively and re-lends to member states for defence procurement at low rates (Council of the EU). The terms are attractive. The accounting is less helpful: the loans still sit on national balance sheets.

That is the divide the EU has not yet bridged. Countries that already have fiscal space are rewarded with more freedom to borrow. Countries under the greatest pressure are offered cheaper financing that still worsens the debt ratio. As the ECFR argues, the fiscal gap has become part of the defence problem itself.

The Political Bill

Nicosia produced no agreement on joint EU borrowing for defence, no revision of fiscal targets, and no new instrument for high-debt countries. The IMF suggested that defence, energy security and innovation have the character of European public goods, pointing towards a case for collective financing. But it kept that alongside structural reform and consolidation, avoiding a single prescription.

The Bruegel think tank has already argued that the newly reformed fiscal rules need another reform. The OECD has warned that defence spending can give economies a short-term lift while leaving the deeper growth problem untouched and the long-term fiscal burden heavier.

For Ireland, watching this debate from outside Nato and with a long habit of military neutrality, the point is not abstract. The EU is moving into a period where security spending, fiscal discipline and national political choices will collide more often. The question Nicosia avoided will shape the next decade: who pays for Europe's security, and what stops being funded when the bills arrive? Somewhere between escape clauses and deficit procedures, elected governments will have to say which public services shrink. So far, they have not been forced to answer.