Rearmament Lifts Eurozone Debt to 91.2%

Eurozone public debt is expected to reach 90.2% of GDP this year and rise to 91.2% by 2027, according to the European Commission's spring forecast. The path is steeper than Brussels expected last autumn. For eurozone countries, Malta included, the defence debate has moved from speeches into budget arithmetic.

At an informal meeting of EU finance ministers in Nicosia last week, the IMF's Alex Pienkowski put a harder number on the risk. If governments make no fiscal adjustments, the average European country's debt would reach 130% of GDP by 2040 (Athens Times, Asharq Al-Awsat). This is not a forecast. It is a warning about the cost of doing nothing when defence spending rises and no other part of the budget moves (Cyprus Mail).

The arithmetic of rearmament

The mechanism is clear enough. IMF analysis of previous defence build-ups, published in its April World Economic Outlook, shows that when countries enter a rearmament cycle lasting more than two and a half years, military spending rises by about 2.7 percentage points of GDP. Roughly two-thirds of that increase is paid for through borrowing rather than cuts elsewhere. Public debt rises by around 7 percentage points of GDP within three years.

The EU's reformed Stability and Growth Pact, the rulebook that sets deficit and debt limits for member states, was meant to absorb this kind of pressure. Last year, the EU created a "national escape clause" allowing countries to exceed spending limits temporarily 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 mainly helps countries that were already close to compliance. France and Italy, the eurozone's second and third-largest economies, have not applied. They want to spend more on defence, but the numbers are already against them. France is running a deficit of about 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. An extra 1.5 percentage points of flexibility does little when the deficit is already around double the limit.

Who can borrow and who cannot

Germany starts from a debt level of around 64% of GDP. It can borrow for defence and remain within manageable limits. Its debt is projected to reach only 68% by 2027 (European Commission). The Baltic states, Poland and the Nordic countries are in a similar position.

France's debt is projected to pass 120% of GDP by 2027 (European Commission). Italy's will reach 139.2% (EUNews). Both have signed up for SAFE loans, the EU's Security Action for Europe mechanism, which allows Brussels to borrow €150 billion collectively and lend it on to member states for defence procurement at lower rates (Council of the EU). The terms are better than many countries could get alone. The debt, however, still sits on national books.

That is the unresolved divide. The EU's fiscal rules give room to countries that already have room, while leaving high-debt states with fewer choices. As the ECFR argues, the bloc has not yet solved this split between security needs and fiscal capacity.

The political bill

The Nicosia meeting 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 can be treated as European public goods, which points towards collective financing. But it presented that as one option alongside structural reform and consolidation, without telling governments which route to take.

The Bruegel think tank has already concluded that the reformed fiscal rules need another reform. The OECD warns that defence spending can lift growth in the short term but increases long-term fiscal pressure if it does not fix deeper growth weaknesses.

The question left hanging in Nicosia will shape the next decade of European politics: who pays for security, and what gets squeezed when the bill lands? Between escape clauses and deficit procedures, elected governments will eventually have to say which public services take the strain. So far, they have avoided naming them.