ReArm Europe!

Two weeks ago, I wrote an article about the security conference that was held in Munich in the presence of Vice President JD Vance. On the day, the president of the European Commission explained that Europe must take care of itself and refrain from its dependence on the USA.

Afterwards, a meeting was held at the Oval Office with President Tump, VP JD Vance and President Zelenskyy. Sadly, the meeting took an abysmal turn. The minerals deal was not signed because President Zelenskyy was asked to leave. Certainly, President Zelenskyy must learn the diplomatic language, especially when hosted by other foreign leaders. The US has given Ukraine billions in aid, so at the very least, President Zelenskyy should avoid confrontation, given the Republicans’ stance on foreign aid. Zelenskyy must be tactful or risk losing what he worked for.

Two days later, President Trump paused the military aid to Ukraine to force President Zelenskyy to the negotiating table. On the same day that President Trump paused the military aid to Ukraine, the president of the European Commission, Ursula von der Leyen, issued a proposal termed ReArm Europe. Not sure why, but the press conference of von der Leyen unveiling the proposal, reminded me of Nancy Pelosi’s episode ripping Trump’s 2020 SOTU speech up. It was a kind of “in-your-face” press conference. Today, EU leaders will be discussing ReArm Europe in a special European Council being held in Brussels. The proposal entails a package of €800bn to be spent on defence. A pot of €150bn in loans is also at the disposal of member states interested in tapping into defence spending, with the European Investment Bank tasked to manage the EU Budget guarantees and lift the current limits to leverage private capital. The funds are to be used on defence spending, including aero defence, although the EIB said that a ban on weapons and ammunition would still remain. However, we wouldn’t know unless this is earmarked funding.

Hitherto, I haven’t understood how the funds covering the EU budget guarantees will be recorded, as these are on balance sheet. This means that if the EU budget finances defence companies, indirectly they are breaching the TEU. The treaty is clear. According to Article 41(2) of the TEU, the financing of expenditure “arising from operations having military or defence implications” is explicitly forbidden from being financed through the EU budget. It has been always understood, at least until I was posted in Brussels, that the financing ban captures procurement and acquisitions of arms for the delivery to third countries, as well as purchases on behalf of member states. This is why the former HRVP Josep Borrell established the European Peace Facility back in 2020 to fund military off budget. The EIB must be quite prescriptive on lending.

In the past years, the trending acronym was ESG. This relates to the concept of sustainability, whereby investors were advised to not invest in defence and military companies, be they in equities or corporate bonds, because the ESG rating would be reduced as it entails social implications. In fact, under the SFDR, fund managers, as well as other investment companies, are obliged to publish the Principal Adverse Impacts, and statements that include not investing in defence companies attached to military production and weapons. However, I am not sure whether this will be changing. If they really want to mobilise private capital, they must readjust anything relating to the S of ESG.

On a separate note, the €800bn are understood to be spent over a period, with short-term measures to arm Ukraine, and long-term measures to ramp up Euroepan military production. It is a quick fix for the French, as well as the Germans to export arms to Ukraine, and then get paid through the spending of other members states, including the mobilisation of capital through the EIB.

Obviously, big European defence companies are enjoying the show. Defence companies like Rheinmetall AG, which is a German automative and arms producer, are certainly welcoming the ramping up of arms production through loans, blended with the EU budget guarantees. There are other defence companies, including BAE Systems, which is a British multinational specialising, among others, on aerospace defence. Another multinational defense company in Europe is the Thales Group, a French firm specialising inter alia in aerospace and defence. This means that Germany, the United Kingdom and France are set to benefit from this defence package. Perhaps, this is the reason why Prime Minster Keir Starmer seized the opportunity to host a summit on Ukraine in London, right after visiting President Trump. Present for the summit was President Zelenskyy, who headed all the way from the USA after Trump threw him out of the backdoor of the Oval Office.

Today’s special European Council will be discussing how the €150bn loans, aimed to cover the spending of air defence, missiles and drone will be spent. The president of the Euroepan Commission said that we are living in dangerous times and in an era of rearmament. She’s been saying this for the past four years. For the defence package, President von der Leyen said that the European Commission will be waiving the deficit procedure for those member states that are willing to spend on defence. My understanding is that there are also funds that were agreed under the Recovery Plan, which can be ringfenced to cover defence spending, instead of using them for their intended purposes. This is money which member states are required to start repaying as of the year 2028. President von der Leyen is aiming to hit the spending of €650bn over the course of four years, having member states increasing their defence spending by 1.5% of GDP. What is saddening, however, is that the European Commission proposed using funds originally intended for cohesion efforts to equalise living standards for defence purposes. There are also around €212bn of frozen Russian assets which can be used to aid Ukraine in the short run.

However, before his departure Joe Biden shipped gargantuan quantities of material just right before Trump was sworn in as president. This means that for the coming months Ukraine is covered with military stocks. During my posting in Brussels the understanding was that Ukraine had a strong arms industry under the USSR. In fact, President Zelenskyy stated that a portion of the ammunition in the battlefields are being met by producing them in Ukraine, through European defence companies’ joint ventures. Whether we will be seeing an entire arms industry in Ukraine in the coming years we still need to see. However, if Ukraine is aspiring to join the EU a kind of deterrent is required, even if they decide to keep neutral. Keeping neutral does not mean that Ukraine doesn’t arm itself to protect its territory. This must have been the strategy from the outset. It would have made more sense for Ukraine to join the EU, arm itself and then invoke Article 42.7 of the Treaty in case of an arms aggression. However, President von der Leyen is running out of time. By the time of ReArming Europe President von der Leyen will be a septuagenarian.

The only thing that is worrying is the fact that during the pandemic it was quite easy to force people indoors through the military. ReArming Europe is not a fancy concept considering the continent’s history, as well as what happened during the pandemic. Hopefully, a peace agreement is reached between Russia and Ukraine through Trump’s intervention, and the EU is gratified enough to expediate Ukraine’s EU membership.