Europe intends to increase its defense spending rapidly and strongly. It should do so without risking Europe's fiscal sustainability and financial stability at a time of great danger.
We argue that the Commission’s current plan to use the flexibility built in the EU’s fiscal rules will not achieve this: On the one hand, this will not lead to the long-term certainty over available resources for defense spending that is now needed. On the other hand, relying on the flexibility and in particular the use of the national escape clause would likely amount to an unplugging of the rules that could stoke strong market reactions.
Therefore, the best way to create the necessary fiscal space is a targeted and temporary exemption of defense spending from the fiscal rules. We outline how this could be done through a change of the legal texts. Finally, we explain how common borrowing could complement a rule change if member states agree to pool decision-making powers in defense policy matters.
