EU mulls new defence funding mechanism to boost military readiness

EU finance ministers are set to consider a proposal to establish a new intergovernmental institution called the “European Defence Mechanism” (EDM) for defence-related lending and cooperation with non-EU countries such as the UK, Norway or Switzerland.

“Given the need to maintain prudent fiscal positions, defence investment cannot proceed without proper coordination,” Polish finance minister Andrzej Domański told counterparts in a letter sent last Friday.

The proposed mechanism mirrors a recent British idea for a supranational rearmament fund. It would involve borrowing on capital markets and centralising defence procurement to reduce costs.

“As defence spending remains a national prerogative, this intergovernmental model may offer a more effective response to insufficient defence financing,” Domański added.

The EU-27’s finance ministers will be joined by their counterparts from the UK, Norway and Switzerland during their informal meeting in Warsaw on 11–12 April, where a policy paper by the Brussels-based economic think tank Bruegel—including the EDM proposal—will be discussed.

Drawing on the model of the European Bank for Reconstruction and Development (EBRD), Bruegel’s paper proposes having the EU as a distinct shareholder represented by the European Commission to ensure a smooth coordination with the non-EU members.

According to Bruegel researchers, the EDM’s mandate could include establishing a single market for defence and even owning strategic military assets, such as a satellite system for military intelligence and communication or advanced missile technology—measures that would reduce the fiscal burden of rearmament on member countries.

While similar to the existing European Stability Mechanism (ESM), the proposed fund would not require participation from all 27 EU member states. It could also extend its financial reach to subscribed non-EU countries and members out of the euro area.

Joining the mechanism would require members to contribute a quota based on their economic size, military spending and/or assets, with decisions potentially taken according to capital shares or qualified majority voting.

The fund could further support frontline members through interest-free lending or by allocating greater shares of procured gear to frontline members than those members pay for.

EU defence funding mechanisms do not offer the right incentives

US President Donald Trump has urged NATO members to raise their defence spending to 5% of GDP—a target no member currently meets, and one that is particularly difficult for the eight European NATO members which spent less than 2% in 2024.

In response, European countries are pledging more money to strengthen European defence—but higher budgets alone won’t bridge the bloc’s capability gaps.

Bruegel researchers argue that current EU defence funding tools do not offer the right incentives to match the Kremlin’s military production.

Existing instruments such as the European Defence Fund (EDF), the Act in Support of Ammunition Production (ASAP), and the Rearm Europe plan represent progress, but “the incentives offered are too small to address the home bias in procurement or to coordinate the provision of ‘strategic enablers’ such as military satellites,” the paper argues.

National defence markets remain dominated by local champions. In France, for instance, the top two defence companies accounted for 69% of the sector’s domestic sales in 2024.

With the US increasingly retreating from its traditional role as Europe’s protector, this fragmented approach, the home bias in procurement and the current technological gaps need to be addressed urgently, the researchers say.

So how? In addition to the European Defence Mechanism, Bruegel recommends expanding the role of existing bodies like the European Defence Agency in common planning, procurement, and funding.

It also suggests a new instrument similar to the one used in response to the COVID-19 pandemic for temporary support to mitigate unemployment risks in an emergency (SURE), and strengthening coalitions such as the permanent structured cooperation for defence and security (PESCO) to develop strategic enablers and reduce dependence on the US.

“Reliance on US manufacturers may be difficult to overcome,” the paper says, while stressing that Europe has a chance to rearm and reduce its dependence on the US if it undertakes a major reform of both the demand and supply side of the defence market in Europe.

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