tactic of using threats to get what he wants in business and politics is something political leaders worldwide are gradually growing accustomed to. But the deal to end the Ukraine war the US president is apparently forging behind the scenes with Russian President has rattled government leaders, especially in Europe, who fear Trump could withdraw US military protection of the continent.
British Prime Minister has responded to these concerns by announcing an increase in the UK’s defense budget to 2.5% of gross domestic product (GDP) by 2027, up from the current 2.3%. He emphasized that this investment would have to be followed up with more defense spending in the coming years and would reflect the UK’s commitment to “securing a just and enduring peace in Ukraine and the need for Europe to step up for the good of collective European security.”
Following recent , the of conservative leader and the Social Democrats (SPD) of outgoing , who are in exploratory talks about forming a coalition, have agreed on a deal to unlock billions of loans and debt to boost the country’s ailing economy and ramp up defence spending in light of the US policy shift.
Under the deal struck on Tuesday (March 4), the two parties are planning to create a special fund of about €500 billion ($528 billion) to fix Germany’s crumblinginfrastructure, while looking to ease strict constitutional rules on taking on new government debt for specific defence investments.
In the election campaign, Merz always ruled out a reform to the country’s borrowing rules, also known as debt break. The plans require a two-thirds majority to alter Germany’s constitution in which the debt break is enshrined.
How serious is the Russian threat?
For decades, , the alliance’s largest and strongest economic power, to shoulder the main burden of the continent’s defense. Now, leaders in Europe are considering how to respond to the likely collapse of if Trump withdraws US support.
Rafael Loss, a defense and security expert at the European Council on Foreign Relations (ECFR), told DW that he believes there’s no immediate risk of “Russian troops standing outside Berlin tomorrow.” However, he warned that Russia aimed to “fracture NATO and the EU to acquire military dominance over Europe.”
The Brussels-based think tank Bruegel even considers a Russian attack on an EU member state “conceivable.”
“Assessments by NATO, Germany, Poland, Denmark and the Baltic states put Russia as ready to attack within three to ten years,” the think tank said in a recent analysis.
In response to , Germany created a €100 billion ($103 billion) special debt fund to modernize the country’s long-neglected armed forces. Though not yet entirely spent, the money is already allocated. However, a steady increase in Germany’s regular defense budget has not yet been achieved.
The challenge of replacing the US military
The Bruegel economists have calculated that US military aid to Ukraine in 2024 amounted to €20 billion out of a total €42 billion. “To replace the US, the EU would thus have to spend only another 0.12% of its GDP — a feasible amount,” they said in their analysis.
Bruegel has also outlined what Europe would need to avoid being defenseless if the US exits NATO. Apart from replacing US combat brigades, ships, and aircraft, it would require boosting European capabilities in intelligence, communications, and command infrastructure that are needed for deploying large, complex military units.
Germany’s military capabilities, for example, remain well below both required levels and allied commitments, Bruegel noted. Berlin’s pledge to supply NATO with two divisions — about 40,000 soldiers — is facing significant setbacks, and a more appropriate contribution from Germany, given its size, would be closer to 100,000 troops.
While military hardware is essentially a “numbers game,” according to Bruegel, replicating “soft capabilities,” like operational structures and military experience, will be far more difficult. Establishing these capabilities could cost Europe hundreds of billions of euros and take many years.
Jack Allen-Reynolds, deputy chief economist for the eurozone at Capital Economics, estimates that European defense spending would need to increase significantly. He told DW that an additional €250 billion per year would be justified in the short term. That would bring EU defense budgets to about 3.5% of GDP.
How to finance Europe’s rearmament?
Allen-Reynolds has suggested several ways to finance this massive expenditure. One option is repurposing the European Investment Bank (EIB) or creating a new “rearmament bank” to substantially support the defense sector with minimal impact on national budgets.
Alternatively, the EIB could issue loans to defense companies or create bonds specifically for military projects. This approach would not directly fund military personnel or equipment but would finance European arms manufacturers to boost military production.
The “most straightforward way” for Allen-Reynolds would be if the EU launched a new joint borrowing program comparable to the €750 billion pandemic recovery fund, also known as NextGenerationEU.
“This would be a relatively cheap way for the EU to access the markets as it would benefit from an AAA credit rating and allow the more fiscally constrained governments to avoid borrowing on their own balance sheets,” he said.
On Tuesday (March 4), the proposed exactly that, announcing a €800 billion plan to beef up the defenses of EU nations, aiming to lessen the impact of potential US disengagemen,t and provide Ukraine with military assistance following the freeze of US aid.
Commission President Ursula von der Leyen said the massive package, called REARM Europe, will allow member states to “significantly increase their defenseexpenditures without triggering punishing rules” on budget deficits and sovereign debt.
A boost to the eurozone economy?
Bruegel believes that from a “macroeconomic perspective,” a debt-funded increase in defense spending could even boost European economic activity “at a time when the upcoming trade war may undermine external demand.”
Concerns over Donald Trump’s threat to impose high tariffs on European cars have led investors to sell auto stocks and buy shares in defense companies, which they see as having strong growth potential.
Rafael Loss, the ECFR expert, also thinks that expanding could have positive effects on the national economy and contribute to overcoming the country’s growth weakness. “If jobs in the automotive supply chain could be preserved by shifting production to defense-related goods, that would be certainly beneficial,” he said, cautioning at the same time against “overestimating” the broader economic impact.
This article was originally written in German. It was first published on March 3 and has been update for latest developments on March 6, 2025.
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