In a hasty but bold move to bolster Europe's defence capabilities, the European Commission has unveiled an ambitious €800bn plan, dubbed ReArm Europe. This initiative aims to significantly enhance the military capabilities of EU member states, particularly in light of recent geopolitical tensions and the suspension of US military aid to Ukraine. The announcement triggered a surge of defence stocks, while Stoxx Europe 600 posted record highs. While the plan may be lauded for its potential to strengthen Europe's defence, it also raises important questions about the fairness and distribution of funding, especially for countries without significant military industry capabilities, such as Malta, who are part of the EU, but not of Nato.

The mechanisms to finance the plan

The ReArm Europe plan is structured around several key financial mechanisms designed to mobilise the necessary funds without destabilising the EU's economic stability. The primary components of the plan are showcased as follows:

1. Suspension of budget rules: One of the most significant aspects of the plan is the proposal to suspend strict budget rules that typically limit defence spending. This suspension allows member states to increase their defence expenditures without triggering the excessive deficit procedure, which mandates governments to reduce deficit levels if they exceed 3% of GDP. By allowing countries to raise defence spending by an average of 1.5% of GDP, the EU aims to create fiscal space of approximately €650bn over four years.
2. Defence loans: The European Commission will provide €150bn in loans to EU governments specifically for defence investments. These loans will be used to purchase military equipment, including air and missile defence systems, artillery, drones and cyber defence tools. This mechanism is similar to the financial strategies employed during the Covid-19 pandemic, where the EU raised funds to support economic recovery.
3. Repurposing existing funds: The plan also involves redirecting existing EU budget funds towards defence-related investments. This includes the potential repurposing of cohesion funds, which are typically aimed at reducing economic disparities between regions, to support defence projects.
4. European Investment Bank (EIB) involvement: The EIB will play a crucial role in financing defence projects by providing loans and investments to defence firms. This move aims to enhance the production capacity of military equipment and ensure that the EU can meet its defence needs.
5. National Escape Clause: The plan proposes activating the national escape clause of the EU's Stability and Growth Pact, allowing member states to temporarily exceed budgetary constraints to finance defence spending. This clause provides additional fiscal flexibility to countries, enabling them to invest more in their military capabilities without facing immediate financial penalties.

What will be the impact on countries with limited military industry capabilities?

The ethical quandary that arises from the ReArm Europe initiative, designed to fortify the EU's collective security, is a multi-faceted issue, especially for nations like Malta that lack significant military industry capabilities. At the heart of this concern lies the disproportionate allocation of funds. The primary beneficiaries of this initiative are set to be countries with well-established military industries, namely France, Germany, Italy and Spain. These nations possess the industrial infrastructure and expertise required to produce advanced military equipment, positioning them to receive a considerable share of the funding.

Then there is the whole Eastern flank of EU countries that will benefit from investment - the Baltic countries, Poland, Slovakia, Hungary and Romania. One might think building military bases, better infrastructure such as widened roads, bridges and railroads to carry the military equipment in case of emergency. Military airports may be extended and built to address the new drone capabilities that have changed the rules of modern warfare.

Moreover, political resistance within the EU presents another layer of complexity. Diverging priorities among member states mean not all countries may agree on prioritising defence spending over other pressing issues such as social programmes or economic recovery. This divergence could lead to potential political friction. Public opposition also plays a significant role; citizens in some EU nations may oppose such large-scale military investments, particularly if they perceive it as unnecessary or at odds with domestic needs.

This shift of cohesion funds towards defence projects risks exacerbating economic disparities within the EU. Originally intended to support the development of poorer regions and reduce economic inequalities, the repurposing of these funds for defence may neglect the economic needs of less developed regions, further widening the gap between affluent and less affluent member states.

Countries without substantial military industries face the challenge of developing their defence capabilities despite access to loans and financial support. The lack of domestic production capacity means that these nations will likely have to import military equipment from other EU member states, resulting in dependency on external suppliers and potentially higher costs.

Ethically, the focus on rearming Europe raises questions about the prioritisation of military expenditure over other critical areas such as healthcare, education and social welfare. For countries like Malta, which have limited defence needs and capabilities, the emphasis on military spending seems disproportionate and misaligned with national priorities.

Furthermore, the reliance on a select few countries for military production may create strategic vulnerabilities within the EU. In times of crisis, countries without significant military industries may find themselves at a disadvantage, unable to rapidly enhance their defence capabilities or secure necessary equipment.

In conclusion, the EU's €800bn ReArm Europe initiative represents a significant move towards bolstering the continent's defence capabilities in response to evolving geopolitical threats. However, the plan also brings to light critical ethical and practical challenges, particularly for small EU nations. These countries, lacking substantial military industry capabilities, find themselves disproportionately affected by the initiative despite having limited influence over its implementation.

It is crucial to ensure that the benefits of increased defence spending are equitably shared among all member states, including those without significant military industries. This would safeguard the economic and social well-being of all EU citizens, particularly those in smaller countries, and promote fairness and solidarity within the union.

Dr Ovidiu Tierean is a senior advisor at PKF Malta