European leaders are caught in a dilemma between increasing defense spending and financial constraints. French President Macron held an emergency summit in Paris on Monday (February 17) to discuss the establishment of a joint lending tool to strengthen European military strength and share financial costs. However, this plan faces numerous obstacles and is difficult to achieve in the short term.

Background and Mode of the Plan

The joint debt plan refers to the € 650 billion Recovery and Recovery Fund (RRF) set up in 2021 to deal with COVID-19. However, it is difficult for European defense funds to emulate the RRF model. Raising military spending to 3% of GDP (currently around 2%) will cost the EU and the UK a total of 230 billion euros. Unlike pandemic response tools, joint defense debt instruments require annual funding to address border threats.

Funding Objectives and Challenges

The primary issue is to determine the funding objectives. The funds are more used for procurement, reconstruction, and strengthening of the defense industry, rather than for soldiers' meals. In an ideal scenario, the plan would not be trapped by the expected rate of return from leading institutions by governments around the world. However, it is unlikely that the joint debt instrument will receive support from all EU member states, such as pro Russian countries like Hungary and Slovakia, as well as geographically distant Spain. Italy's participation is also uncertain. The plan only makes sense if France and Germany agree to participate, and opening up to non EU countries (especially the UK) would increase efficiency. This raises questions about whether the European Commission can become an issuing body.

Financial Burden and Future Impact

Joint lending will not alleviate the financial burden on EU governments. Since 2028, COVID-19 will have to repay 30 billion euros (20% of the EU budget) of debt every year, reminding all governments to pay for it one day. Joint borrowing only postponed the day of final accounting and did not alleviate the pain of future fiscal options.

Analysis of the Impact on the Euro

If implemented, this plan may increase the debt burden of the eurozone and put pressure on the euro exchange rate in the short term. In the long run, if Europe's defense capabilities are successfully enhanced, it may increase market confidence in the eurozone and provide support for the euro. However, the differences among member states and the uncertainty of financial burden may still have a negative impact on the euro.

conclusion

The EU's joint defense lending tool faces multiple obstacles and the road ahead is long. Although the plan will help strengthen Europe's military strength, its implementation still requires overcoming many challenges and will not alleviate future financial burdens.