The EU's Plan on Defence
But also — ECB, Germany, DMA
Hello! Today is March 12, and here is your EU news summary for the week. Feel free to share this newsletter with friends and colleagues, and follow us on Twitter and LinkedIn.
The Briefing
"Today marks a defining moment for Europe. For the security of Europeans… We are moving decisively towards a stronger and more sovereign Europe of Defence," Antonio Costa declared following a special European Council meeting on March 6.
REARM EUROPE • In response to Donald Trump’s threats of disengaging from Europe, European leaders have come together to approve the ReArm Europe plan, which was unveiled on March 4 by Ursula von der Leyen.
This initiative, which aims to strengthen the EU's defence capabilities, is expected to mobilise nearly 800 billion euros.
The plan primarily seeks to offer additional budgetary margins to Member States by excluding their defence spending from the criteria considered in the European budget rules for a period of four years.
The Commission is expected to propose the activation of the Stability and Growth Pact’s national safeguard clause in the coming weeks. According to Ursula von der Leyen, this budgetary flexibility could allow for 650 billion euros in additional spending by 2030.
These national funds would be supplemented by 150 billion euros in European loans — a first since NextGenerationEU — to support the financial effort in defense.
This fund will be used to finance the acquisition of military equipment (artillery, missiles, ammunition, drones, anti-drone systems), some of which will be sent to Ukraine. The Commission is expected to present a more detailed proposal ahead of the European Council meetings on March 20 and 21.
GERMAN TURNAROUND • However, European leaders want to go further. Determined to permanently anchor this rearmament effort, heads of state and government have asked the Commission to examine a new reform of the budget rules, even though they were revised last year.
This shift in approach is driven by Germany in particular, which has surprised its European partners with its radical turn. Longtime a proponent of deficit and debt control rules, Berlin now advocates for a lasting overhaul of the Stability Pact, arguing that the national safeguard clause, limited to four years and renewable only once, does not guarantee a defence effort which is sufficient to meet current challenges.
The future Chancellor Friedrich Merz embodies this new German doctrine. On March 4, he announced a massive investment plan: 100 billion euros per year for defense, circumventing the debt limitation in the German Constitution, and 500 billion euros over ten years to modernise the country's infrastructure.
These announcements could have significant effects beyond Europe’s largest economy. According to analysis by Goldman Sachs, these investments could accelerate Germany’s GDP growth, with a ripple effect across the entire euro area.
Italy, whose military spending remains modest (1.5% of GDP), praised Germany’s initiative while suggesting that budgetary criteria should be revised more broadly. For Rome, any investment aimed at boosting competitiveness should benefit from the same flexibilities.
France, which is likely to support more flexibility in budgetary matters, intends to increase military spending by 1.5 percentage points of GDP. Emmanuel Macron has set a goal of raising military expenditures to 3.5% of GDP in the medium term, though without specifying a timeline.
The revision of the Stability Pact, opposed by the Netherlands and Austria, is being discussed this week in Brussels, during the meetings of the EU and Eurozone finance ministers on Monday and Tuesday.
BUY EUROPEAN? • The 27 have also committed to focusing on joint procurement to reduce costs and harmonise equipment. They also intend to prioritise European suppliers to strengthen the continent’s industrial capabilities.
As of now, there is no mention of the "European preference" requested by France. However, it may come up during legislative discussions regarding the use of the 150 billion euros in European loans. On the other hand, Germany insists on keeping the initiative open to non-EU countries — notably the UK, Norway, Turkey, and Switzerland.
In addition to these measures, the 27 have also called on the European Investment Bank (EIB) to urgently adapt its rules to provide loans to the defence industry. The EIB can finance investments in dual-use (civil and military) projects, but it currently excludes weapons, ammunition, and purely military equipment.
A change in the EIB's investment criteria is expected to be discussed at a European Council meeting on March 20 and 21, according to Euractiv.
In Case You Missed It
ECB • The European Central Bank (ECB) has reduced its main interest rate by 25 basis points to 2.5%. This is the sixth rate cut since June 2024.
The speech by Christine Lagarde, president of the ECB, suggests that the pace of rate cuts may slow in the coming months.
However, the ECB emphasizes that inflationary pressures are gradually easing. It forecasts that inflation will reach 2.3% in 2025, 2.0% in 2026, and 1.9% in 2027, which is close to its 2% target.
Moreover, economic growth in the eurozone remains moderate. New forecasts estimate GDP growth at 0.6% in 2024, 1.5% in 2025, and 1.6% in 2026.
When asked about potential ECB support for defense spending, Christine Lagarde reminded that it is not the role of the ECB, emphasizing that their mandate is price stability.
GERMANY • On March 4, 2025, the CDU/CSU and SPD concluded a major budget agreement, ten days after the elections.
The stated goal is to strengthen defense and revive the economy through a reform of the debt brake. Military spending beyond 1% of GDP will be excluded from debt limits. A special fund of 500 billion euros over ten years will finance infrastructure and innovation to support competitiveness.
The Länder will be able to incur debt up to 0.35% of GDP. A law will accelerate military purchases and a commission will work on a broader reform of the debt brake, expected by the end of 2025.
Friedrich Merz insists on an immediate budgetary commitment to strengthen the continent's security, particularly after recent decisions by the US government.
Markets reacted strongly. On March 5, the 10-year Bund jumped by 0.31 percentage points to reach 2.79%, its largest increase since 1997. The implementation of these announcements could prove to be complex, given the new narrow CDU/CSU-SPD majority.
The reform of the debt brake requires a constitutional amendment, needing the approval of two-thirds of the Bundestag.
DMA • On March 6, Competition Commissioner Teresa Ribera and Tech Sovereignty Commissioner Henna Virkkunen sent a letter to Jim Jordan, Chairman of the US House Judiciary Committee, regarding the Digital Markets Act (DMA).
On February 23, Jim Jordan had written to Teresa Ribera, asking for explanations on several aspects of the DMA. He believes that the regulation specifically targets American companies, that the fines the Commission can impose are equivalent to tariffs — a criticism already made by Donald Trump — and that some provisions of the regulation limit innovation.
In their response, the two commissioners insist that this regulation "is not designed to target companies based on nationality," despite the fact that five of the seven gatekeepers — the companies that must comply with the regulation — are American.
They also emphasize that the goal of the DMA is to ensure compliance by companies, not to impose fines, and that they are determined to enforce the regulation.
On March 5, several MEPs wrote to the US Attorney General, Pam Bondi, and to Howard Lutnick, the US Secretary of Commerce. They explain that the DMA was not designed to target companies based on their nationality, and that many American companies benefit from and support its application — Netflix, Disney, and Epic Games are cited.
On March 25, 2024, the European Commission opened proceedings concerning certain services of Apple, Meta, and Google for which it suspects non-compliance with the DMA.
The text of the DMA indicates that the Commission must "endeavour to adopt its non-compliance decision within 12 months from the opening of proceedings," i.e., by March 25, 2025.
However, the term "endeavor" indicates that there is no legal obligation for the Commission to adopt decisions by this date — this deadline could therefore, in theory, be extended. Moreover, the Commission has full discretion on whether or not to impose fines.
What We’ve Been Reading
In a paper for the ECIPE, Andrea Dugo and Fredrik Erixon advocate for an ‘8 percent approach’ for the EU: to maintain its position in the global order, it should allocate 4% of its GDP to R&D and 4% to defense.
In a column published on Project Syndicate, Olivier Blanchard and Jean Pisani-Ferry outline a blueprint for governments worldwide to advance pandemic prevention, trade, corporate taxation, and environmental policies despite U.S. obstruction.
For the Institut Montaigne, Georgina Wright and Énora Morin reflect on the lessons Europe can draw from the Biden administration’s Inflation Reduction Act.
This edition was prepared by Augustin Bourleaud, Antonia Przybyslawski, Léopold Ringuenet, Alexis Rontchevsky, Antoine Ognibene, Solène Cazals, Hana Rajabally, Lucie Rontchevsky, and Maxence de La Rochère. See you next week!