Europe’s Defence Investments

By Balazs Koranyi

SINTRA, Portugal (Reuters) – Europe should pool its defence investments to reduce costs, expedite processes, and create a strong financial asset that could enhance the euro’s international role, says ECB policymaker Olli Rehn.

ECB President Christine Lagarde argues that unpredictable U.S. economic policies open doors for the euro to gain market share from the dollar globally. However, this necessitates the completion of Europe’s financial architecture, a process that has long been stalled.

Joint defence borrowing could strengthen both Europe and the euro by generating a significant, liquid safe asset necessary for the smooth operation of the financial sector and by enhancing defence capabilities—crucial for any bloc issuing a major reserve currency.

Rehn noted, “Defence is also an opportunity for creating another safe asset that could bolster Europe’s financial architecture. If we deem common defence spending as a public good, we need common solutions.”

Despite increasing national debt from such spending, the EU might establish a defence development bank to manage some assets without impacting national balance sheets, argued Rehn.

Rehn expressed optimism about recent actions by the German government which have the potential to move forward Europe’s long-discussed financial integration. “The German decision to significantly raise defence and infrastructure spending is pivotal,” he said. The increased spending by NATO countries will also provide essential fiscal stimulus and promote growth.

Europe should establish a clear timeline for completing its savings and investment union, targeting January 1, 2028, for its completion, according to Rehn. “The current environment represents an important moment for the euro, and we shouldn’t waste it,” he stated.

The ECB has played its part, finally achieving its price stability goal after a decade of inconsistency. Still, vigilance is essential as global economic instability presents risks of inflation volatility, with growth potentially undershooting the 2% target.

“There are risks to the outlook on both sides, but the risk of being below target is greater, especially since our projections indicate price growth under target for 18 months,” Rehn said. He added that factors like exchange rates, energy prices, and tariffs are disinflationary, hindering economic growth and making the risk of prolonged inflation below 2% a key concern.