A toy military tank sits atop a pile of Euro notes and coins.

Introduction

Defence budgets across Europe are rising. Russia’s war on Ukraine, combined with doubts over the future of US security guarantees, have prompted European governments to invest more in defence. According to EUISS calculations based on EDA and NATO data, spending by EU Member States was 56% higher in 2025 than it was in 2022, after accounting for inflation.

One challenge is sustaining and increasing this spending. Rebuilding Europe’s military capacity will require investment over many years. Yet many national budgets are under pressure from fiscal constraints, higher borrowing costs and competing domestic priorities.

Europeans also need to spend more cooperatively to reduce costs and secure economies of scale. The feasibility of cooperation is influenced by many factors, including national threat perceptions, operational cultures, defence planning cycles and national industrial interests, but well-designed financial incentives can make cooperation more attractive.

A second challenge is mobilising the investment needed for Europe’s broader defence ramp-up, in terms of expanding industrial capacity, investing in R&D and making European infrastructure more resilient and fit to withstand possible sabotage or attack.

Europe’s defence financing instruments can all play a role in meeting these challenges. This landscape has grown increasingly more complex. National budgets remain the main pillar of defence expenditure, but they are increasingly part of a wider ecosystem of EU instruments, public financial institutions like the European Investment Bank (EIB) and increasingly also private capital.

This piece maps the landscape of European defence financing and assesses the growing number of proposals to expand and solidify this ecosystem, such as a repeat of SAFE or multilateral borrowing mechanisms outside the EU framework. Ultimately, there is no silver bullet for Europe’s defence financing challenge. There is no alternative to sustained national spending, but it can and should be supplemented by additional sources of funding. While this will not remove the need for difficult fiscal choices, it will make higher defence spending easier to reach and help drive Europe’s broader defence ramp-up.

Europe’s Defence Financing Ecosystem

The Core: National Spending

 

EU Member States have significantly increased defence expenditure since Russia’s annexation of Crimea in 2014. In nominal terms, spending rose by approximately €89 bn between 2014 and 2022, reaching €239.75 bn. Since then, spending has risen to €417.62 bn in 2025, an increase of 74%.

 

Even after adjusting for inflation, spending increased by approximately 56% over this timespan. The current average level of spending represents 2.2% of the EU’s €18.8tn GDP.

 

According to the EDA, spending will hit €454 billion in 2026, representing 2.4% of EU GDP.

 

Spending is set to grow even further, with Member States that are also NATO allies pledging to increase spending to 3.5% of GDP by 2035, plus 1.5% for defence related expenditure.

 

Raising ‘core’ defence spending to 3.5% of GDP would mean increasing annual spending to around €658bn. That means Europeans will need to find an additional €204bn EUR a year (in today’s money) by 2035. This will put public finances across Europe under strain.

 

Beyond National Budgets: Four priorities to sustain Europe’s defence surge

As defence expenditures have grown, so has the range of funding streams that is complementing national budgets. EU instruments, funding from public banks and private finance can all contribute to giving momentum and coherence to Europe’s defence ramp up. The rest of the piece sets out four priorities to sustain Europe’s defence surge:

  1. Fully exploiting the EU’s potential;
  2. Leveraging public financial institutions;
  3. Exploring joint borrowing beyond the EU;
  4. Mobilising private capital.

Fully exploiting the EU’s potential

The EU is the most important layer of defence financing beyond national budgets, and it already has a range of instruments to support defence. These are mapped below. In essence the EU can add value in three ways: by mobilising additional resources, by embedding defence priorities across the wider EU budget, and by using financial incentives to make cooperation more attractive for companies and Member States.

The EU is already adding significant resources to European defence expenditure, both in terms of strengthening European defences and supporting Ukraine.

 

The  SAFE  loan mechanism provides €150bn in low interest long-term loans to Member States. In essence it allows those with higher borrowing costs than the EU itself to invest more in defence at a lower cost than through national borrowing.

 

The €90bn  Ukraine Support loan , covering 2026 and 2027 is a major element of European defence spending. Around two thirds of the loan, which is financed via EU borrowing, is meant to support Ukraine’s defence, mainly through purchases of military equipment.

 

The European Defence Fund ( EDF ) has a budget of €7.3bn for 2021-27 to finance co-operative R&D. In 2024, the EDF was worth an additional 9% on top of national defence R&D budgets.

 

The Act in Support of Ammunition Production ( ASAP ) was a short-term €500mn programme to ramp-up ammunition production capacity in Europe between 2023 and 2025. It leveraged limited EU funding to support 31 projects in 15 Member States through targeted funding. It resulted in an investment of €1.5 bln in the supply chain and contributed to the six-fold increase in production capacity of 155mm shells since 2022.

 

The European Defence Industry Reinforcement through Common Procurement Act ( EDIRPA ) provided €310 million to foster joint procurement between 2023 and 2025. It funded five cross-border procurement projects covering air and missile defence systems, ammunition, and armoured vehicles.

 

The European Defence Industry Programme ( EDIP ) has a budget of €1.5bn for 2026 and 2027. It is taking forward the ASAP and EDIRPA funding logics, while also providing dedicated funding to support Ukraine and promote its integration with Europe’s defence-industrial base and for projects of common European interest.

 

The European Peace Facility ( EPF ) is an off-budget EU instrument worth €17bn between 2021 and 2027. It aims to support EU military operations and/or assistance to partner countries, including lethal equipment and training.

 

Beyond these defence specific instruments, other EU instruments are also indirectly contributing to providing additional resources.

 

The Connecting Europe Facility ( CEF ) with a budget of €1.7bn in EU grants (2021-27) has been used to strengthen dual-use transport infrastructure and facilitate cross-border military mobility, supporting 95 dual-use transport infrastructure projects across 21 Member States.

 

The European Innovation Council ( EIC ) is also involved in supporting defence. The EIC Accelerator, worth €634mn in 2026, supports start-ups, SMEs and small mid-caps developing disruptive technologies, including dual-use technologies. Meanwhile, in June 2026 the EIC’s Strategic Technologies for Europe Platform (STEP) Scale Up Scheme announced €100 million in funding for defence technologies including air and missile defence, artillery, and drones and counter drones.

 

Finally,  Cohesion funds  can be used to support defence. In March 2026, the Commission reported that Member States had agreed to reprogram €11.9bn in 2021-2027 cohesion funds towards defence and dual-use investments.

 

Aside from providing additional resources for defence, EU instruments can also make cooperation more attractive, helping make European defence spending more efficient. For example, the EDF has contributed to the creation of partnerships between European defence companies that would probably not have otherwise worked together. On the demand side, EDIRPA, EDIP and SAFE have the same purpose.

 

 EDIRPA  showed the potential of targeted EU incentives on cooperation: the original budget leveraged €11 billion (36 times its envelope) in joint procurement orders, with each project involving an average of six Member States. While this volume reflected pre-existing national requirements, EDIRPA helped governments aggregate their national requirements into joint orders.

 

 SAFE  is also meant to encourage joint procurement, although the degree to which it will do so remains to be seen, as it allows carve-outs for some national projects and cooperation will also depend on whether Member States’ capability needs and procurement timelines align.

 

Meanwhile,  EDIP  is meant to carry forward the logic of EDIRPA, with €240 million to foster collaborative procurement carried out by at least 3 Member States across 5 capability areas (counter UAS, ammunition, missile, air and missile defence, ground and naval platforms, C5ISR and space); and €325 million for European Defence Projects of Common Interest, such as drones, protection of critical undersea infrastructure and air and missile defence.

 

There is a strong case for expanding EU defence funding, and to use it more strategically by targeting funding at key capability priorities and at joint projects.

First, the EU can provide cheap financing to Member States with limited fiscal space. This is valuable in itself as it takes some pressure off national budgets and will allow Member States to increase and sustain defence spending. Additional EU financing could take the form of loans or grants. An extension of the Ukraine loan past 2027 should be a priority. In terms of funding Europe's own defences, loan-based instruments are politically more practicable as individual governments are responsible for repayment. The 2028–2034 EU budget could be a sizeable source of defence funding. The Commission has proposed allocating €131 billion to defence, security and space, though this figure could be reduced. Much will also depend on how much of this envelope would go to defence specifically, and what funding logic it would follow. Looking beyond the MFF, the idea of EU defence bonds remains a harder sell. Repayments fall on all Member States, and for many it is cheaper to raise and spend money nationally. Nevertheless, these concerns could potentially be overcome through mechanisms to tightly target spending at agreed priorities with clear added value for all Member States.

Second, EU funding can increase the efficiency of European defence spending by driving cooperation, reducing fragmentation and enabling projects that may otherwise not have been possible. A repeat of SAFE, if linked exclusively to joint rather than national procurement, could help drive cooperation more strongly. Other inducements aside from tightening eligibility criteria could include selecting fewer projects but with a higher financing rate and focusing funding on emerging areas where there are fewer established national industrial players. The key will be striking a balance between the criteria, the funding and the design of any future funding instrument. Forcing cooperation in large groups is likely to backfire, as modest financing cannot substitute for political alignment, shared threat perceptions and common capability priorities. Conversely, financing aimed at fostering the emergence of groupings with a shared vision is more likely to lead to concrete results.

Third, looking beyond the EU’s defence instruments to the Union’s broader toolkit and budget, the priority should be embedding defence considerations horizontally across EU instruments as much as possible. For example, any defence elements of a proposal should be taken into account as fully as possible when evaluating projects in areas such as innovation, regional policy, energy, digital connectivity or transport.

Leveraging the role of public financial institutions

Harnessing the role of public financial institutions should be a second priority. In recent years these have taken a growing role in funding defence, above all the European Investment Bank, but also other national promotional banks.

 

Historically, the EIB’s lending policy was limited to a “dual-use” framework. This began to change in 2022, when the EIB launched its Strategic European Security Initiative, and accelerated significantly from 2024, when the Bank broadened its eligibility criteria for security and defence investments. The EIB’s annual defence lending has rapidly grown, from €1.2 bn in 2024 to over €4 billion in 2025.

 

The EIB is involved in defence investment in four ways. First, the EIB supports defence R&D, providing loans to defence companies. Second, the EIB finances defence-related and dual-use infrastructure, including projects such a military base in Lithuania. Third, it strengthens the defence industrial base by supporting supply-chain finance and providing capital for companies operating in the security and defence ecosystem. Fourth, the EIB invests in venture-capital and private-equity funds supporting defence start-ups and SMEs through its €175 million Defence Equity Facility.

 

However, the EIB is not designed to finance ordinary defence procurement. Its shareholders also remain sensitive to maintaining the Bank’s AAA rating. While the EIB can help lower financing costs, it cannot replace national defence budgets or procure military equipment directly.

 

National public institutions

 

 National public institutions  could become a key source of support for Europe’s defence build-up. A key focus is R&D. For example, of the top-10 active investors in defence, security, and resilience in Europe in 2025 at (pre-)seed level, 6 were public entities.

 

Beyond R&D, national public banks have also supported industrial production and military procurement. For example, Germany’s KFW has partnered with the EIB and other banks to support drone manufacturer Quantum Systems in scaling production. Poland’s BGK, which operates the Armed Forces Support Fund, has raised capital to support the purchase of Korean K2 tanks.

 

Public banks also support dual-use infrastructure projects. For instance, in June 2025, the EIB agreed with France’s Caisse des Dépôts, Germany’s KfW, Italy’s CDP, Poland’s BGK and Spain’s ICO to explore potential joint financing for security and defence, including in infrastructure.

 

Fully harnessing the EIB’s potential should be a priority. There are obstacles to greater involvement of the Bank in pure defence, not least in terms of the level of risk in some defence investments which could put at risk the EIB’s AAA rating. Nevertheless, there is a strong case for the Bank to further expand defence lending. For example the EIB could help derisk investments in joint production by Ukrainian and European companies in the EU. More broadly, the EIB could take on a larger role in financing upgrades to critical infrastructure, including to support military mobility.

Explore joint borrowing mechanisms beyond existing frameworks

There is growing discussion of borrowing mechanisms beyond the EU framework. One reason is that finding agreement between a small group of countries could be easier than at 27, and it would also be easier to include non-EU partners such as the UK or Norway. Some options are already being explored. In March 2026, Finland, the Netherlands and the UK have announced that they are exploring a new defence financing and procurement mechanism aimed at driving joint procurement.

 

By July 2026, Poland had joined the initiative, now termed  Multilateral Defence Mechanism (MDM) . However, borrowing outside of the EU would mean that using the Union’s tested borrowing infrastructure would not be possible, which would complicate the debt issuance. Countries that can borrow more cheaply nationally may continue to question the value of such collective borrowing.

 

Another idea is the proposal to set up a  Defence Security and Resilience Bank (DSRB) . Such a bank would have defence as part of its core mandate and would therefore be freer than the EIB. However, governments would have to pay in the initial capital, adding to overall debt levels. Moreover, the added value of a new Bank may not be evident when compared to existing defence lending mechanisms such as the EIB. Still, the DSRB should be taken seriously. Indeed, the idea is gaining ground: in July 2026, Canada, Albania, Belgium, Greece, Latvia, Luxembourg, Romania, Türkiye and Ukraine announced their shared intention to establish the DSRB, with the aim of allowing it to begin operations as early as 2027. The DSRB could mobilise capital that may not otherwise be available, support projects outside the EIB’s comfort zone, and help bring together financing for defence-relevant infrastructure.

 

The MDM and the DSRB pursue the same broad objective as EU instruments: mobilising additional resources for European defence and making cooperative projects easier to finance. EU institutions could be associated with both mechanisms, helping align projects with EU priorities. The EU could also be a co-investor when this aligns with its own priorities. For example, EU grants could provide targeted top-ups, and Member States participating in MDM projects could combine these with SAFE-style loans, if projects meet EU eligibility criteria.

Mobilise private funding

The private sector is playing a growing role in supporting Europe’s defence ramp-up. Venture capital is a particularly important source of financing for emerging defence players. European defence start-ups are set to raise over €9 billion in 2026, a fourfold increase over 2025.

Data also suggests that the EU is attracting a larger share of defence venture capital funding, with the EU share across NATO, Canada, Australia and New Zealand rising from 13% in 2024 to 21% in 2026.

 
 

Aside from venture capital, the traditional banking sector also contributes to expanding Europe’s defence production capacity. A number of European banks, such as ING, Deutsche Bank and Danske Bank, have expanded their defence financing activities by expanding lending or setting up dedicated offices.  Banks  are often working alongside public financial institutions to fund defence. For example, in 2026 Commerzbank and Deutsche Bank joined the EIB and KfW in providing a €150 million financing package for German drone manufacturer Quantum Systems, supporting investment in technology, industrial capacity and organisational growth. Demand for defence-focused ETFs has also increased sharply. Assets in European-listed defence ETFs more than quadrupled to $13.57 billion during the first half of 2025. Flows into defence ETFs support valuations of listed companies, allowing them to raise capital more easily. However, they do not benefit unlisted companies.

 

NATO instruments are also helping to mobilise private investment. The  NATO Innovation Fund  is a standalone venture capital fund, backed by 24 countries in NATO. It has around €1 billion in committed capital, which it aims to invest over 15 years. The fund operates independently of NATO and its founding countries. It invests in cutting-edge science and engineering startups developing emerging and disruptive technologies (EDTs) in fields such as energy, materials science, AI, quantum computing, biotechnology, and space.

 

In parallel, NATO’s Defence Innovation Accelerator for the North Atlantic ( DIANA ) provides defence start-ups with limited funding (€11 million in 2025), as well as highly valuable access to test centres and military users.

 

The key challenge is mobilising  private capital  beyond venture funds with a high-risk appetite, looking for example to institutional investors such as pension funds, as well as private savers. Completing the Capital Markets Union would be an important step, as it would allow private savings across Europe to be more easily and smoothly mobilised for defence investment. Another priority is ensuring that the Commission’s December 2025 clarification of the EU sustainable-finance framework is consistently reflected in national practice, to ensure that there are no EU or national regulatory obstacles to large institutional investors such as pensions funds investing in defence.

 

There are limits to what private capital can do. Private capital can provide additional resources and momentum for Europe's defence ramp up. It can help promising defence investments get off the ground by allowing promising companies that struggle to access financing to secure funding, building prototypes and paying contractors down their supply chains. Private capital may also have a role in defence-relevant infrastructure, especially where projects generate long-term revenues. However, these companies will still struggle to sustain and expand their operations unless they secure contracts from governments. Ultimately the most useful thing that governments can do to better harness private capital is focusing on creating demand through long-term demand signals.

Conclusions

Europeans face a major fiscal challenge in sustaining and increasing defence spending. In reality the challenge is dual: on one hand governments need to sustain and expand defence spending; on the other Europe needs to mobilise the investment to strengthen its defence and secure its critical infrastructure.

When it comes to the first challenge, national budgets remain the core. However, they can be complemented by additional sources of finance. Additional EU level grants can provide genuinely new resources for defence. There is a strategic choice to be made in terms of how much grant style funding from the next EU budget goes to defence, and how much priority defence is given relative to other objectives. At the same time, new SAFE style loans can allow Member States to spend more by leveraging the EU’s collective credit rating to borrow more cheaply. Lending from the EIB and national promotional banks can finance specific projects and take some pressure off government budgets. Novel mechanisms such as the Multilateral Defence Mechanism and the Defence, Security and Resilience Bank could allow for cheaper government borrowing by harnessing the credibility of a broad group of governments and facilitate joint procurement. However, all loans taken out by governments will still add to government debt levels.

Meeting the industrial and resilience challenge is different. If governments provide credible long-term demand, this can crowd in investment by public and private banks and private investors, allowing defence companies to invest in R&D, industrial expansion and so on. The surge in VC capitals shows that investors crowd in where they see a growing market. In the same way, government policy and public funding can also crowd in private investment to help make Europe’s infrastructure more resilient and fit to deter an adversary. All this is helpful to Europe’s broader defence ramp up, and takes some of the burden of defence investment off governments. However, private finance does not itself help governments maintain larger budgets or avoid difficult choices.

Ultimately, Europe's defence surge will be sustained by national budgets. But Europeans should not shy away from drawing on the full range of defence financing tools at their disposal to reinforce national spending and amplify its impact.