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
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:
- Fully exploiting the EU’s potential;
- Leveraging public financial institutions;
- Exploring joint borrowing beyond the EU;
- 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.
Beyond these defence specific instruments, other EU instruments are also indirectly contributing to providing additional resources.
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.
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.
National public institutions
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.
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.
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.
