Introduction
Defence budgets across Europe are rising. Russia’s war of aggression against Ukraine, combined with doubts over the future of US security guarantees, has 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, including expanding defence production capacity, investing in R&D and making European infrastructure more resilient to possible sabotage or attack.
Europe’s defence financing instruments can all play a role in meeting these challenges. This landscape has grown increasingly 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 analysis maps the landscape of European defence financing and assesses the growing number of proposals to strengthen and expand this ecosystem, such as a potential new round of funding under the EU’s Security Action for Europe (SAFE) instrument 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 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 expenditure has grown, so has the range of funding streams 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 following sections set out four priorities for sustaining 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 source 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 appealing for defence companies and Member States.
The EU is already contributing significant resources to European defence expenditure, both in terms of strengthening Europe’s defences and supporting Ukraine.
Beyond these defence-specific instruments, other EU instruments also indirectly contribute 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 otherwise have 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 using 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 in some form is likely to be necessary. In terms of funding Europe’s own defences, loan-based instruments are politically more feasible as individual governments are responsible for repayment. A new round of funding under SAFE would be a powerful way to mobilise additional resources for Europe’s defence build-up.
The 2028–2034 EU budget could also be a sizeable source of defence funding. The Commission has proposed allocating €131 billion to defence, security and space, although 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 Multiannual Financial Framework (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. Linking a new round of SAFE funding more closely to joint rather than national procurement would further strengthen incentives for cooperation. Inducements aside from tightening eligibility criteria could include selecting fewer projects, each 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 eligibility criteria and the funding on offer. The structure also matters. Forcing large groups of countries to cooperate is likely to backfire, as modest financing cannot substitute for political alignment, shared threat perceptions and common capability priorities. Financing aimed at fostering the emergence of groupings with a shared vision is more likely to lead to concrete joint projects.
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-related 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 institutions have played 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 purely defence-related projects, not least in terms of the level of risk in some defence investments which could jeopardise its 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 reaching agreement among a small group of countries could be easier than reaching agreement among all 27 Member States, and it could 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 announced that they were exploring a new defence financing and procurement mechanism aimed at driving joint procurement(8).
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 to coordinate projects. 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, four times as much as in 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 innovative companies that struggle to access financing to secure funding, building prototypes and paying contractors along 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 to focus on creating demand by providing clear, long-term signals about future defence needs.
Conclusions
Europeans face a major fiscal challenge in sustaining and increasing their defence spending. In reality, the challenge is twofold: on one hand governments need to maintain 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 other 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 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. Meanwhile, 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 facilitating 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 funding for defence shows that investors respond when they see a promising market. In the same way, government policy and public funding can attract private investment to help make Europe’s infrastructure more resilient and therefore fit to deter adversaries. 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 in 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.
1. European Innovation Council, ‘EIC 2026 Work Programme’, amended 17 June 2026 (https://eic.ec.europa.eu/eic-funding-opportunities/eic-2026-work-programme_en).
2. See for example: European Investment Bank, ‘Indra Group to step up research and development of defence and space technologies with €385 million in EIB financing’, 15 July 2025 (https://www.eib.org/en/press/all/2025-288-spanish-company-indra-group-to-step-up-research-and-development-of-defence-and-space-technologies-with-eur385-million-in-eib-financing).
3. European Investment Bank, ‘EIB backs new military base in Lithuania with €540 million loan’, 20 June 2025 (https://www.eib.org/en/press/all/2025-249-eib-backs-new-military-base-in-lithuania-with-eur540-million-loan).
4. European Investment Bank, ‘EIB triples financing for banks to provide liquidity to SMEs in the supply chain of Europe’s defence industry, signs first deal with Deutsche Bank’, 11 June 2025 (https://www.eib.org/en/press/all/2025-236-eib-triples-financing-for-banks-to-provide-liquidity-to-smes-in-the-supply-chain-of-europe-s-defence-industry-signs-first-deal-with-deutsche-bank).
5. European Investment Bank, ‘Quantum Systems secures new European financing package to scale the future of unmanned technologies’, 12 February 2026 (https://www.eib.org/en/press/all/2026-057-quantum-systems-secures-new-european-financing-package-to-scale-the-future-of-unmanned-technologies).
6. Bank Gospodarstwa Krajowego (BGK), ‘BGK secures international financing for modernisation of Polish Army’, 29 December 2025 (https://www.en.bgk.pl/news/details/bgk-secures-international-financing-for-modernisation-of-polish-army-1/).
7. European Investment Bank, ‘European promotional institutions and EIB join forces to support EU security and defence’, 6 June 2025 (https://www.eib.org/en/press/all/2025-233-european-promotional-institutions-and-eib-join-forces-to-support-eu-security-and-defence).
8. HM Treasury, ‘Joint statement from Finland, the Netherlands, and the United Kingdom on joint defence financing and procurement’, 17 March 2026 (https://www.gov.uk/government/news/joint-statement-from-finland-the-netherlands-and-the-united-kingdom-on-joint-defence-financing-and-procurement).
Explore the financing landscape
