Since Russia’s full-scale attack on Ukraine in February 2022, the geopolitical nightmare constellation for Europe has been solidifying at a rapid pace. Europe will not have significant influence on the outcome of the war, but it will have to pay for its consequences in full, be it through its own rearmament, taking in refugees, the economic consequences or the costs of reconstruction.
At the same time, pressure on Europe is increasing from almost all sides: China is doing everything it can to eliminate US and Western dominance in global issues and is heading a coalition that includes Russia, Iran, and North Korea as well as a growing number of anti-Western states in the so-called Global South. Meanwhile, Beijing is an increasingly aggressive economic competitor, with little or no concern for the rules of global trade.
Europe also does not have significant influence on what is happening in the Middle East. This is despite the fact that the situation on the ground is having a major impact on Europe, polarizing domestic politics, and making anti-Semitism acceptable again far into the center of society.
In addition, the question of how to curb unregulated immigration to Europe remains unanswered in terms of domestic and foreign policy, while the causes of flight in the Sahel, the Middle East, and Central and South Asia are worsening rather than improving.
And finally, Donald Trump’s return to the White House threatens the at least partial loss of American protective power, which cannot be easily replaced when it comes to conventional and nuclear security in Europe, along with a multitude of trade conflicts and diplomatic disputes with which Trump has repeatedly threatened Europeans.
Not Wanting to and Not Being Able to
For a long time, Europe’s foreign policy weakness in the face of these developments could mainly be dismissed as a lack of political will. The European Union member states, with their small-minded parochial thinking, ultimately had no interest in a powerful joint presence with “one voice.” Dependence on the US in terms of security policy had led Europeans to form a soft, weak-willed, and naive subsidy mentality, the peace dividend after 1989 had been more important than the public good security and, in any case, the end of history was eagerly awaited, not land grabs and war crimes on a grand scale.
All of this is true and bad enough. But more than 10 years after the annexation of Crimea, eight years after the warning shot of Trump’s first term in office, and almost three years after Russian President Vladimir Putin’s full-scale invasion of Ukraine, it is now also becoming clear that there is not only a lack of political will for a real turnaround in Germany and Europe. There is also a lack of money. It is no longer just a question of not wanting to. Now it’s also about not being able to. To put it bluntly: Europe is broke at the very moment when it is facing its greatest security challenge since the end of the World War II.
Massive Investment Requirements
The level of investment required to guarantee Europe’s own security, to project European power regionally and globally, and to even come close to meeting the major powers on an equal footing is enormous. There is a lack of satellite networks for Europe’s own reconnaissance and for real-time global operations. There is a lack of military innovation in artificial intelligence, drones, and integrated, data-supported warfare. Quantity and quality are lacking, as are air defense systems, strategic transport capabilities, offensive cyber capabilities, and excellence in intelligence. There is not enough personnel and material to achieve NATO’s long-term goals, which require reserves and the ability to constantly expand. And this is only on the military side. Other aspects of overall national security and social resilience also need to be considered.
The increases in defense budgets that Europe has seen consistently since 2014 cannot even come close to reaching the required volume. But where will the additional money come from? Major economic growth that fills the tax coffers will not be able to close the gap in the foreseeable future. Although not all European economies are growing at the same rate as Germany (forecast for 2025: 0.1 percent), Europe’s long-term growth rates are significantly lower than those of the United States or China, for example.
Hardly Any Room for Maneuvers
At the same time, the debt levels of important European countries have reached a point that makes massive new borrowing for defense (or for any other purpose) inauspicious. France’s debt level at the end of 2024 is 112 percent of gross domestic product, which, combined with a government deficit of -6 percent caused the crisis surrounding the 2025 budget that ultimately led to the collapse of the French government of Prime Minister Michel Barnier in early December. Budgetary leeway in France is extremely tight. There is no room for quantum leaps in security and defense policy.
The situation is similarly dramatic in Italy, where the national debt is around 137 percent of GDP. A lower deficit of -4 percent and a stable majority for Prime Minister Giorgia Meloni’s government, coupled with predictable budget management, are still saving Italy from a debt crisis. However, without the EU’s multi-billion-euro coronavirus aid funds (NextGenerationEU), from which Italy is still benefiting, the situation would be less stable and so the signs in Italy are pointing more toward austerity than expansionary fiscal policy.
The United Kingdom, which is no longer a member of the EU but a central part of the European in NATO, is also in huge financial difficulties. Here, too, the national debt exceeds the total volume of annual economic output (101.3 percent), and the new Labour government of Prime Minister Keir Starmer was only able to afford taking on new debt for 2025 by significantly raising taxes and at the same time reducing government spending, i.e., visibly countering debt with fiscal discipline. Overall, however, the necessary steps that the strategic situation demands are not really possible in the UK either.
All Eyes on Berlin
That leaves Germany as the largest European economy. The rest of Europe envies Germany for its comparatively healthy public finances. The debt ratio is only just under 63 percent, with a downward trend. The deficit of -2 percent is well within the European deficit criteria. In theory, therefore, Germany would have considerable scope to increase its debt, which is also the reason why the whole of Europe is looking to Berlin and hoping for clear fiscal policy signals from the German government.
However, the constitutional “debt brake” prevents a quick route to new debt. Even the special fund for the Bundeswehr worth €100 billion could only be set up outside the regular budget (and therefore outside the debt brake) with a constitutional majority. In addition, the money borrowed for this purpose will have to be repaid which, in turn, will burden the regular federal budget with interest and redemption payments.
In terms of domestic policy, the opposition Christian Democrats (CDU/CSU) as well as the pro-business Free Democrats (FDP), who until recently were members of the ruling coalition, are the advocates of the debt brake, and Chancellor Olaf Scholz of the center-left Social Democrats (SPD) has also repeatedly backed his then Finance Minister Christian Lindner (the FDP leader) in defending the debt brake. Where in other countries the already precarious financial situation is slowing down new borrowing, in Germany domestic policy is the most important hurdle. The culture of the “Swabian housewife” with her solid finances is by no means just an outmoded cliché, but rather the preferred basic conviction of many voters that cannot simply be ignored.
If you can’t take on debt, you have two other options to increase your fiscal firepower: raise taxes and cut spending, as Starmer has done. However, tax increases not only have the disadvantage of being extremely unpopular politically, they also harm growth prospects because they deprive citizens and companies of capital.
Is Redistribution Sustainable?
And so, you end up with the most difficult part of the strategic fiscal puzzle: making savings. If you have hardly any growth, can’t get into debt, and don’t want to raise taxes, you have to spend less. This is the fiscally conservative credo of CDU leader Friedrich Merz, who has a good chance of becoming chancellor after the February 2025 elections, and also of Christian Lindner, who repeatedly insisted before the failure of the SPD-Greens-FDP coalition that Germany does not have a revenue problem but a spending problem. If they had their way, Germany could free up considerable funds (for example for defense or support for Ukraine) by cutting less productive expenditure elsewhere.
There are two objections to this: Firstly, even maximum budget savings could probably not generate the volume that would be needed in the long term for a genuine strategic upgrading of the country.
Secondly, massive austerity would also lead to major political conflicts with all those from whom something would be taken away—clashes over allocation that would entail the potential for crises both for governments and for the social and political peace in Germany.
What these divisions would look like in Germany could be predicted with some certainty. After all, the largest pots of money that the government can dispose of at its own discretion without being fully legally bound are social spending and the defense budget. Unlike in the US, a spending practice has become entrenched throughout Europe over many decades in which social spending is three to four times larger than the defense budget.
In theory, this ratio could be shifted in favor of the military, but it is highly doubtful whether a government would electorally survive a significant shift at the expense of the welfare state. The entitlements are too entrenched and all generations of politicians since the 1950s have been too socialized in this basic political constellation for it to be touched.
Anyone who wanted to break these dependencies would have to reckon with considerable resistance, not to mention the loss of reputation as a heartless commissioner of austerity without a social conscience. At the beginning of 2024, German farmers impressively demonstrated what happens when a well-organized social group is to be deprived of financial benefits that it considers to be its natural assets. The cuts planned by the federal government were largely withdrawn after a few weeks of militant farmer protests. Similar actions have also taken place in other European countries. Redistribution does not appear to be a promising way out of the fiscal squeeze.
The EU as a Last Resort
But what can be done when neither growth, nor debt, nor taxes, nor spending cuts are on the agenda? The last resort for European states that are no longer able to act on their own is the EU. For many years, some member states, led by France, have wanted to make common borrowing a regular means of European budgetary policy. Some of them want to achieve this through the introduction of EU bonds, also known as eurobonds, as a general source of finance, while others only want to introduce them for specific and temporary projects.
They agree on using the creditworthiness of the entire EU in this way to overcome the compromised financial standing of individual member states on the capital market. The EU should leverage itself in such a way that it becomes more than the sum of its parts. This approach worked once before during the COVID-19 pandemic, when the EU used the emergency mechanism under Article 122 of the Treaty on the Functioning of the EU (TFEU) to collectively raise funds for the recovery fund—funds that are still being distributed according to precisely defined plans and have not even come close to being used up.
In November and December 2024, the team of Commission President Ursula von der Leyen, who had just been confirmed in office, worked with the European Council and the member states on a comprehensive EU aid package for Ukraine, which was to be generated at short notice in this way (while at the same time drawing on other existing EU reserve funds) in order to send a powerful strategic signal to Washington and Moscow before the re-elected US President Trump took office: we will not abandon Kyiv, even if America’s support dries up.
However, there is also considerable resistance to this form of financing within the EU, which cannot be easily circumvented due to the unanimity required for these issues. It’s true that the concerns of the “frugal” member states, which traditionally include Germany, the Netherlands, and Denmark, have diminished in view of the difficult situation in Ukraine. But even if such a package were possible for Ukraine, the prospects of this instrument creating permanent access to extensive new budget funds for the EU are slim.
The Big Policy Change
The bottom line is that nobody knows exactly where the money is supposed to come from that would enable Europe to survive in the big game of the emerging world order. In the end, redistribution, new taxes, and higher debt would only be tools that can accompany, but not replace, the policy change that is actually needed, one that works toward significantly increasing growth and greater competitiveness in Europe.
To achieve this, labor and energy costs would have to be reduced, bureaucracy and regulation would have to be seriously cut back, a functioning migration policy would have to attract top performers and skilled workers to Europe, education, research, and innovation would have to be significantly improved, incentives for longer working hours and more women in the workforce would have to be created, the industrial revolution through artificial intelligence would have to be fully embraced and a banking sector consolidated in the Capital Markets Union would have to grant easier loans to risk-taking entrepreneurs.
The former head of the European Central Bank, Mario Draghi, pointed the way in his recently presented Draghi Report—and also quantified the investments required for this, at up to €800 billion.
Can the EU, can the Europeans achieve such a feat? And can they do so together, in a coordinated manner, and without major delays in order to have a significant impact on income in the near future, not just the distant future? Anyone who remembers the failure of the Lisbon Strategy adopted a quarter of a century ago, which aimed to make the EU the most competitive economic area in the world by 2010, will have their doubts. Exactly the opposite has happened: Today, Europe’s crisis is largely a crisis of competitiveness.
The timeless laws of political and military power have not been suspended. Economic might, access to resources, and population size remain decisive factors. The strength that enables powerful defense and, if necessary, robust enforcement of one’s own interests must be paid for. And it can only be paid for by those who generate prosperity. The fiscal is strategic.
When a new German government is formed in the spring and a new coalition agreement is negotiated, it will ultimately also be a question of following this logic, which has once again become existential. Whether the parties and their leaders have truly understood the dimensions of what is at stake, will be determined by whether they are able to achieve a major breakthrough in an extremely tense situation or remain stuck in tactical, party-political pettiness.
Jan Techau is Director of Europe at the Eurasia Group, based in Berlin.
