Europe’s Defense Dilemma

By Stefan Koopman, senior macro strategist at Rabobank

First 100 Days

Franklin Roosevelt was the first to mark the symbolic importance of “the first 100 days”, reflecting on his early progress toward the New Deal. In the EU’s case, the first 100 days of a new administration often define the agenda as well. The focus is now fully on competitiveness through strategic autonomy – following up on the recent the Letta and Draghi reports.

On defense, the urgency is evident. The escalating risk environment has pushed European nations to increase defense budgets after decades of underinvestment. However, bridging the gap will take years. Commission President Von der Leyen estimated that Europe needs EUR 500bn in extra defense investment just to catch up. And beyond sheer spending, the EU also wants to pursue efficiencies: greater coordination on what this money will be spent on, while also addressing the highly fragmented and national European defense industry.

Against this backdrop, the Financial Times reports that EU Defense Commissioner Kubilius has proposed a joint borrowing mechanism for military spending. This plan would help finance the bloc’s EUR 500bn target. However, there’s less to it than the headlines suggest. While the proposal helps to streamline funding, its scope and impact may disappoint. The mechanism merely enables and frontloads borrowing, while the funds must still be repaid by individual member states. It neither provides grants, nor does it guarantee EUR 500bn in additional spending, undercutting the headline’s ambition.

Structurally, the proposal faces familiar hurdles. Any joint borrowing initiative would likely encounter resistance from fiscally conservative states, even though this setup seems to revolve around a coalition of the willing and could also include non-EU countries, such as the UK. Still, unanimity remains a significant challenge, as it will likely mean that each disbursement needs to be approved by national parliaments, including the Bundestag. This echoes previous issues with EU-wide ‘borrow-to-lend’-schemes such as the EFSF and the ESM.

There’s also the strategic challenge. Coordinating cross-border defence projects requires shared priorities and operational alignment, which the EU often struggles with. While discussions on project financing may foster some coordination, national interests could still dominate as long as the fund can’t provide grants. If the fund only reduces borrowing costs for some member states but still adds to all member states’ own debt levels, countries will prioritize their own spending choices.

Meanwhile, as Kubilius floated his trial balloon, his boss Von der Leyen traveled to Uruguay. Reports indicate that she is set to finalize the EU-Mercosur trade deal today. This would mark the EU’s largest trade agreement in terms of population and trade volume. The agreement, 25 years in the making, appears poised for completion just two days after the collapse of the French government, giving Von der Leyen a strategic moment to bypass France’s long-standing objections. France remains firmly opposed to the deal and is actively seeking to form a blocking minority to prevent its ratification, despite the new market opportunities it offers Europe at a time when US President-elect Donald Trump is threatening a 10% tariff on EU goods. Additionally, the EU cannot pursue its strategy of de-risking and diversifying away from China without opening new markets in other economies. In this context, an EU-Mercosur deal represents the EU’s best opportunity to align the continent with its own regulatory framework rather than China’s.

Elsewhere, OPEC+ has once again delayed the revival of its oil production, marking the third deferral as crude prices struggle amid a looming surplus. This latest delay pushes the return of the halted 2.2 million barrels to September 2026, a full year later than initially planned when the roadmap was announced in June. This move underscores how much weaker the oil market has turned out to be compared to OPEC+’s initial expectations. The decision to add some barrels in the first half of next year has been perceived as mildly bearish, with the first Brent contract now hovering at USD 71.8/bbl. Despite this, the market remains rangebound, with crude prices trading well within the 6-dollar band seen since mid-October.