Europe Must Forge 'War Economy' Amid Shifting US Support

Highlights

• Europe can no longer rely solely on US security guarantees and must develop its own defense capabilities.
• Despite a new 90 billion euro loan to Ukraine, internal divisions within the EU persist regarding Russia sanctions.
• Frozen Russian assets are seen as a potential funding source for increased European borrowing for defense.
• Europe must exert stricter control over its economic ties with Russia and address firms circumventing sanctions.
• The continent aims to lessen its dependence on US foreign policy and build mutually beneficial partnerships.

Details

For over four years, the conflict on Europe's border has been a persistent concern for policymakers. Initially viewed as a distant threat, it is now recognized as undermining the continent's fundamental stability. Russia's aggression has devastated parts of Ukraine, and the broader challenge for Europe extends beyond the battlefield, testing its economic resilience and political unity. With US President Donald Trump reportedly seeking to impose a disadvantageous settlement on Kyiv and threatening to withdraw American backing, Europe faces the prospect of bearing a greater share of the burden independently.

The past four years offer insights into how Europe might finance such an undertaking, alongside warnings about potential internal rifts. The European Union has been pivotal in recent Ukrainian financing, contributing 18.1 billion euros to the G7's 50 billion dollar Extraordinary Revenue Acceleration loans in 2024, and finalizing a 90 billion euro loan this April without US involvement. However, disagreements persist, particularly concerning measures to constrain Russia. While the EU recently approved its most extensive round of sanctions, these largely expanded existing designations rather than broadening the scope of restricted activities or accelerating the reduction of Russian energy imports, with pipeline gas imports still permitted until autumn 2027.

A crucial initial step involves establishing a permanent framework for joint EU borrowing. This mechanism would not only fund Ukraine's ongoing defense but also bolster the European defense industry, essential for the continent's self-defense and, if needed, for countering future Russian threats. The COVID-19 pandemic demonstrated Europe's capacity for innovation, as member states overcame previous hesitations regarding shared debt to create the 750 billion euro NextGenerationEU recovery fund in 2020. Extending this approach to wartime finance through initiatives like the EU's contribution to the ERA loans and this year's 90 billion euro facility, both financed by common EU borrowing, underscores this logic.

Why it matters

Europe's ability to finance its own security will significantly strengthen its geopolitical standing by reducing reliance on US support. Joint borrowing and investment in a robust defense industry will enable the continent to provide sustained aid to Ukraine and enhance its own defensive capabilities. This approach is fundamental to building a more resilient Europe against future threats and offers the potential for more effective economic pressure on Russia. However, achieving these goals will require overcoming internal EU divisions and demonstrating a unified political will.