Europe proposes using euro zone crisis fund for defence

The European Stability Mechanism (ESM), a euro zone rescue fund with more than €430 billion ($514 billion) in lending capacity, could be mobilised to provide loans for defence spending as Europe seeks to reinforce its military capabilities, the fund’s managing director told Reuters.

Pierre Gramegna said the ESM could offer credit lines specifically for defence purposes without imposing stringent economic reform conditions, partly to dispel any stigma associated with requesting support from the emergency fund.

“In these times of geopolitical turmoil, which have triggered higher expenditure, defence costs for all countries, we must use the full potential of the ESM,” Gramegna said.

He pointed to the possibility of extending defence-related credit lines to countries with sound public finances whose budgets are nevertheless under strain, particularly smaller euro zone member states.

“We have instruments,” he said. “It is in the best interests of Europe … to use the full potential.”

Gramegna also highlighted growing strains in transatlantic relations, noting that “it is obvious that the relationship between Europe and the United States is becoming more and more bumpy.”

Any such financial support would carry strong symbolic weight, repurposing a fund created at the height of the euro zone debt crisis to prevent the collapse of national economies and banks and to shore up the single currency.

US President Donald Trump’s increasingly confrontational stance toward Europe has pushed EU leaders to search for alternative means of defending the continent against Russian aggression. Gramegna’s remarks suggest openness to deploying Europe’s substantial financial reserves to strengthen euro zone states, particularly the Baltic countries bordering Russia, though any loans would still require approval from the 21 euro zone members backing the ESM.

Only countries using the euro would be eligible for such loans, excluding non-euro members such as Poland. Defence is not explicitly mentioned in the ESM’s mandate, and any shift in focus would require unanimous consent from member states, including militarily neutral countries such as Austria, Cyprus, Malta, and Ireland.

Europe’s push to bolster its defences—four years after Russia’s full-scale invasion of Ukraine—has gained fresh urgency since Trump threatened trade tariffs against countries rejecting his claim over Greenland, a Danish territory.

Gramegna hinted at a renewed role for the ESM, which was established during the debt crisis to support countries such as Greece but has since become largely dormant.

“It is one of our instruments,” he said, referring to the possible use of precautionary credit lines for defence. “It’s available. We need to rediscover the potential of that instrument.”

“You need to guarantee that this facility … has to be used for defence expenditure,” he added, stressing that it would not be accompanied by harsh conditions. “The whole goal here is to avoid that this type of tool is combined with restructuring of the economy.”

His comments revive a proposal for a “defence support line” previously floated by former Italian prime minister Enrico Letta, which would allow countries to borrow up to 2% of their economic output at low interest rates for defence purposes.

Gramegna’s idea mirrors an ESM crisis support scheme worth up to €240 billion that was created during the COVID-19 pandemic to help countries finance healthcare spending, though that facility ultimately went unused.

The Baltic states—Lithuania, Estonia, and Latvia—could be among the main beneficiaries. Since Russia’s invasion of Ukraine, they have nearly quadrupled defence spending to around 5% of economic output, financing much of the increase through borrowing.

The three countries, which border Russia and its ally Belarus, have also experienced a growing number of sabotage incidents that law enforcement agencies attribute to Russia.

They have already borrowed billions of euros under the EU’s oversubscribed SAFE loan scheme, through which the EU jointly raises funds on financial markets to lend to member states at cost for defence projects. Support from the ESM would operate along similar lines.

If structured like the pandemic-era facility, the loans could carry significant weight. Estonia’s gross domestic product stood at roughly €40 billion in 2024, meaning 2% would amount to less than €1 billion.

Gramegna said countries could submit “collective requests,” a mechanism designed to avoid any stigma associated with seeking ESM assistance. “The impetus has to come from the member countries,” he added.

By Vafa Guliyeva