The EU is shifting its spending priorities from greening the economy to investing in defence, as the bloc faces backlash over climate regulation and grapples with Russia’s war in Ukraine.
Faced with tightening national budgets, member states have reduced a common fund designed to spur innovation in the bloc from €10bn to €1.5bn — and have ensured that it can only be used for defence-related projects, not green technology or other climate-related investments. The European Investment Bank, the world’s largest lender that labelled itself the “climate bank” in 2019, is also under pressure to fund more projects in the arms industry.
After the Covid-19 pandemic “there was a huge focus on green and digital”, said Belgian finance minister Vincent Van Peteghem. “Now . . . we see that focus shifting a little bit away.”
While the green transition was still a priority, and the bloc’s unprecedented €800bn post-pandemic recovery fund available until 2026 was in part covering that financing need, there was a new focus on “strategic autonomy, competitiveness and defence”, said Van Peteghem, and “how we’re able to finance that in the coming years”.
The shift in priorities towards defence is exemplified by the European Sovereignty Fund announced in 2022 that was supposed to boost spending in areas including green and cutting-edge technology as part of the bloc’s response to the US’s nearly $800bn Inflation Reduction Act.
When she first spoke about the fund, European Commission president Ursula von der Leyen said its goal was to “make sure that the future of industry is made in Europe”.
But during the last EU summit, which took place in December, leaders signalled they would only agree to an extra €1.5bn for defence, after the commission had pushed for a “strategic technologies platform” (STEP) worth €10bn, which would have included investments in low-carbon technologies and scientific research projects.
The final amounts are still under negotiation with the European parliament, which is trying to increase spending for green tech and research.
STEP was already a more modest version of the sovereignty fund, as it was only designed to top up existing programmes, rather than create a new dedicated financing vehicle based on joint debt.
Under the commission’s proposal, the €10bn overall top-up would have included €3bn for InvestEU, an investment scheme designed to provide guarantees for sustainable projects; €500mn to the science and research programme Horizon Europe; €5bn to the Innovation Fund, which targets low-carbon technologies; and €1.5bn for the European Defence Fund, which backs research in the defence sector.
Jules Besnainou, executive director of the industry group Cleantech for Europe, said discussions over how the EU financed its ambitious climate policy had “gone out of the window”.
“STEP was already wildly insufficient for the things we are talking about here. The fact that this is not working out is super worrying,” he said.
The fate of STEP has run in parallel to a recent commitment from the EIB to put €8bn towards “investments that will boost European security”, according to the bank, despite core defence projects such as military equipment or weaponry being on its list of banned investments.
The bank has faced increasing pressure in recent months to loosen its lending policy on defence. This month it announced the launch of a €175mn “Defence Equity Facility” together with the commission to provide venture capital to small and medium-sized enterprises and start-ups making innovations in defence and security technology.
Wopke Hoekstra, the bloc’s climate commissioner and a former Dutch foreign minister, said areas that required “significant investments” included defence, climate action and artificial intelligence. On defence, he noted that countries were “stepping up, and rightly so, and we haven’t seen the end of it”.
Leaders of the 27 member states are due to meet on Thursday to try and give approval to a €50bn macro-financial support package for Ukraine, which is being blocked by Hungarian Prime Minister Viktor Orbán.
EU countries are also discussing the financing of further military aid for Kyiv amounting to €5bn per year under a separate fund, the European Peace Facility, with a decision expected by March. Brussels is debating how the EPF, which has already reimbursed EU capitals for nearly €6bn worth of weapons they sent to Ukraine, can be recalibrated to also finance arms production.
EU countries have struggled to increase domestic production of ammunition and other armaments to replace what has been so far provided to Ukraine, and are likely to miss a self-imposed target of producing 1mn artillery shells a year by March.
In a joint letter to the FT, the leaders of Germany, the Netherlands, Denmark, Estonia and the Czech Republic describe the need to speed up arms supplies as a “question of life and death” for the Ukrainian forces.
Climate-related spending needs remain high, with Brussels estimating that cutting greenhouse gas emissions by 90 per cent by 2040 would require yearly investments of €1.5tn, according to draft assessments seen by the Financial Times.
Diplomats also fear that investments in greening the economy are likely to plummet after 2026 when the recovery fund runs out, with capitals including Berlin having made clear that the unprecedented joint borrowing was a one-off. Under the €800bn package, countries must spend 37 per cent of their share on climate objectives, but diplomats said that its end could prompt a sudden halt in spending.
A revision of EU rules on government debt levels, intended to allow them fiscal headroom to invest in priorities such as climate change, has similarly been tweaked during negotiations to allow defence spending as a mitigating factor should a country breach a 3 per cent annual deficit threshold.
Green infrastructure spending has not received the same treatment under the rules, which are still being discussed.
“In the discussion on fiscal rules what you see is the comeback of bad old habits of austerity,” said Philippe Lamberts, an MEP and co-president of the Greens. “What I see is Europe shooting itself in the foot big time.”
Frauke Thies, executive director of the think-tank Agora Energiewende, said at an event last week that the context for green policy was now “very different” to when Brussels first proposed its Green Deal climate law in 2019.
“We are in a situation of a battered economy and budget constraints. We have security issues. We have geopolitical conflict, competitiveness concerns. And finally it’s a big question of societal challenges, public acceptance.”
