Vulcan View: The latest EU developments 17 February – 21 February

EU faces defence spending dilemma as US support wavers 

European leaders are confronting a pressing dilemma: how to fund a significant surge in defence spending amid rising security threats and waning U.S. military support. With the U.S. signalling potential cuts to aid for Ukraine and President Trump urging European nations to allocate 5% of their GDP to defence, the EU must find ways to mobilise an estimated €500 billion in additional defence investments over the next decade. Policymakers are now exploring options such as revising budgetary rules, issuing common debt, and reallocating existing funds to meet this challenge.

Revising budgetary rules

Speaking at the Munich Security Conference on Sunday (16 February), European Commission President Ursula von der Leyen proposed invoking an escape clause of the Stability and Growth Pact to exempt defence spending from the EU’s strict budget deficit limits. This idea has gained traction in high-debt countries like Italy, Greece, and Spain, which view it as essential for freeing up resources.

This approach has sparked disagreement. German Chancellor Olaf Scholz supports exempting defence spending above NATO’s 2% GDP target but has hesitated to endorse the emergency clause fully. His likely successor, Friedrich Merz, is expected to clarify Germany’s stance after the upcoming elections.

However, Polish Finance Minister Andrzej Domański stressed the importance of national control over defence budgets, cautioning against centralising power in the Commission. “We may not have precisely the same view [as the Commission] on how this [defence boost]” he said, advocating for adjustments to existing fiscal rules rather than new EU-wide measures.

Common borrowing

Issuing joint EU debt to fund defence has further divided member states. Spanish Finance Minister Carlos Cuerpo has championed the proposal, calling it a “no-brainer” and pointing to the success of the Next Generation EU fund. Greek Prime Minister Kyriakos Mitsotakis reinforced this view, stating that he anticipated a European joint borrowing facility “to pick up steam quickly”. However, fiscally conservative nations like the Netherlands remain sceptical. Dutch Finance Minister Eelco Heinen dismissed the idea, stating, “More common debt is not the way forward”. In his view, budget cuts in other areas should compensate for this defence spending.

Repurposing Funds

Moreover, the European Commission is considering reallocating unspent pandemic recovery funds to avoid resistance to joint borrowing. The Commission has suggested redirecting up to €93 billion from the Recovery and Resilience Facility (RRF) to defence, though this has sparked mixed reactions. While some see it as a practical short-term solution, others worry about the legal and political implications of altering the fund’s original purpose.

Cohesion funds, typically used for regional development, have also emerged as a potential source of defence financing. The Committee of the Regions is open to the idea if it can be considered a “regionally focused funding”. European Council President António Costa supported it arguing that military investments could spur local economic growth, saying: “New investments into defence can also create jobs and develop our regions, our cities, our communities. New investments into defence will mean more territorial integration, more regional development, more employment”.

Finally, EU High Representative Kaja Kallas highlighted the tough choices ahead, telling Bloomberg: “It requires still very painful decisions from member states. I think it’s an illusion if we think that we can just do this without reallocation of resources or reprioritising.” In addition, she affirmed that common borrowing was still “on the table” to be discussed among EU leaders.

Conclusions

As geopolitical tensions rise, the urgency for a unified defence financing strategy grows. However, internal divisions persist, particularly among Eastern European nations concerned about bearing additional financial burdens without immediate security guarantees. The path forward remains uncertain while EU finance ministers prepare for critical negotiations. Although there is general support for increasing defence spending, the methods are hotly contested. The coming months will be pivotal in determining whether Europe can overcome its differences and forge a unified strategy to meet its defence ambitions.

EU approves 16th sanctions package amid US-Russia talks 

On Wednesday, 19 February, EU ambassadors reached an agreement on the 16^th sanctions package against Russia. The formal adoption is anticipated on Monday, 24 February. European Commission President Ursula von der Leyen and EU High Representative Kaja Kallas have expressed their support for the package. President von der Leyen stated, “The EU is clamping down even harder on circumvention by targeting more vessels in Putin’s shadow fleet and imposing new import and export bans.” Meanwhile, Kallas emphasised the EU’s commitment, sharing that “the Kremlin won’t break our resolve.”

The latest sanctions package includes:

• A phased ban on primary aluminium imports. This import ban will be phased in a year from the official adoption of the package.
• Restrictions on 13 banks, 48 individuals and 35 entities aiding Russia’s offensive against Ukraine. This loss includes both asset freezes and travel bans.
• Expansion of the blacklist of tankers operating within Russia’s shadow fleet. Any vessel identified as part of this fleet is prohibited from accessing EU ports and services.
• Restrictions on the sale of video game consoles, joysticks and flight simulators. These may be used by Russia’s military to control drones.
• A ban on exports of chromium and certain chemicals as well as a service ban for oil and gas refineries.

The development comes as U.S. President Donald Trump initiates negotiations with Russia, notably without European representation at the table. The four-hour meeting in Saudi Arabia consisted of Russia hardening its demands – insisting it would not tolerate the NATO alliance granting membership to Ukraine. Ukraine has stated it will not accept any deal imposed without its consent, meanwhile, German Chancellor Olaf Scholz emphasised that “there must be no decision over the heads of Ukraine.”

EU countries have expressed concern over these discussions, emphasising the importance of a unified Western stance on Russia. These unilateral negotiations have the potential to undermine existing sanctions and increase geopolitical instability.

The EU’s 16^th sanctions package underscores the bloc’s commitment to opposing Russian aggression through stricter trade and financial measures. The inclusion of additional financial institutions and entities highlights a broader attempt to close loopholes from previous sanctions.

Housing sparks tensions in the opening weeks of the new coalition 

Disagreements now appear to be emerging between Fine Gael and Fianna Fáil regarding policy proposals to incentivise a greater level of housing development. In response to the Central Statistics Office (CSO) reporting a significant shortfall in housing completions for 2024, Taoiseach Micheál Martin indicated that schemes will be put in place to attract substantial new private finance into the Irish housing market and that this will become a central pillar of government policy. This marks a relatively significant shift in the government rhetoric. In the lead up to last November’s general election, the majority of emphasis was on the need to build social and affordable housing. Now, freed from the constraints of immediate electoral considerations, the government appears willing to recognise the imperative to leverage private investments in order to meet the housing targets set out in the Programme for Government.

One approach that Fianna Fáil appears inclined to consider is to introduce some form of tax incentive scheme for property developers. Sources have emphasised that nothing has been agreed yet, and any such scheme is likely to be strictly timebound and limited in scope, perhaps to brownfield sites. It is also anticipated that this would be met with some resistance from the Department of Finance, which was badly scarred by property-based tax incentive schemes that fuelled the property boom of the 2000s and the subsequent financial crash.

For his part, Fine Gael Minister for Finance Paschal Donohoe has indicated that he would not support the reintroduction of tax schemes similar to those seen during the last property boom. He explicitly set out his opposition to “Section 23” tax breaks, which enabled investors to offset taxable rental income by buying a new property for rental purposes. Critics say that this policy led to homes being built in unsuitable areas and ramped up excessive lending. The scheme was abolished in the years after the financial crash. On the other hand, the newly appointed Fianna Fáil Minister for Housing said that “all options have to be on the table for discussion” for brownfield sites.

Micheál Martin also indicated that the government will review rules around rent pressure zones and examine options put forward by the Housing Commission, which contained a suggestion to align rent increases to “reference rents” for local dwellings of similar quality. When questioned by reporters about this while on a trip to Brussels, Martin was keen to emphasise that the government was not committing to “end” or “abolish” rent pressure zones, but rather to examine an “evidence based approach to reforming the rental market”, with a particular focus on the reference-pricing mechanism. While property developers and investors have been critical of rent controls for dampening interest in Ireland’s private rental sector, the response from industry has been mixed. While chief executive of the O’Flynn Group, Michael O’Flynn, stated that he is “very encouraged to hear the Taoiseach saying that he’s considering such a review”, Greg Kavanagh of Beakonshaw likened the prospect of getting rid of rent pressure zones to “taking aspirin for cancer”.

For more information, please contact the Vulcan Consulting Team.

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