EU proposes raising defense funding in 2-trillion-euro budget

The European Union’s executive arm on Wednesday put forward a proposal for a 2 trillion euro ($2.31 trillion) budget for the bloc, with a significant increase in funding allocated for defense.

The framework amounts to 1.26% of the EU’s average gross national income and will run for a seven-year period starting from 2028.

“This is a budget for the realities of today, as well as the challenges of tomorrow,” European Commission President Ursula von der Leyen said during a press conference. Around 35% of the budget will go toward climate and biodiversity projects, she said.

Von der Leyen said the EC was proposing to allocate 131 billion euros to support investment in defense and space, a fivefold increase from current spending, as part of its new European Competitiveness Fund.

European nations have widely pledged this year to hike their national defense spending in response to geopolitical concerns, thereby boosting listed company share prices in the sector and attracting the attention of private capital. Von der Leyen said in March that Europe was in its “era of rearmament” and could mobilize 800 billion euros in defense investment through loans and other programs.

The new budget plan seeks to streamline EU financial programs so citizens and companies can access funding opportunities more easily, the EC said Wednesday.

Member state contributions would remain unchanged while the EU looks to five new revenue streams to generate 58.5 billion euros a year, including rates on non-collected e-waste and new duties on tobacco products, as well as a lump-sum contribution from companies generating an average 6.8 billion euros annually.

Other measures include the ringfencing of income support for farmers and fishermen, a tripling in funding for migration management to 34 billion euros, and 100 billion euros in support for Ukraine.

The proposal must still be cleared by by the European Parliament and gain unanimous approval from EU member states, which finance around 70% of the budget through tiered contributions based on their economy size. That could mean significant revisions still lie ahead.

Dutch Finance Minister Eelco Heinen said in a statement that the budget proposal was “too high” and that the EU needed to focus on how existing funds could be spent better.

The overall figures are broadly in line with expectations, Carsten Brzeski, global head of macro for ING Research, told CNBC.

“Against the history of the EU budget, today marks a breakthrough as this is not only the largest budget ever in absolute terms but also in percentage of GDP,” Brzeski said.

“In the greater scheme of things, however, the increase is still far too small to cater for all the spending and investment needs Europe currently has. Had Europe really wanted to follow the recommendations of the Draghi report, a budget of 2% of GDP would have been required,” he continued, noting that this would have been “politically unfeasible.”

Instead, national governments and private capital will still need to finance a major chunk of Europe’s investment needs, Brzeski said.