In a move likely to spark fresh debate over the future of European integration, Olli Rehn, a senior figure at the European Central Bank, has floated a provocative idea: joint European defence borrowing to fund a new “defence development bank.”

Supporters say it is a bold stroke of economic and geopolitical statecraft; critics fear it is one more step down the road towards a centralised European superstate.

The proposal, unveiled at a defence and finance summit in Helsinki on Monday, would see EU member states pool their borrowing power to fund military investments across the bloc. Crucially, Rehn emphasised that such borrowing would not only enhance Europe’s long-strained security infrastructure, but also serve to strengthen the euro’s role as a global reserve currency—linking defence and monetary policy in a manner unseen since the Cold War.

“We are entering an era where economic sovereignty and military capability must reinforce each other,” Rehn told delegates. “By issuing common defence bonds, Europe can deepen both its strategic autonomy and the credibility of the euro.”

The idea is already being interpreted as a direct response to persistent concerns in Brussels and national capitals over Europe’s lacklustre military preparedness in the wake of Russia’s war in Ukraine, tensions in the South Caucasus, and the faltering American security umbrella. It also comes amid mounting pressure on the EU to close what NATO Secretary-General Jens Stoltenberg has described as “gaping holes” in its conventional defence posture.

Economic Muscle Meets Strategic Steel

Rehn’s argument is both monetary and martial. By pooling sovereign debt under a joint defence framework, he claims, the EU could finance large-scale projects—such as next-generation tanks, missile defences, or cybersecurity networks—without the bureaucratic delays of intergovernmental haggling or national vetoes. Simultaneously, the issuance of large volumes of common euro-denominated defence bonds would, in theory, bolster the euro’s attractiveness on global markets.

Supporters liken the scheme to the EU’s €750 billion pandemic recovery fund launched in 2020, which saw Brussels borrow on the markets for the first time on a significant scale. That fund, dubbed “NextGenerationEU,” helped shore up the post-Covid recovery—but also marked a fundamental shift in the EU’s fiscal architecture. Defence, Rehn argues, now requires a similarly collective leap.

“If the Americans are unwilling or unable to underwrite Europe’s defence for another generation, then Europe must do it itself,” says Markus Ferber, a German MEP from the centre-right EPP group. “And that requires money. Serious money.”

Ferber, a longtime fiscal hawk, nonetheless supports the plan—provided it is tightly controlled. “What we cannot allow,” he adds, “is another blank cheque for Brussels.”

Franco-German Divergence?

Yet even as the proposal gathers momentum among technocrats and some lawmakers, it has exposed new divisions between the EU’s two largest powers. France, which has long advocated for “strategic autonomy” and boasts the bloc’s only nuclear arsenal, sees the plan as a natural extension of its vision for a Europe capable of defending itself.

Germany, however, remains more cautious. Finance Minister Christian Lindner has signalled wariness over any scheme that might dilute national budgetary oversight or inflate shared debt liabilities. Berlin is already grappling with constitutional court rulings that constrain federal borrowing and complicate its post-Ukraine defence spending pledges.

There are also legal questions: EU treaties do not currently provide for shared borrowing for military purposes. Any such move may require treaty revision or creative financial engineering—neither of which is straightforward.

“The legal basis is not yet clear,” concedes one EU diplomat. “But politically, the wind is shifting. Russia’s war has changed the game.”

Brussels’ Hidden Hand

Behind the scenes, Commission officials are said to be drafting a proposal that would lay the groundwork for such a bank, likely framed as an extension of existing EU industrial and research support programmes. The European Investment Bank (EIB), long averse to military projects, could play a role if its mandate is amended.

The proposed defence development bank would likely be modelled on the European Stability Mechanism or the pandemic recovery fund. Member states would guarantee the debt, while the funds would be deployed according to criteria set by Brussels—perhaps via competitive bids or strategic needs assessments coordinated with NATO.

Some see the move as inevitable. “The Americans will be focused on the Indo-Pacific,” says Professor Daniela Schwarzer, a senior analyst at the German Marshall Fund. “If Trump returns to the White House, Europe could find itself dangerously exposed.”

Others warn that the proposal risks deepening EU internal fault lines. Poland and the Baltic states have welcomed the military intent, but are wary of further fiscal integration that might advantage wealthier western members. Southern states, for their part, view defence bonds as a chance to bypass tight national budget constraints—but risk alienating northern fiscal conservatives.

A Currency Armed

Still, the broader strategic logic has resonance. As the global balance of power shifts—and as traditional alliances fray—the idea of a euro that not only finances trade but anchors defence could prove politically potent.

“Until now,” one senior ECB official said, “we’ve had a currency without a state, and a state without an army. That is no longer sustainable.”

What remains to be seen is whether Europe has the political courage to fuse its economic muscle with its strategic steel—or whether, as in so many crises past, it will settle for muddling through.

For now, Rehn’s trial balloon is drifting over a continent at war’s edge, its shadow casting questions far beyond the realm of finance.