A European crisis fund with more than 430 billion euros in lending capacity could be tapped to help finance defence spending across the euro zone, as the European Union races to reinforce its military amid mounting geopolitical tensions. Speaking to Reuters, Pierre Gramegna, managing director of the European Stability Mechanism, said the fund could provide credit lines specifically for defence without imposing the stringent economic reforms that once defined its crisis-era loans.
Gramegna said the ESM should use its full potential at a time when defence costs are rising sharply across Europe. He argued that credit lines could support countries in good financial health whose budgets are under strain, particularly smaller euro zone states, and stressed that easing conditions would help avoid any stigma associated with requesting support from the emergency fund.
The comments point to a significant shift for the ESM, which was created during the euro zone debt crisis to prevent the collapse of national economies and banks and to protect the single currency. According to Reuters, any move to channel its resources toward defence would be symbolically important, transforming a once-crucial crisis tool that has become largely redundant in recent years.
Europe’s push to bolster its defences has gained urgency as relations with the United States have grown more strained. U.S. President Donald Trump’s hostility toward Europe, including threats of trade tariffs linked to disputes such as his claim on Greenland, has forced European leaders to seek greater strategic autonomy, particularly in the face of continued Russian aggression following the invasion of Ukraine.
Gramegna suggested that ESM support could be especially relevant for smaller countries on Europe’s eastern flank, including the Baltic states bordering Russia and Belarus. Lithuania, Estonia and Latvia have nearly quadrupled defence spending since Russia’s invasion of Ukraine to around 5% of economic output, relying heavily on borrowing to fund the increase. The region has also faced a rise in sabotage attacks that authorities attribute to Russia.
Only euro zone members would be eligible for ESM loans, excluding non-euro countries such as Poland. Any change in the fund’s use would require approval from the 21 euro zone governments backing the ESM, including states with traditions of military neutrality such as Austria, Ireland, Malta and Cyprus. The ESM’s mandate does not explicitly cover defence, making political backing essential.
Gramegna said the fund could rely on so-called precautionary credit lines, with strict guarantees that the money would be spent on defence while avoiding what he described as draconian economic conditions. The aim, he told Reuters, would be to ensure the facility is not tied to broader restructuring of national economies.
The idea echoes a “defence support line” previously proposed by former Italian prime minister Enrico Letta, which would allow countries to borrow up to 2% of economic output at low interest rates for military purposes. It also mirrors a pandemic-era ESM scheme worth up to 240 billion euros designed to support healthcare spending during COVID-19, a facility that ultimately went unused.
If applied in a similar way, such loans could carry significant weight. Estonia’s gross domestic product was around 40 billion euros in 2024, meaning a 2% credit line would amount to less than 1 billion euros. Gramegna suggested that countries could make collective requests to further reduce any political sensitivity around turning to the ESM, adding that the initiative would need to come from member states themselves.
