Exclusive: Europe's $500 Billion Crisis Fund Eyed for Defense Loans Amid Rising Geopolitical Tensions

FRANKFURT, Jan 30 (Reuters) – Europe's massive crisis-fighting fund, originally created to salvage economies during the euro zone debt crisis, could now be tapped to finance defense spending as the continent races to strengthen its military capabilities, the head of the European Stability Mechanism (ESM) said in an exclusive interview.

Pierre Gramegna, managing director of the Luxembourg-based ESM, told Reuters the fund – with over 430 billion euros ($514 billion) at its disposal – is prepared to offer credit lines specifically for defense investments. In a notable departure from its past strict conditionality, such loans would not come tied to demanding economic overhauls, a move intended to remove any stigma for countries seeking support.

"In these times of geopolitical turmoil, which have triggered higher expenditure for all countries, we must use the full potential of the ESM," Gramegna said. He emphasized the tool would be particularly aimed at financially sound but budget-strained nations, especially smaller euro zone states.

The proposal marks a symbolic pivot for the ESM, established in 2012 as a firewall against sovereign defaults. It reflects a deepening urgency within European capitals to find new funding mechanisms for defense, driven by Russia's war in Ukraine and growing uncertainty over the future of U.S. security guarantees under a potential second Trump administration.

"It is obvious that the relationship between Europe and the United States is becoming more and more bumpy," Gramegna noted, alluding to the political impetus behind the initiative.

Repurposing a Crisis Fund

Any shift would require approval from the ESM's shareholder governments, including militarily neutral members like Austria, Ireland, Malta, and Cyprus. The fund's treaty does not explicitly mention defense, making political consensus essential.

The plan echoes a "defense support line" previously floated by former Italian Prime Minister Enrico Letta, which envisaged loans of up to 2% of a country's GDP at favorable rates. It also mirrors an unused 240-billion-euro pandemic credit line the ESM set up in 2020 for health spending.

Baltic nations such as Lithuania, Estonia, and Latvia – which have raised defense spending to nearly 5% of GDP since 2022 – are seen as potential beneficiaries. These countries border Russia and its ally Belarus and have recently faced a spike in hybrid attacks attributed to Russian sabotage groups.

"We have instruments," Gramegna stated. "It is in the best interests of Europe to use the full potential. It's available. We need to rediscover it."

Political Hurdles and Strategic Calculus

Analysts caution that the proposal faces significant political obstacles. "When the euro area countries designed the ESM, they never intended it to be available for everyday use," said Rebecca Christie, a fellow at the Bruegel think tank in Brussels. "Adding defense would be powerful. But Germany would need to make a complete about-face on how the fund can be used."

Gramegna suggested countries could make "collective requests" to avoid any perception of weakness, adding that the "impetus has to come from the member countries."

The move comes as the EU has already begun joint borrowing for defense through its oversubscribed SAFE scheme. ESM loans would operate on a similar model but could offer a larger, readily available pool of capital.

Voices from the Ground

Reuters spoke to several European citizens for their reaction:

Klara Schmidt, a teacher in Berlin: "Finally, a pragmatic solution. We can't keep depending on unpredictable allies. Using existing funds for our security is logical and overdue."

Marco Ferrara, a small business owner in Milan: "This sounds like another layer of EU debt disguised as defense. Who ultimately pays? We're still recovering from the pandemic funds. The priority should be economic growth, not more military spending."

Anita Kovač, a cybersecurity analyst in Tallinn: "For us in the Baltics, this isn't abstract. It's about survival. If this helps smaller countries like mine shore up defenses faster, it's a vital step. The threat is at our border, now."

David Müller, a retired engineer in Vienna: "Absolute madness. The ESM was for economic emergencies. Militarizing it drags neutral countries into a spending race we don't want. This undermines the very foundation of the fund and pushes Europe closer to a war footing."

(Reporting by John O'Donnell; Additional reporting by Andrius Sytas in Vilnius and Jan Strupczewski in Brussels; Editing by Mark Heinrich)