One of the most notable features of this change is the rise in the rate of military expenditure. Traditionally, European countries have been able to rely on the American security guarantee through NATO therefore, have had a low level of military expenditure.
The geopolitical changes brought about by the Russia-Ukraine conflict, ongoing international trade tensions, and dislocations in global supply chains have hastened a significant paradigm shift in European economic thinking. The European Union has enjoyed an open global trading system, low defence expenditures, and a strong dependence on imported energy supplies for decades. However, in 2026, the notion of strategic autonomy has transcended from being a purely rhetorical concept to a hard economic imperative. Today, a critical question is being raised about whether the European Union can afford a new economic model of greater self-sufficiency in a partially deglobalising world.
The concept of strategic autonomy for Europe refers to several key objectives. These include the need for enhanced defence capabilities, the reduction of dependence on external sources of energy, reshoring, the fiscal system, which must support increased public investment, and the need for the financial system to remain stable despite the increase in borrowing. Each of these areas is significant for the fiscal implications that they pose.
One of the most notable features of this change is the rise in the rate of military expenditure. Traditionally, European countries have been able to rely on the American security guarantee through NATO therefore, have had a low level of military expenditure. However, in the light of the conflict in Ukraine and the commitment of the American government, European countries are now increasing their military expenditure.
The total amount spent by the EU members in 2024 is approximately 343 billion euros, which is expected to increase to 381 billion euros in 2025 as the pace of military investment continues to grow. This is an increase of over 60% more than the total amount spent in 2020. This is not an increase in terms of percentages; it is an increase in terms of structure. NATO members in Europe are no longer expected to spend 2% of their GDP on the military; in fact, the new figures are more in the range of 3 or even 3.5% of their GDP in the coming decade.
This process is being led by the major economies. Germany, traditionally a reluctant spender on military expenditure, has taken a vastly different approach to defence investment. The German government has sanctioned large amounts of borrowing and infrastructure funds, not only to upgrade its military capabilities but also to ensure its overall economic competitiveness. France and Poland have also pledged to increase their defence spending in the long run, indicating a new consensus that defence spending is here to stay.
Yet defence is only one part of the strategic recalibration of Europe. Energy independence is equally core to the new economic agenda for Europe. Europe’s dependence on imported gas from Russia prior to 2022 has been a major vulnerability, and the impact of the resulting gas supply issues has been felt throughout the region’s economies. Europe’s new energy strategy is a major undertaking to diversify energy supply, accelerate the development of renewable energy, and improve domestic energy infrastructure.
The shift in the energy system of Europe has significant financial implications. Huge investments will have to be made in the development of renewable energy sources, the electricity grid system, and hydrogen and battery technologies. Although energy prices have been stabilising over time, the overall energy prices in Europe are still high compared to other major economies, such as the USA. The prices of electricity in Europe have been significantly higher compared to those in the USA, posing a challenge to energy independence in Europe.
This energy dynamic directly relates to another key aspect of European strategic autonomy, namely industrial reshoring. The pandemic has shown how vulnerable global supply chains are, especially in sectors like semiconductors, pharma, and critical technology. At the same time, geopolitical rivalry between the major powers has highlighted the importance of domestic industrial capacity.
European policymakers, as a result, have been promoting industrial policies aimed at encouraging firms to relocate their manufacturing activities closer to home. Subsidies for semiconductor manufacturing, battery manufacturing, and clean technology are widespread in Europe today. The aim is not to disengage Europe from global trade, but to ensure that Europe has sufficient industrial capacity in sectors deemed essential for its economic security.
Yet, there is a considerable cost attached to reshoring. Manufacturing in Europe is a costlier proposition compared to Asian countries, owing to higher labour costs, stringent environmental regulations, and higher energy costs. In this context, there has been a greater dependence on subsidies and fiscal incentives to close the competitiveness gap. While this would help in bolstering strategic resilience, it would also put further pressure on the exchequer, which is already burdened with the costs of welfare and an ageing population.
This fiscal pressure has led to a substantial rethink of the budgetary framework in Europe. For many decades, the European Union has been operating under strict fiscal rules that ensure the sustainability of government deficits and debt levels. The well-known Maastricht criteria set the following limits: an annual deficit of 3 percent of GDP and a debt level of 60 percent of GDP. The combined spending on defence, energy, and industrial policy has made this increasingly hard to achieve.
To this end, European policymakers are already undertaking efforts to amend the fiscal rules with a view to injecting more flexibility into strategic spending. Some of the proposals include granting temporary exemptions for defence spending and creating special finance tools for supporting large-scale investment programmes. The European Commission is also exploring options for mobilising as much as €800 billion of extra defence-related funds, both at the national and EU levels.
This is a major shift in European economic policies. Fiscal consolidation has been at the core of European economic policies since the financial crisis. Now, strategic investments and economic resilience have emerged as key economic policies. European nations have begun to accept higher levels of debt if it is for their economic security.
