Europe Must Forge a War Economy to Secure Its Future Amidst Shifting Global Alliances

For over four years, a war on Europe's periphery has loomed large in the minds of policymakers. However, it has been treated more as a distant threat than a present danger actively undermining the continent's foundations. Russia's conflict has inflicted immense damage across Ukraine's southern and eastern regions, despite slow shifts in the front lines. For Europe, the repercussions extend far beyond the battlefield, straining economic resources and testing political cohesion in its support for Ukraine and efforts to contain Russia.

The situation is further complicated as United States President Donald Trump advocates for a disadvantageous settlement for Kyiv and repeatedly threatens to withdraw American support. This leaves Europe facing the prospect of shouldering a significantly larger portion of the burden independently. Even if the immediate crisis is resolved, Europe can no longer rely on Washington to guarantee its security. Consequently, the continent must cultivate the financial capacity to sustain Ukraine's defense, bolster its industrial strength for self-defense, and develop economic leverage to influence Moscow.

To confront these challenges, Europe must transition to a war economy. The past four years offer valuable lessons on financing such an endeavor, alongside stark warnings about internal divisions that could jeopardize its success. The European Union has already played a leading role in financing Ukraine, increasing its contribution from an 18.1-billion-euro ($21 billion) share of the G7's $50 billion Extraordinary Revenue Acceleration (ERA) loans in 2024 to a new 90-billion-euro ($100 billion) loan finalized in April, notably without US involvement.

Despite these efforts, internal disagreements persist on various fronts, particularly concerning measures to constrain Russia. This month, the EU implemented its most extensive sanctions list to date. While the number of designations was record-breaking, the measures did little to expand the scope of restricted activities and failed to expedite the phase-out of Russian energy imports, with pipeline gas imports still permitted until autumn 2027. European leaders have also voiced concerns over Trump's decision to waive new Russia-related sanctions, seemingly in an effort to manage the economic consequences of his foreign policy.

However, the US-Israel conflict in Iran has underscored that Europe's measures against Russian hydrocarbons could have been more stringent. Prior to February, approximately 20 million barrels per day (bpd) of crude and oil products, along with roughly 110 billion cubic meters (bcm) annually of liquefied natural gas (LNG), transited through the Strait of Hormuz. In comparison, Russia exported about 6.5 million bpd of oil and products in September and approximately 43bcm of LNG last year, representing about a third of Hormuz's oil traffic and two-fifths of its LNG. As the crisis escalates and Trump seeks additional Russian supplies, Europe must augment its efforts to contain Moscow with increased investment in its own security.

The paramount first step is establishing a standing framework for joint EU borrowing. This would not only finance Ukraine's ongoing defense but also fund the defense industry essential for Europe's self-preservation and, if necessary, for prevailing against future Russian aggression. Crisis often spurs innovation, as evidenced during the COVID-19 pandemic when EU member states overcame their long-standing reluctance towards mutualized borrowing to create the 750-billion-euro NextGenerationEU recovery fund in 2020. The EU's contributions to the ERA loans and this year's 90-billion-euro facility, both financed through common EU borrowing, extended this principle to wartime finance. Nevertheless, these remain ad-hoc improvisations.

Deepening the fiscal and capital markets union and fostering a genuine fiscal-military state would lay the groundwork for Europe's power and its capacity to deter and win conflicts. This mirrors the situation in the US, where robust capital markets have enabled companies like SpaceX to invest heavily over years, developing technologies such as its Starlink network that have revolutionized modern warfare. The significance of this technology is acutely felt on Ukraine's battlefields, where Kyiv's communications have depended on a network subject to the decisions of SpaceX CEO Elon Musk. Therefore, Europe requires the fiscal capacity to fund its own technological development and procurement.

Understandable concerns exist regarding the existing debt levels of European nations such as France and the United Kingdom. However, Russia's frozen sovereign assets present a potential avenue for supporting further borrowing. Divisions persist over the utilization of these assets, with Belgium, home to the largest share at Euroclear, opposing the move due to fears of Russian legal repercussions and damage to its standing in the global financial system. The bloc must collectively assume this risk, which is ultimately overstated.

Not all EU fiscal support needs to be channeled through direct joint debt. Significantly expanding the EU capital markets union and establishing tax-advantaged structures across the region for defense firms and technological innovators could prove even more effective. Beyond the assets themselves, Europe must exert greater control over its ongoing economic ties with Russia. This necessitates more active intervention in cases like that of Austria's Raiffeisen Bank. In 2025, following a Russian court ruling, over 2.1 billion euros were diverted from Raiffeisen's Russian subsidiary to compensate Rasperia, a company linked to sanctioned oligarch Oleg Deripaska. A Vienna court's ruling last month now enables Raiffeisen to seek compensation from Rasperia's frozen assets within the EU, utilizing the same sanctions derogation through which Euroclear released approximately $3 billion in 2025. This type of legalized dealing with Moscow undermines the credibility of threats, as the Kremlin can seize European assets and prompt the release of Russian-linked assets frozen in the EU, turning every expropriation into a bargaining chip.

Furthermore, the UK and the EU have increasingly employed measures against sanctions circumvention that share similarities with US secondary sanctions. Europe should now adopt a more assertive stance, making it clear that firms aiding Russia in evading sanctions risk losing access to European financial systems and markets. US companies will opt for Europe over the Kremlin, even if Trump further waives sanctions. Finally, Europe should aim to diminish US influence over its foreign and security relationships. Speaking in Qatar recently, US Ambassador to Turkiye Tom Barrack indicated that Washington is moving away from its long-standing security-for-oil bargain with Gulf states. While Europe may not offer the same level of security, it can propose a mutually beneficial partnership addressing mutual concerns. Europe is currently stepping up in the Gulf, with the UK and France deploying aircraft, air defenses, and refueling support to assist Saudi Arabia against Houthi attacks. Unlike Washington, Europe can offer a deeper future partnership and serve as a reliable purchaser of Gulf oil and gas exports, in exchange for Gulf states enhancing their efforts to address Europe's security concerns regarding Russia through improved sanctions compliance and, crucially, by ending the Kremlin's influence in OPEC+.

Europe possesses the financial means to secure its own future; it must now find the resolve to invest in it.