The massive sums being discussed for increased defence spending have sparked a debate on potentially adjusting the EU stability pact. Cynics might say that it doesn’t matter, since the pact is barely adhered to anyway. Investors, however, see things differently. Regardless of whether the criteria are met precisely or not, fiscal oversight and the pact itself have a disciplining effect. Debt ratios in the eurozone remain significantly lower than in the US or Japan.

The willingness of EU governments and the European Commission to revise the freshly overhauled pact once again is limited. Northern EU states, in particular, are hesitant to accept long-term exemptions for defence spending – especially if such exceptions extend beyond items clearly attributable to defence budgets.

Bond investors are also wary of hollowing out the stability pact through unlimited and loosely defined exemptions. EU member states risk losing them as reliable buyers of their debt. Under a more relaxed EU fiscal regime, these investors would have strong incentives to demand higher yields and speculate on widening spreads – a nightmare for financial stability.

Europe’s finance ministers would therefore be wise to follow the Commission’s approach: Temporarily activating national exemption clauses offers a time window to offset rapidly rising defence expenditures elsewhere – primarily through stronger economic growth.

In other words, those who take on significant debt must compensate by cutting back elsewhere. This means shifting public spending toward investment rather than consumption. If this condition is met, capital markets will likely tolerate debt ratios exceeding 60% for a time. Concerns about debt sustainability generally arise only beyond the 100% threshold.