Rising Defense Spending Increases Borrowing Costs and Burdens the Private Sector

During yesterday’s (March 10, 2025) Eurogroup meeting, there was particular concern about not leaking the ‘ideas’ that have been placed on the table by finance ministers regarding a specific issue. This issue revolves around how member countries and the Commission will secure an additional three billion euros that von der Leyen wants to spend to prepare for potential conflict. The reason for this caution lies in the dual aspects of such a large-scale plan: reallocating resources from other programs and national expenditures, and increased borrowing. While everyone understands the implications of reduced spending on infrastructure, cohesion programs, education, health, and more, the borrowing aspect is more complex due to market dynamics. When seeking more loans, lenders demand higher interest rates, affecting both heavily indebted nations like Greece and Italy, and traditionally low-rate borrowers like Germany. Recent numbers indicate rising concerns as German bonds now require 0.5% more within ten days since Merts announced Germany’s rearmament plans exceeding 500 billion euros. Meanwhile, Italian bonds are nearing 4%, with French and Spanish bonds following suit. Fortunately, Greece has pre-financed much of its needs for the year through the Public Debt Management Agency, covering debt servicing and future repayments. However, the private sector faces increasing interest rates following overall trends, obliging them to borrow at much higher costs than initially anticipated, even during a period where the ECB has been reducing rates. This paradox highlights how decisions made at the Eurogroup may inadvertently worsen conditions for private sector borrowing.