EDITORIAL: The West Under Dual Fiscal and Military Pressure — How to Finance Freedom

EDITORIAL: The West Under Dual Fiscal and Military Pressure — How to Finance Freedom

Introduction: The Moment of Budgetary Truth

Two simultaneous bills — history and geography

The West faces in 2026 a budgetary equation unlike any in its recent history. It must simultaneously pay for the fiscal mistakes of the past decade — a decade of low interest rates that enabled the accumulation of considerable public debt — and finance a military build-up made imperative by Russian aggression in Ukraine and the growing threats from China, Iran and their proxies. These two imperatives are arriving at the same time, against a backdrop of persistent inflation and economic slowdown. The question is no longer whether the West can afford to defend its values — it is how, at what cost, and who will pay.

The figures are stark, beyond dispute. The eurozone saw its GDP contract by 0.2% in the first quarter of 2026 — a downward revision from the initial estimate of +0.1%. Inflation accelerated to 3.2% in May, driven by energy inflation still running at 10.8%. The ECB responded by raising rates by 25 basis points to 2.25% in June. Meanwhile, in the United States, Trump's Big Beautiful Bill adds $3 trillion to the American national debt over ten years, and the Fed holds its rate at 3.625% with an additional hike likely in the third quarter. That is the economic cocktail of an era under pressure.

History arriving at the cash register

The decade from 2010 to 2020 was, for the West, a period of exceptional monetary ease. Interest rates near zero — and in some European countries actually negative — made borrowing cheap and encouraged governments to fund public policy on credit rather than through taxation or spending cuts. This was understandable in the context of the 2008 financial crisis and the shocks that followed. It was also, in hindsight, a form of collective procrastination — deferring the painful adjustments that could have been made today until tomorrow. Tomorrow has now arrived. It is called 2026.

The rise in interest rates since 2022 has mechanically increased the cost of debt servicing for all Western governments. Countries like Italy and France, with high debt-to-GDP ratios, are devoting a growing share of their tax revenues to simply paying interest — resources that are not going into investment, defence or public services. That is the double fiscal penalty: past debts cost more at precisely the moment when new spending has become imperative. Fiscal room for manoeuvre has narrowed at exactly the worst time.

The Military Bill: From Rhetoric to Real Commitments

The 2% of GDP benchmark — finally taken seriously

For decades, the NATO benchmark of 2% of GDP for defence was treated by most European members as a rhetorical obligation rather than a concrete commitment. Germany was at 1.3%. France was at 1.8%. Few countries genuinely met the target. The financing of the Russo-Ukrainian war since 2022 and the growing threats on NATO's eastern flank have radically changed the situation. In 2026, several member states exceed the 2% mark — and some are aiming considerably higher.

Poland, directly exposed to the Russian threat via its border with Belarus, has reached defence investment levels among the highest in Europe. The Baltic states — Estonia, Latvia, Lithuania — have increased their defence budgets significantly. NATO approved in December 2025 a common budget of £2.5 billion in 2026, with an annual increase of 25% above inflation through to 2030. Germany, with its special defence fund of €100 billion, has undergone the most notable turnaround. France, with a defence budget of €66.7 billion in 2026, up €6.8 billion, is part of the same dynamic.

The European Defence Investment Programme (EDIP)

At the European level, the European Commission has launched the European Defence Investment Programme (EDIP), endowed with a budget of €1.5 billion in grants. That is a first step — but modest relative to the ambition. The Commission is proposing €130 billion over seven years for defence and space in the next multiannual financial framework — four times the current framework. Commissioner Andrius Kubilius, responsible for Defence and Space, has made this industrial build-up his priority. The figures show that Europe is investing — but the gap between those investments and actual needs remains considerable.

The central tension is as much political as budgetary: several European governments face publics that do not always see the necessity of massively increasing military spending, particularly in a context of perceived austerity on other budget lines. The political communication around the necessity of these investments remains a major challenge — explaining to citizens that the defence of freedom carries a real cost, and that this cost must be borne now rather than later, is not a politically simple message in democracies accustomed to peace.

The American Situation: The World's Borrower-in-Chief

$3.8 trillion more — Trump's choice

The United States represents a particularly acute instance of the fiscal-military tension gripping the West. The world's largest economy, already carrying a federal debt exceeding $35 trillion, has just passed the "Big Beautiful Bill" which, according to the Congressional Budget Office, will add $3.8 trillion in additional fiscal deficits over ten years — partially offset by $1 trillion in cuts to social programmes, but already well into the red. The Committee for a Responsible Federal Budget is even more pessimistic, estimating the additional debt at $3 trillion when interest costs are factored in.

These figures are not abstract. A growing debt means growing interest payments — and as rates climb, those payments absorb a growing share of federal revenues. This is money not available for investment in defence, research, diplomacy or aid to allies. America under Trump is choosing to cut taxes while spending massively — a combination that enriches the wealthiest in the short term but structurally weakens the American state's ability to honour its long-term commitments. That is the specific form of necessary evil Trump represents for the West.

The Fed under pressure and the cost of the strong dollar

The Federal Reserve is holding its benchmark rate at 3.625% and is expected to raise it to 3.875% in the third quarter of 2026, according to projections from KBC. This restrictive monetary policy is a response to inflation which, even if it has somewhat decelerated from its 2022–2023 peaks, remains above target. The new Fed chair, Warsh, held his first meeting without changing rates — but markets are anticipating an imminent hike, and real divisions among governors exist.

A dollar maintained at elevated levels by restrictive interest rates has effects on emerging economies and on America's trading partners — making the servicing of dollar-denominated debt more expensive for developing countries, and complicating export dynamics for economies oriented towards American markets. These spillover effects of US monetary policy on the global economy are well documented — and they complicate the management of the dual fiscal-military pressure for European allies who must manage their own constraints while adjusting to American externalities.

The Eurozone Between Inflation and Stagnation

An economy that refuses to choose between its ills

The eurozone presents in June 2026 the profile of an economy suffering simultaneously from persistent inflation and sluggish growth — the mild stagflation scenario that economists had feared. Inflation at 3.2% is above the ECB's 2% target. GDP growth for the year is being revised downwards — KBC's projections fall from 0.7% to 0.3% for 2026. This is not a recession — but it is a performance well below the potential of an economy that needs growth to fund its defence ambitions and its green and digital transitions.

The ECB is in a delicate position: raising rates to contain inflation means further slowing an economy already struggling; letting rates fall risks allowing inflation to become unanchored. It chose to hike in June — a move considered by KBC to be likely "a one-off event" given the recent decline in energy prices. The US-Iran memorandum of understanding sent oil tumbling from $113 per barrel at end-April to $78 by mid-June — a welcome relief for energy-importing economies, which include the majority of eurozone members.

National fiscal room for manoeuvre — deeply unequal

The ability of eurozone member states to simultaneously fund their defence and honour their budgetary constraints is profoundly unequal. Countries like Germany and the Netherlands — with historically lower debt-to-GDP ratios — have more latitude. Countries like Italy (140% of GDP in debt), Greece and France (around 110%) have far narrower margins. This heterogeneity creates tensions within the Union — on the rules of the Stability Pact, on the pooling of defence debt, on common European funding for equipment purchases.

The ongoing discussions in the European Council on common European borrowing for defence — inspired by the post-Covid NextGenerationEU model — illustrate this search for collective solutions to national constraints. The precedent of Covid debt pooling proved it was feasible — but it also generated intense political opposition, particularly from the so-called "frugal" countries of northern Europe. Replicating that model for defence will require a political will that geopolitical events — the Ukrainian front in particular — are contributing to forge.

How to Finance Freedom — the Available Solutions

Tax, borrow or reallocate — the three paths

Faced with the dual fiscal-military pressure, Western governments have in theory three levers. Tax more — increase revenues to fund additional spending without worsening the deficit. Borrow more — accept a temporary rise in deficits with the hope that investment will generate future growth that repays the debt. Reallocate — cut other spending lines to free up resources for defence. In practice, all governments use a combination of the three — with different weightings depending on their political and economic circumstances.

The temptation to borrow is politically strong — it is the path of least resistance in democracies where voters dislike tax hikes and cuts to public services. But it has limits in a high interest rate environment. Borrowing at 3–4% over twenty years to fund military spending that has a deterrence effect — therefore a security return on investment — may be defensible. Borrowing to fund current operating spending in a context of structural deficit is far less so.

Innovative paths — defence bonds, pooling, rule reform

Several innovative solutions are on the table in European capitals. European defence bonds — obligations issued at Union level to fund collective defence investments — could allow capital to be raised at a lower cost than the borrowing rates available to the most indebted member states. The EDIP model could be expanded. Reforming the Stability Pact rules to exclude defence spending from the deficit calculation — a proposal advanced by several governments — would create fiscal room without worsening sovereign credit risk.

The European Union also has a structural asset that the United States does not: a single market of 450 million consumers generating considerable economic potential. Deepening this single market — particularly in services, capital and data — is one of the least costly ways to generate additional growth without increasing debt. The Draghi report of 2024 estimated the potential productivity gains from a more integrated single market at several hundred billion euros annually. This path — politically difficult but economically sound — deserves to be taken more vigorously.

The Ukrainian Case — Inverted Model and Lesson for the West

Funding a war while keeping an economy running

Ukraine offers an extreme — and paradoxically inspiring — example of managing the dual fiscal-military constraint. A country in total war, with its economy under maximum pressure, has managed to maintain essential state functions, to fund a massive military industrial build-up (from €1 billion to €50 billion in defence production over four years), and to remain solvent thanks to international support. Zelensky managed a war economy with a rigour and creativity that few observers had anticipated.

For the West, the Ukrainian lesson is twofold. First, it is possible to fund very high levels of defence spending without economic collapse — if the political will is there and priorities are clear. Second, the cost of failure — allowing a democracy to be invaded without supporting it — is infinitely higher than the cost of preventive support. Western aid to Ukraine has cost tens of billions of euros — but a fallen Ukraine would have cost far more in military repositioning, mass migration, regional instability and strategic credibility.

Defence investment as an investment in peace

There is a powerful economic argument for defence investment that public accountants tend to overlook: it is an investment in stability. A defended, credible, deterrent Europe is a Europe where private investment is made, where supply chains function, where markets are predictable. A Europe that does not defend itself is a Europe where the geopolitical risk premium rises — and that premium is paid in interest rates, in insurance costs, in delayed investment decisions. The full accounting of the cost of defence must include what it would cost not to fund it.

This logic — defence as a precondition for prosperity — is perfectly well known to economists who study peace dividends and their conditions. It should be at the heart of the political arguments made by governments asking their citizens to contribute to the collective defence effort. This is not a gratuitous sacrifice — it is an investment whose return is measured in decades of stability rather than fiscal quarters. It is a difficult logic to sell in democracies dominated by the four-year electoral cycle — but it is the only one that is honest.

Bond Markets Facing the Inflation of Military Spending

The sovereign risk premium and its implications for defence budgets

When European governments announce significant increases in their defence spending — Germany with its Sondervermögen of €100 billion, France with its Military Programming Law bringing its military budget to 2% of GDP, Poland already exceeding 4% of GDP in military spending — bond markets react. Sovereign risk premiums rise slightly for countries that lack a credible fiscal trajectory. The cost of debt financing increases. And in a context where the ECB's benchmark rates remain significantly above historic floors, every additional basis point represents hundreds of millions of euros in additional interest charges over decades.

The European Central Bank is navigating this tension with calculated prudence. Cutting rates too quickly risks reigniting inflation. Keeping them too high risks strangling the growth needed to fund Europe's defence ambitions. The ECB's June 2026 Economic Bulletin highlights this tension without resolving it — which is honest, because there is no magic solution. There are painful trade-offs to be made between price stability, supporting growth and funding collective defence. These trade-offs will be the central economic decisions of the years ahead.

The defence eurobond: an idea that is slowly gaining ground

The idea of issuing common European bonds to fund defence spending — along the lines of the Next Generation EU programme that funded post-Covid recovery — is making its way through European chancelleries. The von der Leyen Commission, in its third mandate, has explored this avenue under the name "Defence Bonds". The idea has obvious appeal: pooling funding would allow the EU's superior credit rating to be leveraged compared to individual member states, thus reducing the financing cost for all.

The obstacles are well known: Germany and the Netherlands remain wary of any form of debt pooling, fearing they would end up co-guaranteeing the commitments of fiscally less rigorous countries. Germany's Federal Constitutional Court has historically placed limits on communal financing. These resistances are real — but they are eroding in the face of geopolitical evidence. When Russia threatens at the doors of Europe and the United States is no longer an unconditional guarantee, even the most frugal governments must revise their calculations.

The West Facing Its Fiscal Contradictions: Spending for Freedom Without Creating a Crisis

The democratic paradox: promising without funding

Western democracies excel at making spending commitments without always providing the corresponding resources. The NATO 2% of GDP defence spending target was largely honoured in the breach by the majority of European members for decades. Even today, with the war in Ukraine as a brutal warning, several alliance members struggle to meet this objective. Belgium, Spain and Italy remain below the 2% mark in 2025–2026. These shortfalls are not merely a question of political will — they reflect real budgetary constraints in countries where social spending is politically untouchable and fiscal margins are narrow.

The solution is not simple: raising taxes to fund defence is unpopular. Cutting social services to free up margins is even more unpopular. Borrowing more worsens already concerning debt trajectories. This is the fiscal impossibility triangle of democracies under geopolitical threat: you must spend more on security, you cannot tax more, you cannot borrow indefinitely. The way out of this triangle necessarily runs through politically painful trade-offs that most governments push back until later — until "later" arrives.

Economic growth as the structural solution — and its conditions

The only viable way out of the fiscal impossibility triangle is economic growth. A GDP that grows faster than defence spending makes those expenditures sustainable without increasing fiscal pressure or relative indebtedness. This is the logic behind massive investments in education, research, digital infrastructure and the energy transition promoted by the European Commission. These investments are not in contradiction with defence spending — they are its indispensable economic complement.

But European growth has been sluggish for several years. The Draghi report on European competitiveness, published in 2024, identified structural deficits in innovation, in access to capital for young companies, in excessive regulation of certain markets. These deficits have not been closed in a year. Europe needs an ambitious industrial policy, a more integrated capital market, smarter regulation — not fewer rules, but rules better calibrated to allow innovation without sacrificing citizen protection. This is a long-term programme whose effects will not be felt for several years. But there are no shortcuts.

Conclusion: Pay Now or Pay Far More Later

The generational choice

The dual fiscal and military pressure facing the West in 2026 is not a stroke of bad conjunctural luck — it is the result of cumulative choices made over decades. Decades of underinvestment in defence, made possible by the Pax Americana of the post-Cold War era. Decades of easy borrowing, made possible by accommodative monetary policies. And a decade of wilful blindness to the rise of threats — Russia, China, Iran, North Korea — that democracies preferred not to look squarely in the face rather than draw the budgetary consequences.

Western governments of 2026 inherit these accumulated choices. They have no possibility of going back — they can only decide how to manage the present constraint and avoid worsening tomorrow's. This means investing in defence — without illusions about the ease of doing so — while maintaining sufficient budgetary discipline to preserve the credibility of public finances. This is a grown-up policy, in countries accustomed to policies that promise more while delivering less. Difficult to sell — but impossible to avoid.

Freedom is not free — and it never was

This editorial argues for clarity about the real cost of freedom. Not for blind austerity, not for unchecked rearmament, but for a collective sense of priorities that acknowledges some spending is an investment in what makes life in our societies possible. Ukraine has been paying this cost in blood since 2022. The West pays in euros, pounds and dollars. This is a distribution that our Ukrainian allies accept — provided we honour our commitments. This moment of budgetary truth is also a moment of democratic truth. The way our governments manage it will say much about the actual health of our democracies.

The figures are there — 0.3% growth in the eurozone, 3.2% inflation, $3 trillion in additional debt in America, €66.7 billion on defence in France, £2.5 billion in the NATO budget. They tell a clear story: the West is under pressure, but still has the resources to make the right choices. The question is whether the political will matches the necessity. Ukraine, once again, shows us what will can accomplish when it has no choice. We still have a choice. Let us make it.

Columnist's Transparency Note

Bias and positioning

Maxime Marquette is convinced that the underinvestment in collective Western defence since the end of the Cold War was a strategic error whose consequences we are paying today. This positioning clearly influences his reading of the current budgetary situation. He supports increased European defence spending and better European fiscal coordination. On precise economic questions, he relies on the analyses of recognised institutions and acknowledges he is not an economist.

The macroeconomic data cited in this article come from the KBC Economic Perspectives (June 2026), the ECB Economic Bulletin (June 2026), and public data on national defence budgets. American budgetary projections come from the CBO and the CRFB via Associated Press coverage. This article was written on 27 June 2026.

What this article does not cover

This editorial does not provide a detailed econometric analysis of national fiscal trajectories, nor a systematic comparison of the fiscal policies of each member state. It adopts a broad macroeconomic perspective on the tension between defence spending and fiscal sustainability. A more granular analysis would require country-by-country data and finer projections than those available in the sources used. The author also acknowledges that the question of the fair distribution of the burden across generations — on the debts we leave to our children — deserves more extensive treatment than this text can devote to it.

Projections on the trajectory of Fed and ECB rates are those of KBC Economics and may differ from those of other institutions. The author makes no investment recommendations in this text.

By Maxime Marquette, columnist

Sources

Primary sources

KBC Group — Economic Perspectives June 2026, macroeconomic analysis — 25 June 2026

European Central Bank — Economic Bulletin No. 4, 2026 — 25 June 2026

KRGV/AP — Big Beautiful Bill, CBO and CRFB estimates — 25 June 2026

Secondary sources

NATO — Common Budgets 2026 — 17 December 2025

French Senate — Defence Budget 2026, €66.7 billion — 2025

EU Perspectives — Ukrainian defence production, EDIP reference — 23 June 2026

Zone Armée — NATO common budget 2026 — December 2025