In light of the ongoing conflict in Ukraine, European Council President Charles Michel is advocating for a significant shift in the European Union’s defense financing strategy. One of his key proposals? The introduction of European defense bonds, a potential new asset class aimed at bolstering the continent’s weapons manufacturers.

During a recent speech at the European Defense Agency conference, Michel emphasized the need for rapid and efficient production of arms and ammunition in response to the Russian threat. He proposed that the EU could issue defense bonds, thereby creating an opportunity for retail investors to contribute to strengthening Europe’s technological and industrial defense base.

This idea comes at a critical time when the EU’s defense industries face challenges due to fragmentation, necessitating a more streamlined and predictable approach to public orders. “Produce and we will buy,” Michel assured, highlighting the potential for these industries to access private financing more easily.

While this concept mirrors some of the joint borrowing strategies seen during the COVID-19 pandemic, it’s unclear how much support it will garner across the EU. Ursula von der Leyen, President of the European Commission, echoed the need for enhanced financial backing for the defense sector in her address at the conference. She pinpointed the European Investment Bank (EIB) as a key player in this strategy.

However, the EIB’s involvement is not without complications. The bank currently avoids lending for weaponry due to risks to its top credit rating and ESG (Environmental, Social, and Governance) status. A policy change to include defense loans would require consensus among EU members, marking a significant shift in the bank’s operations.

Beyond defense bonds, Michel’s vision includes regulatory reforms to streamline defense spending, improved coordination of investments among EU members, and targeted funding for under-financed defense areas.

As the EU faces heightened security challenges, these proposals mark a potential turning point in how the bloc approaches defense financing. For investors and policymakers alike, this development could signal new opportunities and a shift in the landscape of defense industry investment.