Europe Eyes ReArm Plan, €3 Trillion Eurobonds as Trump Threatens 50% Tariffs and Troop Cuts
European leaders are confronting a shift in U.S. policy under President Donald Trump, who has launched trade wars, threatened tariffs on European goods of up to 50%, and begun reducing the U.S. military presence in Europe. These moves have heightened concerns over economic growth and security, with U.S. tariffs projected to reduce EU GDP by up to 0.5% and increased defense spending to compensate for diminished American support potentially requiring an additional 1.5% of GDP per year.
In response, Europe is considering measures such as the ReArm Europe Plan, which includes €150 billion in defense loans, and Germany's €500 billion stimulus for defense and infrastructure. The EU currently spends 1.8% of GDP on defense, or about €325 billion, but may need to increase this to 3.5% of GDP. Aid to Ukraine stands at €38 billion annually, and the bloc is weighing the use of over €200 billion in frozen Russian central bank assets to fund further support.
Economic reforms are also on the agenda, including proposals for Eurobonds totaling up to €3 trillion, as suggested by economists Blanchard and Ubide, and recommendations from the Draghi and Letta reports to complete the single market and invest in strategic sectors. The IMF estimates intra-EU trade barriers are equivalent to tariffs of 44% for goods and 110% for services, highlighting the need for greater integration.
The EU is exploring ways to enhance the euro's international role, with the ECB's Christine Lagarde noting that increasing the euro's global presence would allow Europe greater control over its destiny. The euro's share of global reserves is 20%, compared to the dollar's 57%. The STOXX 600 has returned about 10% this year, while the S&P 500 is flat and the dollar has declined by nearly 10%.
Transatlantic negotiations are complicated by the risk that the U.S. may link support for Ukraine, NATO, and trade concessions. Internal EU divisions, such as Hungary's veto threats, and debates over social policies, including the Samoa Agreement, add further complexity. Nonetheless, the EU has demonstrated capacity for collective action, such as sanctioning 300 Russian ships, and is considering reforms to streamline decision-making and strengthen coordination among member states.