Pierre Gramegna, managing director of the European Stability Mechanism, said the ESM could give credit lines for defence and would not demand stringent economic reform in return

International News via Reuters:

A European crisis fund with more than 430 billion euros ($514 billion) of firepower could lend money to countries for defence, the head of the European Stability Mechanism told Reuters, as the bloc scrambles to reinforce its military.

Pierre Gramegna, managing director of the European Stability Mechanism, said the ESM could give credit lines for defence and would not demand stringent economic reform in return, in part to dispel any stigma that might arise from asking the emergency euro zone fund for money.

“In these times of geopolitical turmoil, which have triggered higher expenditure, defence costs for all countries, we must use the full potential of the ESM,” said Gramenga.

He pointed to the use of credit lines for defence for countries in good financial health but whose budgets are stretched, in particular smaller euro zone states.

“We have instruments,” he said. “It is in the best interests of Europe … to use the full potential.”

“It is obvious that the relationship between Europe and the United States is becoming more and more bumpy.”

REPURPOSING DEBT CRISIS FUND

Any such financial support would be symbolically important, repurposing a fund set up at the height of the euro zone debt crisis to stave off the collapse of national economies, banks and shore up the currency.

U.S. President Donald Trump’s open hostility towards Europe is forcing its political leaders to scour for alternative means of defending the region against Russian aggression.

Gramegna’s remarks suggest a willingness to use the vast European reserve to reinforce euro zone countries, in particular smaller Baltic nations bordering Russia, although loans first need to be signed off by the euro zone nations backing the ESM.

Only countries in the euro zone could get the loans, excluding those who do not use the currency, such as Poland. The ESM makes no explicit mention of defence in its mission and any such shift would require the blessing of member states, including from militarily neutral countries like Austria, Cyprus, Malta or Ireland.

Europe’s attempts to boost its defences, four years after Russia’s full-scale invasion of Ukraine, have taken on greater urgency since Trump threatened trade tariffs on countries that rejected his claim on Greenland, a Danish territory.

Gramegna hinted at a potential role for the ESM, which was set up during the debt crisis to lend to countries such as Greece but has since become largely redundant.

“It is one of our instruments,” he said, referring to using so-called precautionary credit lines for defence. “It’s available. We need to rediscover the potential of that instrument.”

“You need to guarantee that this facility … has to be used for defence expenditure,” he said, adding that it would not come with draconian terms. “The whole goal here is to avoid that this type of tool is combined with restructuring of the economy.”

‘DEFENCE SUPPORT LINE’

His comments breathe fresh life into a “defence support line” earlier suggested by former Italian prime minister Enrico Letta to lend up to 2% of a country’s economic output at low interest rates for defence.

The proposal faces hurdles, however.

“When the euro area countries designed the ESM, they never intended it to be available for everyday use,” said Rebecca Christie of Brussels-based think tank Bruegel.

“Adding defence would be powerful. But Germany would need to make a complete about-face on how the fund can be used,” she said, referring to Europe’s largest economy.

Gramegna’s proposal mirrors an ESM crisis support scheme worth up to 240 billion euros set up during the COVID pandemic to help countries spend on healthcare. That ultimately remained unused.

The Baltic states of Lithuania, Estonia and Latvia could stand to benefit. They have almost quadrupled spending on defence since Russia invaded Ukraine to roughly 5% of their economic output, borrowing heavily to cover the bill.

Those countries, which border Russia and its close ally Belarus, have suffered an increasing number of sabotage attacks that law enforcement agencies blame on Russia.

They borrowed billions of euros from the EU’s oversubscribed SAFE loans scheme for defence projects, where the EU jointly borrows money on the market to lend it on at cost to EU governments for defence. ESM support would work similarly.

If set up like the pandemic support, the loans would have considerable weight across the EU. Estonia had a gross domestic product of roughly 40 billion euros in 2024 – 2% of that would be less than 1 billion euros.

Gramegna said countries could make “collective requests”, which would avoid any stigma attached to asking for assistance from the ESM. “The impetus has to come from the member countries,” he said.

Additional reporting by Andrius Sytas in Vilnius and Jan Strupczewski in Brussels; editing by Mark Heinrich

The figures signal remarkable resilience for a bloc of 350 million people that was expected to succumb to a trade war with the U.S.

International News via Reuters:

The euro zone economy grew quicker than expected last quarter as consumption and investments kicked into higher gear, offsetting low exports and the exceptional uncertainty emanating from U.S. trade policy, Eurostat data showed on Friday.

The figures signal remarkable resilience for a bloc of 350 million people that was expected to succumb to a trade war with the U.S., surging export competition from China and years of military conflict on its eastern border. 

Yet each quarter last year the euro zone produced respectable – if unspectacular – growth, despite industry and exports, the previous engines of expansion, struggling to gain their footing.

SPAIN REMAINS ENGINE OF GROWTH

The bloc’s economy grew by 0.3% on the quarter, above expectations for 0.2% in a Reuters poll, and expanded 1.3% compared with a year earlier, versus economists’ consensus bet for 1.2%.

Spain remained the driver of growth, expanding a quicker-than-forecast 0.8%, but Germany, the euro zone’s largest economy, also seems to be emerging from years of struggles to grow 0.3%, above economists’ estimate of 0.2%.

“The fourth quarter performance (for Germany) is admittedly modest yet still the best quarterly performance in the last three years,” ING economist Carsten Brzeski said. “Increasing new orders and falling inventories bode well for at least a soft turnaround in industry.”

Italy, too, beat forecasts with 0.3% growth while France, hampered by political instability, expanded as predicted by 0.2%.

Ireland, however, created a statistical drag for the bloc as its vast multinational sector, based there for tax reasons, contracted sharply. This is more a statistical effect, however, and does not indicate actual contraction in the economy.

2026 OFF TO A GOOD START

Other figures already suggest that the bloc started 2026 on a relatively strong footing. 

A key sentiment reading out on Thursday showed an unexpected jump, driven by France and Germany, with broad-based gains among all key sectors. 

Meanwhile, industry is showing signs of stabilisation, households have finally started to reduce their historically high savings rate, unemployment is holding near record lows and inflation is steady around the European Central Bank’s 2% target.

Prospects are further boosted by Germany’s spending boom on infrastructure and defence, which may be slow to get off the ground but will have a measurable impact on growth from the second quarter. 

This will end three years of German stagnation and likely support the rest of Europe, as its industry relies on a vast supplier base spread across the bloc. 

Exports are unlikely to recover fully anytime soon, however, as U.S. tariffs, increasingly tough Chinese competition and the dollar’s tumble over the past year point to a permanent shift in trade patterns.

This puts the burden on the domestic economy to find new sources of growth. But economists say consumption has plenty of reserves as does intra-EU trade, keeping prospects relatively upbeat.

Indeed, most projections see growth for years in the 1.2%-1.5% range, or around the bloc’s potential.

This puts the ECB in a very comfortable position as inflation is at target, interest rates are on a neutral setting and growth is at potential – a trinity some policymakers call the nirvana of central banking. 

This is why investors see steady interest rates all year, with only fresh shocks upsetting this outlook.

Reporting by Balazs KoranyiEditing by Peter Graff