When Donald Trump returned to the White House in January 2025, the shockwaves were felt far beyond Washington. For the European Union, his comeback triggered something extraordinary: the suspension of long-standing fiscal rules once considered untouchable. Almost overnight, Europe’s stability-first economic philosophy gave way to a new priority — security.
For decades, the EU’s economic governance has been anchored in the Stability and Growth Pact (SGP), which limits national deficits to 3% of GDP and public debt to 60% of GDP. These rules reflected a deeply embedded “stability paradigm,” strongly championed by Germany and rooted in the fiscal discipline culture of the Maastricht era.
But as we explain in a new article, just published in Journal of European Public Policy, Trump’s renewed skepticism toward NATO, combined with uncertainty about continued US military protection, forced Europe to confront an uncomfortable truth: defense is expensive, and balanced budgets are not easily compatible with rearmament.
Suspending the Rules: Readiness 2030 and SAFE
In March 2025, European Commission President Ursula von der Leyen unveiled a ReArmEU plan, later relabeled the “Readiness 2030” initiative. Its core feature was the activation of the national escape clause within the SGP. This mechanism allows member states to deviate from agreed fiscal paths in exceptional circumstances.
For four years, EU countries can now increase defense spending without triggering the excessive deficit procedure. The Commission capped the flexibility at 1.5% of GDP annually, but the political message was clear: security overrides fiscal orthodoxy.
Alongside this flexibility, the EU established a new €150 billion fund called Security Action for Europe (SAFE). Through SAFE, the European Commission can borrow on financial markets and provide loans to member states for joint defense procurement projects. While temporary and limited in size, SAFE represents a renewed — albeit cautious — experiment with centralized fiscal capacity.
Germany’s Fiscal Revolution
Perhaps even more striking was what happened in Berlin. Germany, long the guardian of fiscal restraint, amended its constitution in March 2025 to partially relax the Schuldenbremse — its constitutional debt brake. This rule had strictly limited federal borrowing to 0.35% of GDP annually.
Under the new reform, defense spending above 1% of GDP is exempt from the debt brake. In addition, a €500 billion special fund was created for infrastructure and green investments.
Chancellor Friedrich Merz described the move as Germany’s “whatever it takes” moment — echoing Mario Draghi’s famous 2012 pledge during the euro crisis. For a country deeply attached to the principle of Schwarze Null (the “black zero” balanced budget), this was a dramatic pivot.
The implications are profound. Germany now has fiscal space to invest massively in defense — potentially up to €1 trillion over the next decade. As a result, the logic of the debt brake has been fundamentally weakened.
A Fiscal Limbo
Despite these bold steps, Europe’s response reveals a paradox. Faced with an existential security challenge, the EU did not centralize defense financing. Instead, it largely nationalized it.
Member states are free to spend more — but their ability to do so depends on their fiscal space. Countries with low debt, like Germany and several Nordic states, can expand defense budgets more comfortably. Highly indebted countries such as Italy or France face market pressures that limit their room for maneuver.
This creates asymmetries. Wealthier member states may strengthen their defense industries and technological capabilities, while others risk lagging behind. Coordination mechanisms such as joint procurement exist, but defense policy remains fundamentally intergovernmental.
The result can be conceptualized as a “fiscal limbo”: old rules suspended, new tools temporary, and no permanent settlement in sight. Twice in recent years — first during COVID-19 and now amid a security crisis — Europe has suspended its fiscal orthodoxy. Yet each time, it has avoided fully reconciling fiscal discipline with the need for common funding for European public goods.
The Trump effect forced Europe to acknowledge that security cannot be financed on the cheap. The real question now is whether this moment will lead to deeper fiscal union — or whether Europe will once again muddle through, caught between stability and sovereignty in an increasingly unstable world.