EU frees up billions in Covid cash for defense spending

BRUSSELS — The EU's executive told member countries they can repurpose hundreds of billions of euros in Covid-19 relief money to fund defense projects, reflecting a radical shift in priorities since the days of the pandemic.

On Wednesday, the European Commission confirmed countries have until August 2026 to meet agreed targets in order to receive up to €335 billion in Resilience and Recovery Facility (RRF) funding — and said defense-related projects would now be eligible for funding.

Back in 2021, the European Commission offered EU countries hit by the Covid pandemic a cash pot of €650 billion in loans and grants for projects combating climate change, improving digitalization, and supporting other growth-friendly reforms funded by EU-level debt issuance.

It was the height of the Green Deal, before Russia's full-scale invasion of Ukraine when climate was Brussels' top priority. Under the RRF legislation, 37 percent of funds were to go to combating climate change and 20 percent to digitalize the economy, while defense was not mentioned in the list of possible funding areas.

But four years on, with around half of the RRF money yet to be disbursed, the Commission on Wednesday told countries defense projects under common EU plans such as the satellite communication programs were now eligible.

It also called for lawmakers and governments to include in the European Defense Industry Programme (EDIP) regulation a provision to make it possible for countries to use Recovery money to make contributions to the defense fund.

“These alternatives could help the Recovery Facility to deliver additional important benefits from common European priorities, including in the areas of security and defense,” Economy Commissioner Valdis Dombrovskis told reporters, listing a large number of ways in which countries can redesign their plans.

The idea is that if a country diverts RRF-backed money to contribute to these common programs, it can easily secure it.

When asked how defense investments can contribute to the RRF’s green and digital goals, Dombrovskis said the current rules provide no specific treatment for defense-related measures.

He added that the Spanish plan already included measures on cybersecurity, for instance, and that other countries have invested in crisis readiness.

Time is running out

But for countries wishing to redirect funds, time is getting tight. Governments must prove they have achieved agreed targets in order to receive the funds — and several are late.

For months, countries such as Italy and Spain, the top beneficiaries of the funds, have lobbied to postpone the 2026 deadline. The EU executive is firmly rejecting the idea, which would imply extending the possibility for the Commission to borrow money on the markets and would require a deal among governments and ratification by 20 parliaments — with the risk of a complete stall, an EU official said.

"So this is not only not a good idea, it is also extremely costly and very dangerous," the official said.

The Commission suggests countries ensure that the planned investments are feasible or else "replace them with things that are feasible,” the official said.

The  EU lists many options for countries to secure the funds in a communication published on Wednesday, including using funds to inject capital into national promotional banks or transferring them to the EU program for investments, InvestEU.

Countries can also resize their ambitions — for instance, if a government is unable to finish building a hospital, it can complete at least part of it and use other EU funds to finish the job — and scale up projects already completed.

Romania, Hungary and Bulgaria are countries with both larger plans and more delays. Romania has asked for grants equivalent to 3 percent of its GDP.

Hungary has not yet presented a single request for payment. In its case, delivery of the money depends on crucial rule-of-law reforms that would create more anti-corruption safeguards and strengthen the independence of the courts. Budapest stands to lose €10.4 billion.