EU defence surge raises pressure on Reeves

As the Nobel laureate Robert Lucas quipped during the 2008 financial crisis: “I guess everyone is a Keynesian in a foxhole.” Donald Trump’s upending of the postwar security consensus has underlined the enduring wisdom of Lucas’s observation. But now, instead of bank bailouts and emergency bond buying, European firepower is being directed at bombs, tanks and drones in the desperate fight to secure the continent's border with Russia.

- Richard Partington

Berlin and Brussels - typically cap- itals of financial orthodoxy - have been convinced that this approach is required once again. Under the plan put forward by Germany's chancellor-in-waiting, Friedrich Merz, Berlin is on the brink of relaxing its “debt brake” rule to pave the way for spending on defence and infrastructure worth an additional €1tn (£840bn) over the coming decade.

The EU, too, is at a “watershed moment”, having agreed an €800bn plan allowing member states to ramp up borrowing for their defence spending, under an “escape clause” from its stability and growth pact debt rules.

It is being chalked up as one of the most remarkable shifts in European economic policy in decades.

But for Britain, a more old-fashioned approach still prevails, with the chancellor, Rachel Reeves, insisting that her self-imposed fiscal rules remain “non-negotiable”. Rather than allow for a rise in borrowing, Labour's plan to increase defence expenditure from 2.3% of GDP to 2.5% by 2027 involved a corresponding cut for the overseas aid budget.

Pushing spending higher still would require further “difficult decisions”, Reeves has suggested.