• The proliferation of threats to European security has forced European countries to increase their defence budgets. But filling long-standing gaps in military capabilities will take time, a sustained fiscal effort and better co-ordination of national military spending.
• Efforts to strengthen defence capabilities are largely national, but the EU is playing a growing role in some areas – such as fostering joint research. Now, constraints on national budgets are pushing European policy-makers to consider innovative ways to boost and co-ordinate defence spending.
• The notion of EU defence bonds is routinely touted by European leaders.
• Defence bonds have three key selling points:
• They would increase overall European defence spending.
• They could enhance efficiencies through pooled investments, generating economies of scale.
• They would also reduce free-riding by some member-states who have been reticent about increasing defence investment.
• Defence bonds could be used to fund several European public goods:
• To support Ukraine.
• To enhance European defence R&D and production. 
• To encourage joint procurement.
• To finance efforts to strengthen borders and critical infrastructure.
• Defence bonds face three main hurdles:
• Opposition to joint debt in principle by a group of wealthy, fiscally hawkish countries.
• Differing threat perceptions between member-states and concerns about sovereignty and neutrality.
• Distributional questions about which countries – and which defence industries – would benefit from higher defence spending.
• In terms of design, options for defence bonds include using existing EU funding mechanisms, creating a defence-specific fund, or establishing a new off-budget instrument. Each option has advantages and challenges, particularly regarding their legal and political feasibility.
• For defence bonds to be viable, additional national guarantees would be required, especially since existing commitments in the EU budget limit the Union’s borrowing capacity. The European Stability Mechanism provides an alternative model, but it would require an institutional overhaul.
• Defence bonds face significant obstacles. Yet, as threats to European security grow, the lure of innovative defence funding solutions may prove irresistible. If designed carefully, EU defence bonds could offer the financial firepower necessary to close capability gaps and strengthen European deterrence.

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