President Trump’s Davos reversal on Greenland may have lessened the risk of another trade war, but it increased the risk of another hot war in Europe. The Greenland crisis exposed the weakness of any defence alliance that depends on the US. For Europe, the lessons are clear. The assumption that NATO’s security architecture remains structurally intact underpins much of Europe’s economic performance. If Trump disengages from NATO, however, Europe would be forced into a hurried, ‘go‑it‑alone’ defence posture. This would not represent a marginal adjustment, but a full strategic pivot.

Despite rising geopolitical tensions, consensus continues to treat the rise in European defence spending as slow, manageable, and with limited economic fallout. That complacency looks increasingly dangerous. To understand the scale of the challenge, consider the marginal costs of a rapid European assumption of its own defence. This can be analysed through the prism of three variables: rapid military spending, replacing US assets, and taking on the nuclear umbrella.

In the bid to accelerate defence spending, Europe must reach NATO’s five per cent of GDP benchmark by 2030 instead of 2035. This requires an additional 0.6 per cent of GDP annually over five years – double the current pace.

To replace US military assets, Europe must replace US defence expenditures and assets integrated into NATO. The US currently contributes about 16 per cent of NATO’s annual budget. Yet that is not the full cost of replacing the US in NATO, because that also involves military assets and personnel as well as US enablers – satellite communications, electronic intelligence and logistics for transport and supply. At a rough guess that might amount to between one and two per cent of the EU27’s GDP. The build-up to 2030 could well push expenditure above this run rate.

Replacing the US nuclear umbrella adds a new spending category. Based on UK and French benchmarks (six-12 per cent of defence budgets), extending a credible deterrent across Europe would add 0.5-one per cent of GDP annually.

In combination, these elements suggest incremental defence spending of three per cent of GDP annually through 2030 – on top of the planned increase from two per cent today toward five per cent by the mid-2030s. The fiscal consequences would be immediate. The EU27’s aggregate budget deficit is forecast by the EU Commission at 3.4 per cent of GDP in 2026. A ‘go‑it‑alone’ defence scenario would push that figure closer to six per cent of GDP. Europe, therefore, faces stark funding choices.

Defence could be financed through higher taxes, which would directly suppress private‑sector demand. Alternatively, defence spending could be financed by higher budget deficits funded by bond issuance at either the national or EU level. The third option is that the European Central Bank becomes an explicit participant in the defence effort.

What is certain is that the ‘natural’ effect of issuing so many defence bonds would heft yields dramatically throughout Europe. Sovereign risk dispersion across the euro area would also widen. Countries with already‑high debt ratios – France in particular – would come under increasing scrutiny. The market assumption that European sovereign spreads are politically capped may ultimately be tested.

That is where the ECB comes in. Normally, central banks like the ECB are not allowed to buy debt directly from the government. That is because printing money to fund the budget deficit can feed inflation and remove all spending constraints on politicians. But if it was necessary to do so to ensure Europe’s defence, a way could be found by allowing the ECB to buy ‘Defence Bonds’ issued as a liability of the EU (and possibly of a wider ‘coalition of the willing’).

Ironically, the issuance of EU Defence Bonds could, in theory, help with the internationalisation of the Euro. At present, the Euro only accounts for about 20 per cent of the foreign currency reserves of global central banks. In part, this is because if a foreign central bank wants to park its reserves in euros, it must buy the assets or liabilities (bonds) of individual member states. If there were more EU Defence Bonds to buy, foreign central banks might hold more euros. Increased international holdings of euros are good for the EU because it lowers the cost of transactions for imports, exports and capital. But it also projects soft power globally, which is important in the age of declining US soft power and a fading US dollar.

In practice, this ambition may collide with reality. Reserve managers are acutely sensitive to geopolitical risk. Currency impacts are equally important. Persistent fiscal expansion combined with ECB yield suppression is a negative mix for the Euro, particularly against currencies exposed to global growth rather than regional security risks.

For all these reasons, the real Davos debate is about the trade‑off between strategic autonomy and economic comfort.