Merz Is Forcing a Reckoning on EU Defense Spending

Berlin gathers the euro-skeptics. Brussels tries to hold the center.

Friedrich Merz is holding a meeting Thursday with the leaders of the Netherlands, Finland, Austria, Denmark, and Sweden. Their shared demand is blunt: slice hundreds of billions of euros off the EU’s proposed 2028-2034 budget, currently near €2 trillion.

António Costa, president of the European Council, is simultaneously touring capitals—Prague, Tallinn, Vilnius, Bratislava—trying to build the opposing coalition. Many of the governments he’s visiting do not want cuts. They want investments.

This is the opening round of the most consequential budget fight in a generation. The outcome will determine not just how much the EU spends, but on what, and who pays.

The domestic pressures on Merz are real—and they are driving European policy.

Germany contributes roughly a quarter of the EU budget. It is also the largest net contributor by a wide margin. Merz faces a far-right Alternative for Germany surging in the polls, on track to win Saxony-Anhalt’s state election on September 6. He is already unpopular at home.

That makes it politically costly for him to accept a budget that looks like Brussels is spending freely while German voters tighten their belts. His rhetoric is sharp because his political survival depends on it.

Costa knows this. A senior EU official familiar with the negotiations noted that Merz has never specified a precise cut figure. That absence is deliberate. It signals his demands may be flexible once the real horse-trading begins in October.

But the framing has shifted. Two years ago, the debate would have been about agricultural subsidies and cohesion funds. Now it is about whether the EU can afford to fund defense and strategic autonomy—and whether the budget hawks and the security-conscious East can bridge the divide.

The unexpected alliance: frugal northerners and threatened easterners.

Here is what the political economy of this budget fight reveals. Merz and Austrian Chancellor Christian Stocker want to shift spending away from agriculture. Estonia’s Prime Minister Kristen Michal and Lithuania’s President Gitanas Nausėda want more for defense, security, and regional development. Both camps are unhappy with the status quo. Both are looking for a deal that reorients the budget.

Traditionally, Northern European budget hawks have opposed new EU taxing powers. Traditionally, Eastern European countries have depended on cohesion funds and resisted shifts that reduce their allocations. Those two positions have been locked in opposition for years.

Now they are talking to each other.

Lithuania signaled it might soften its stance on new EU taxes if the budget provides adequate funding for defense and security. That is a meaningful shift from Vilnius’s historical position. Estonia followed with similar language, opening the door to new own resources if they demonstrate European added value.

If Merz can deliver spending cuts in agriculture and link them to increases in defense—and if Nausėda and Michal can accept that trade—then a fragile but potentially transformative coalition emerges.

Costa’s countermove: new revenue, not just reallocation.

Costa is pushing a different logic. He argues that reducing the budget size while protecting agriculture and cohesion while increasing defense spending is mathematically impossible without new revenue. That argument is gaining traction precisely because the commission’s own proposal includes new levies.

The commission proposed levies on emissions, carbon imports, non-recycled electronic waste, tobacco products, and an annual lump-sum payment from large companies. The European Parliament floated additional taxes on digital services, online gambling, and crypto assets.

The question now is not whether new EU taxes are on the table—they are. The question is which ones, how much, and whether every member state will approve them unanimously. Any new revenue stream must be stable, predictable over the seven-year cycle, legally workable, and in effect by January 1, 2028.

Costa’s capital tour is designed to find the landing zone. His next stops—Berlin, Paris, Rome—are where the real decisions will happen.

Why the timing is treacherous.

France, Spain, and Italy hold national elections next year. If the current negotiators lose power, any deal reached by year-end could be reversed or renegotiated. That incentive is pushing everyone toward a deal now—but it also means the compromise will be imperfect, written under time pressure, and vulnerable to future political shifts.

Spain, which believes the commission should not reduce the proposed budget and is resisting a shift away from agriculture, is a key obstacle. If Madrid refuses to budge, the arithmetic works against the cutters.

Sweden’s general election on September 13 adds another variable. A change in Stockholm’s government could alter the composition of Merz’s budget-cutting coalition before it even gets started.

What happens next.

Ireland, holding the Council presidency, will present fresh compromise numbers in October. The European Council summit later that month will either produce a framework or expose the irreconcilable differences. The ball is in Costa’s court—he needs to convert his consultations into a concrete proposal that can pull in both the Merz camp and the larger, less fiscally disciplined members.

The Berlin meeting will produce a united front, not precise numbers. That is the point. It is a signal, not a settlement.

What is significant is not the scale of the cuts—though hundreds of billions is a formidable demand—but the direction of travel. The EU budget is being pulled away from its postwar center of gravity toward defense and strategic autonomy. Whether that shift is funded by cutting agriculture, by taxing the bloc’s richer members and corporations, or by some hybrid of both is the question that will define European fiscal policy for the next decade.

Merz may be gambling that domestic pressure forces a reckoning. Costa is trying to make that reckoning produce a broader deal. The next four months will show who wins.