The ECB, which meets this week, has an unenviable job: Monetary policy in the euro-zone’s unitary by definition, but there’s no common fiscal framework, nor even the trappings of one.

There’s a sense in which that setup shouldn’t work at all, let alone as well it does on a day-to-day basis.

At some point, the tension inherent in one monetary policy for disparate economies all dancing to their own fiscal beat will result in a crisis. Oh, wait, it already did.

Mario Draghi managed to hold the currency union together in 2012, but the euro-zone debt crisis was a microcosm of the broader challenge Europe faces in trying to be one entity on some fronts and nearly two-dozen on others.

If Europe thought adopting a common fiscal framework was a difficult task, the question of cooperation took on an existential character late last week, when Donald Trump effectively reneged on America’s Article 5 commitments. Ukraine’s not a NATO member, but Trump and JD Vance left little doubt: If Vladimir Putin wants to invade the Baltic states, he can. The US military wouldn’t consider that an attack on America.

Over the weekend, Keir Starmer convened European leaders in London for an emergency summit. Tellingly, Estonia, Latvia and Lithuania weren’t invited. That rather foreboding omission aside, the UK’s apparently confident enough in its own military capacity to put troops in Ukraine and the Royal Air Force in its skies, daring Vladimir Putin — or calling his bluff, however you want to look at it.

As a separate entity, the UK can do that assuming voters are on board with it. But Europe, as a confederation of nations which very often struggle to stay on the same page when the stakes are high, can’t send “the European army” to Ukraine, because there isn’t one. Yet.

The group photos from Starmer’s summit found European leaders looking very nervous. Some of them appeared terrified. If that’s accurate, I don’t blame them. Europe’s staring down the barrel quite literally vis-à-vis Russia, and for the first time since NATO’s inception, the US military backstop’s in question. At the same time, Brussels will soon have to fight a trade war with Donald Trump.

Those two challenges would be daunting enough for a country which spoke with one voice and had the capacity to present a united front. That’s not Europe. Europe’s just a glorified club.

On Monday, inflation data showed the annual rate of services price growth in Europe matched the slowest pace since June of 2022 last month. At 3.7%, inflation in the European services sector’s still far too warm, but the preliminary tally for February represents the first meaningful decrease in the annual rate since April.

As the figure shows, core inflation ran 2.6% last month, the slowest pace since January of 2022, which is to say the coolest since before the war. One interpretation is that lackluster demand is limiting businesses’ pricing power.

The benign inflation readout pretty much cements another rate cut from the ECB later this week. I don’t know what Christine Lagarde and the Governing Council make of the security situation in Europe, but the GC’s hawks (who’re reportedly worried the depo rate might already be at neutral, and thereby that additional cuts could find the ECB inadvertently adopting a stimulative policy stance, jeopardizing the inflation fight) need to consider the very real possibility that the bank will be called upon in the years ahead to engage in some manner of roundabout financing scheme to ensure that funds raised for mutual defense don’t carry punitive rates.

That sort of thing’s anathema to hard money types, which is to say it’s the stuff monetary hawks’ nightmares are made of. But… well, if you want to see what a real nightmare looks like, take a look at some pictures from Bucha ca. March 2022.

Berlin’s the bastion of fiscal restraint and as the most powerful nation in the euro-zone, even in its currently hobbled state, a Germany which prioritizes defense spending over the nation’s pathological debt phobia is a Germany that sends a message to the euro-zone’s other fiscally conservative members: This isn’t a drill; we can’t sacrifice our security — indeed, our sovereignty — at the altar of budget rectitude.

Don’t be too surprised if, at some point, the ECB ends up buying war bonds to underwrite the establishment of a European army. It may not come to that, and if it does, the ECB’s role could look more like yield-curve control than PEPP (the bank’s pandemic QE program). But if you’re going to raise an army from scratch and equip it such that it’s capable of squaring off, on its own, against the irritable remnants of an erstwhile superpower, you’ll need a central bank willing, able and ready to be complicit in a circular funding scheme.

Remember the justification for central bank pandemic bond-buying? Those programs were very often couched in terms of war. The world was “at war” with COVID. Well, this is war too. Real war. With bullets and bombs.

The ECB’s role would be particularly important when you consider that investor demand for any jointly-issued European war bonds would be circumscribed by the circumstances. Who’s in the hypothetical buyer pool for that debt? Not Russia, that’s for sure. And not China. Probably not the Saudis either. Indeed, probably not any nation concerned about recycling its savings in G7 claims after seeing Russia’s reserves frozen.

I assume European asset managers would be ready buyers. Maybe US PMs too. Norway’s sovereign wealth fund would probably take some, and maybe the SNB, although that’d raise questions about Swiss neutrality. Still, you have to believe a lot of the burden would fall to the ECB. “Whatever it takes!” after all.

On Monday, Reuters said coalition talks in Germany include urgent discussions for establishing a €400 billion special defense fund.