BRUSSELS, Feb 18 (Reuters) - The European Union is currently in discussions regarding how to fund a significant increase in its defense readiness to deter any potential future threats from Russia and reduce its reliance on the United States for security.
The European Commission estimates that the EU will require around 500 billion euros ($523.00 billion) in defense spending over the next decade. The approach to financing this expenditure is expected to involve a mix of options rather than a singular solution. Several ideas are being debated:
The Commission intends to formulate EU laws that will relax yearly spending restrictions on governments, allowing them to gradually decrease public debt and maintain budget deficits below 3% of GDP.
Although not all EU member states are in favor of this proposal, citing existing special provisions for defense spending within the regulations, they emphasize the need to clearly define what constitutes defense investment, which they consider a more crucial issue.
Granting governments more flexibility to increase national borrowing could widen deficits, potentially leading to negative reactions from bond markets, especially in countries like France and Italy with existing high deficits, caution Citi economists.
A sharp rise in spending could also strain governments' other financial commitments, highlighted ratings agencies.
Negotiations for the next seven-year EU budget will commence in July. The Commission advocates for a larger budget than the current approximately 1% of EU GNI, amounting to 1.2 trillion euros, to accommodate EU defense initiatives.
Many EU governments contend that while discussing defense expenditure in the EU budget is pertinent, the implementation of the next budget scheduled for 2028 with initial disbursements in 2030 is too late for adequately preparing against potential threats.
The current seven-year EU budget, established prior to the Russian invasion of Ukraine, lacks designated funds for defense projects.
Approximately one-third of the budget is allocated to improving living standards across the EU, and some of these funds could potentially be redirected to defense-related projects like civil shelters or infrastructure enhancements.
EU member states have jointly borrowed considerable sums since 2021 for economic recovery post-COVID-19. Some officials suggest leveraging this joint borrowing mechanism for defense expenditure.
However, proposing additional joint EU borrowing faces resistance in Germany due to legal constraints stemming from the COVID recovery fund. Some officials suggest that new joint EU borrowing could be legally viable without grants, solely comprising loans.
A substantial portion of the available recovery fund remains unutilized, leading to discussions about reallocating these funds towards defense. Unanimous agreement among EU countries would be necessary for this redirection, making it an improbable scenario.
Increasing EU bond issuance could attract investors and promote European unity, potentially narrowing the borrowing cost disparity between member states.
Transitioning EU bonds from temporary to permanent instruments could enhance investor interest, reducing the EU's borrowing expenses and making defense funding more cost-effective.
Poland, current holder of the EU presidency until June, advocates for establishing a Special Purpose Vehicle (SPV) akin to the euro zone's European Stability Mechanism, accessible to all interested parties, including non-EU nations like Britain and Norway.
The SPV proposed by Poland would operate by utilizing both paid-in and callable capital to secure funds from markets for defense projects, subject to higher initial borrowing costs compared to the EU.
Another proposal suggested by British military leader General Nick Carter, Guy de Selliers from the European Bank for Reconstruction and Development, and Edward Lucas from a Washington-based think tank involves the creation of a defense-focused bank modeled after the EBRD. This bank would offer paid-in and callable capital to extend loans for defense endeavors, potentially amounting to 100 billion euros.
($1 = 0.9560 euros)