MNI: Additional EU Defence-Financing Prospects Bleak

Talks on the European Union's EUR150 billion SAFE lending facility for military spending look set for agreement in coming weeks, paving the way for lending operations to potentially get underway before the summer break, but prospects for agreement on additional defence funding look bleak, officials told MNI.

The agreement of a “defence and security partnership” between the EU and the UK will be the centrepiece of the May 19 EU-UK summit in London, allowing UK defence contractors to participate in projects funded by SAFE loans, going beyond the 35% cap on third-country involvement, which would otherwise apply.

 But while many countries are pushing for talks to move on to additional financing instruments, especially in light of the lacklustre reception for the European Commission's proposal for flexibility around its fiscal rules, many officials are sceptical there will be much support for an NextGenerationEU-style joint-borrowing programme to support the defence surge.  (See MNI POLICY: EU Officials Ignore Legal Warning On Defence Loans)

While such options were discussed at a meeting of finance ministers in Warsaw in April, sources say that the patchy record of NGEU in terms of absorption and achievement of milestones makes unanimity for an NGEU II hard to achieve.

Germany - the paymaster of NGEU - is now looking tapped out, having announced its own EUR500 billion infrastructure investment plan and defence boost of its own. Bruegel thinktank experts even recently suggested that there is now a risk the country might end up facing an EU excessive deficit procedure.

ESM

 Some hopes have been raised that the European Stability Mechanism might join the defence-financing fray and provide more cheap loans for member states which want them. Finance ministers will meet in Luxembourg next month for a discussion on extending the ESM's toolkit, but officials note that more loans rather than outright grants, however cheap, will not address the problems of states which lack fiscal space for more borrowing.   

ESM support would in any case be limited to the 17 euro area states, so big defence players like Poland would not be eligible, and nor would other states which would find the financing terms attractive and face urgent defence funding needs, such as the Baltic countries. 

Sources also noted that Italian Finance Minister Giancarlo Giorgetti was sceptical on any possibility that the Italian parliament would ever ratify the long-awaited changes to the ESM Treaty, which would increase the resources available to the mechanism, when he spoke to his euro zone counterparts on Monday.  

One option that still stands a chance of winning broader agreement could be the Rearmament Bank concept, mooted in a recent UK "non-paper" and echoed by Bruegel in its proposal for a “European Defence Mechanism”. The idea has the benefit of also involving the UK and other like-minded third countries in a flexible inter-governmental arrangement and so spreading the burden of Europe's defence build-up.