MNI: EU Defence Finance Not As Coordinated As Hoped - Official

European Commission hopes of easing the market stigma for countries which exceed the bloc’s borrowing limits in order to boost defence spending look set to be frustrated, with divisions among member states about whether to exercise national escape clauses to the bloc’s fiscal rules, officials told MNI.

As senior EU economic officials meet in Brussels on Thursday to discuss how to best coordinate the activation of the escape clauses, a move which they hope will provide safety in numbers and mitigate any negative bond market reaction, the talks are likely to run into divergent national approaches and a lack of solidarity between states.

France has already made clear that it will not apply for the escape clause exemption for fear of triggering market jitters, given the already precarious state of its public finances, though it has signalled its flexibility and insists it is pragmatic on whether to tap the EU's new EUR150 billion SAFE loan facility for defence. 

High-debt Belgium is expected to follow the French lead on the escape clause, while other high-debt states such as Italy and Spain remain unsure.

The escape clauses grant a four-year exemption from EU fiscal rules for increases in military spending up to 1.5% of GDP. (See MNI: France, Other EU States, To Forego Defence Escape Clause)

SPANISH POLITICS

Left-wing and pacificist pressure has politically charged the domestic debate on increasing military spending in Spain, where officials underscore how defence is not the priority that it is for the front-line states and Germany.

Madrid is leaning towards applying for the escape clause just to keep its options open, although it has doubts as to whether it will actually use it in the short term, an official told MNI.  However, there are still ongoing negotiations until the end of April while Prime Minister Pedro Sanchez pushes for additional joint EU borrowing on top of the SAFE loans which will be provided on favourable terms.

Italy meanwhile has been so alarmed by the general rise in bond yields following Germany’s announcement of its EUR500 billion defence and infrastructure package that it too might back away from the escape clause option, officials told MNI. 

Prime Minister Giorgia Meloni faces internal opposition within her government to the idea of more coordinated European defence and would like an extension of the Commission's April deadline for applications for the escape clause, they said. (See MNI: Defence Spending Deepens Italian Government Fractures)

POLES TO EXERCISE CLAUSE

Poland meanwhile says it is a certain taker for the escape clause and, while it is keen on loans as well, it is reserving judgement until it is clear on the EU's conditions and certain that there will be an interest rate advantage, EU sources told MNI.

Markus Ferber, a member of the European Parliament’s ECON Committee who is close to the new German government, told MNI that there was a strong case that Germany itself would apply for an exemption. 

"In light of the need to meaningfully increase defence spending and the plan to also spend more on infrastructure, I would expect Germany to go beyond the European deficit threshold. Hence, it would make sense to make use of the option to activate the national escape clause,” he said.

Some officials stressed that France, Italy and Spain have not given up hopes for a big EU common funding solution to the defence question.

"There is a parallel discussion taking place," said one source, noting the big push for joint funding made by the leaders of these countries at the last two EU summits.   

"They do not see that door as closed and believe the discussion will come back to more common funding at some point soon," the official said.