MNI INTERVIEW: France Ready To Join SAFE Loan Facility

France might sign up to the European Union’s EUR150 billion SAFE loan facility for defence spending in order to ensure that the scheme achieves "critical mass" to fund purchases of European-built equipment, although a final decision has yet to be taken, French Treasury Chief Economist Dorothee Rouzet told MNI.

"We could envisage joining SAFE - even though borrowing would be neutral for France in terms of financing costs - in order to help achieve the critical mass for the instrument to support the European defence industry. The European preference criteria in SAFE are crucial in this respect,” Rouzet said in an interview.

There have been concerns among some officials in Brussels that the loan scheme might only attract demand from front-line states like Poland as well as the Baltics, given the fiscal space these countries have for more borrowing as well as the lower funding costs of the European Commission. EU 10-year bonds yield just over 2.9%, compared to 3.2% for French 10-years and 5.6% for Polish debt. (See MNI: Additional EU Defence-Financing Prospects Bleak)

FOCUS ON PRODUCTION

While NATO leaders look set to agree to a proposal from Secretary General Mark Rutte to increase spending on defence and related infrastructure to 5% of GDP by 2032 when they meet in The Hague on June 24-25, Rouzet said it is vital that European supply and capacity issues be addressed first. Otherwise, it would be a "missed opportunity" to develop a genuinely European defence sector. 

"Rather than focusing on setting high targets in terms of percentage of GDP, we have to start from the discussion among Europeans about what we need: the gaps in terms of equipment, how to avoid duplication and fragmentation in our defence effort, and solving coordination issues around production and joint procurement."  

Rouzet also explained France's decision not to apply for a National Escape Clause from EU fiscal rules in order to boost defence spending, saying it was important to be clear that any increase would be financed within current fiscal limits. 

"This was sending a signal that increasing defence spending in France does not imply increasing public spending overall. Given the already high deficit, we should stick to our fiscal trajectory and make room within it."