The European Commission is “scraping the barrel” for Defence money

The discussions about “where Europe will get the money for Defence” have just officially started. For starters, Ursula von der Leyen is proposing €800 billion, of which €150 billion will be borrowed. But what she is proposing brings a complete reversal of what we have known in previous years in the economy.

“We are living in dangerous times,” said the president of the European Commission. However, on many issues, unanimity among member states is needed. And perhaps neither March nor the two summits (6 and 20 of this month) together with so many more finance ministers’ meetings (Eurogroup and Ecofin) will be sufficient to take decisions.

“Money is scarce”

State funding (i.e. state resources from citizens’ taxes) is not sufficient for the notorious “increase in defense spending” that is underway. It seems unprecedented for Europe, but this is only one part of the five pillars contained in the plan for… rearmament of Europe (ReArm Europe) which provides, among other things, the following:

1. to create a new EU financial instrument to provide loans to member states with an EU guarantee (like a Eurobond) of up to 150 billion euros. The money will go (as -indicatively- mentioned in the text) to air and missile defense, artillery systems, missiles and ammunition, drones, critical infrastructure related to space, troop movements, cybersecurity, artificial intelligence and electronic warfare.

2. Common defense procurement but also incentives for investments in the defense sector, to strengthen the military industry in Europe.

For this purpose, among other things, it is proposed:

– funds from Cohesion Funds (i.e. the NSRF), Recovery Fund or other European Funds, to be directed to the “urgent need to increase investments in European defense”. The mid-term review of the Cohesion Policy programs is characterized as an “opportunity” for reallocation and more resources for defense. It is also proposed to “relax” the concentration rules for funds invested in defense, i.e. even more money for weapons.

– abolishing existing restrictions that prevent the support of large companies in the military industry sector in the EU. That is, the concentration of this market in a few large “players” is favored (exceptionally).

– supporting the development of a strong and resilient European defense industry which, according to the ReArm Europe plan, will “also strengthen European competitiveness and promote regional development and economic growth”.

3. Change in the EU’s fiscal governance framework to make more state investments in Defense (expenditure as a percentage of GDP). The EU invokes the need for immediate action in the event of a crisis, but without threatening economic stability. This means that the fiscal rules “do not go for a walk”. There will be a “fiscal relaxation” (escape clause) with the aim and priority of giving more money to investments in weapons and defense equipment – and not other benefits. It has not yet been clarified whether the increased spending will also cover increased salaries (as Poland is requesting) or only investments in weapons, tanks, frigates, aircraft, etc.

“The Commission will propose the coordinated activation of the national escape clause of the Stability and Growth Pact,” the text presented by von der Leyen emphasizes. “This will support the EU’s efforts to achieve a rapid and significant increase in defense spending in order to respond to the unprecedented security and defense situation. The loans provided through the new EU financial instrument will benefit from the escape clause of the Stability and Growth Pact.”

4. European Investment Bank loans: “The European Investment Bank will announce details of upcoming changes that will further broaden the scope of its financing, while ensuring its financial capacity.”

What does this mean? A relaxation of the European Investment Bank’s investment restrictions. Currently, the EIB is not allowed to invest in purely weapons systems, but in dual-use goods (e.g. a military hospital that will also serve civilians, Iron Dome protection domes for populated urban areas, etc.). “Dual-use” may no longer be a criterion for financing projects.