European Centre for Counterterrorism and Intelligence Studies, Germany & Netherlands – ECCI
Von der Leyen’s ‘Rearm Europe’ plan and the holes in it
euractiv – The spectre of the US withdrawing from Europe and reviewing its defence position has shaken the Old Continent.
European Commission President Ursula Von der Leyen’s new plan to “Rearm Europe” included close to no fresh money and left the burden of finding the real cash on member states’ shoulders.
Von der Leyen said on Tuesday morning that the EU leverage in issuing bonds and loosening its regulations could free up to €800 billion for the defence industry and member states’ purchases.
That number is, however, based more on hopes and guesses than tied realistically to immediately reforming the bloc’s defence under-production and under-investment.
The EU countries’ best way to access money relatively fast will be to use the proposed €150 billion emerging from joint borrowing. But the Commission provides few details as to how it achieves the €800 billion figure through the less-controversial options proposed.
Von der Leyen’s plan prioritises the least controversial options, such as the right to increase national deficit levels and move money around within EU accounts rather than coming up with fresh money.
The EU executive is planning on releasing official legislative text proposals by the EU leaders’ summit on 21 March, after she gathers their first reactions at Thursday’s summit.
Time to move
With the spectre of the US withdrawing from Europe and reviewing its commitment to defend its allies, shaken EU countries are looking for a way to find more ways to spend on suddenly urgent defence.
The EU countries’ leaders are meeting on Thursday, with a debate expected to focus on finding hundreds of billions to support the much-needed defence projects, such as an air defence shield, munitions, cyber defence and a stiffer border with Belarus and Russia.
The Commission had estimated the EU contribution to boost arms production and procurement in Europe and Ukraine at €500 billion before the summer.
Countries have so far had many different stances on what the EU could offer in supporting member states with procurement or production.
The Commission’s goal was offering an easy solution to free up cash ahead of the next EU budget, starting in 2028.
Tuesday’s proposals should work “very fast and very efficiently,” a senior EU official said, since adopting the texts needs only majority agreement from member states.
But with defence so linked intimately to security as a national prerogative, EU countries might decide to slow down instead and aim for a consensus as they do for the EU defence industry programme (EDIP). link
Despite the governments promising increased defence spending, many European arms manufacturers are still waiting for contracts and orders to re-start their production or expand it.
Joint borrowing for joint procurement
Even though the EU Commission is calling its main initiative an “instrument under Article 122 of the treaty,” its proposal includes the very controversial joint borrowing of up to €150 billion for defence.
The Commission would borrow that money in capital markets, then loan it to member states under the condition they jointly procure weapons in Europe. The grouping condition could involve a minimum of either three EU countries or two EU countries plus Ukraine.
How the countries’ projects would be approved for loans and how a preference for European-made hardware would be included have yet to be decided.“Details must still be worked out,” a second senior EU official said.
Von der Leyen has given a long list of highly sophisticated and expensive equipment and systems that can be funded. They include “strategic enablers and critical infrastructure protection, including in relation to space; military mobility; cyber, artificial intelligence and electronic warfare,” she said.
In the short term, the easier procurement would touch upon the proposed air and missile defence, artillery systems, offensive missiles, ammunition and drones and anti-drone systems.”
Arguments ahead
Expect Tuesday’s proposals to stir some fights among the member states, who will have to decide from which companies they purchase weapons. Also needing to be clarified is what counts as purchases qualifying for European funding.
Some will want to keep the focus as narrow as possible to focus on improving the bloc’s defence industry capabilities. Others, stressing urgency, want to buy from foreign companies.
The goal is to “support achieving a rapid and significant increase in investment in Europe’s defence capabilities now and over this decade,” the first senior EU official said. The money would help “reduce cost”.
Joint borrowing for defence costs needs only support from a qualified majority of EU countries, which means it might be easy to set up even though shared debt has faced critics in the past.
The frugality-focused countries, especially the Netherlands, may go along since the borrowing and repayments rest only on the shoulders of the countries participating in the joint procurement groupings. But Germany, the continent’s largest economy, remains unclear on common borrowing idea, while France has historically supported the move.
Once the system is set up, the money can flow in a couple of weeks, the first official said. However it might take time to get to the countries since they must propose procurement plans to the Commission, which then must approve them before disbursing the cash. In the regular defence industrial programmes, the process takes a whole year.
The Commission did not propose redirecting the leftover money from the pandemic recovery fund, where around €93 billion in loans remains available.
“It is easier to set up another instrument to provide the loans for the defence-related expenditure,” the first EU senior official said.
Cohesion funds facing permanent change
Among the ideas the EU executive pitched is redirecting limited cohesion funds for defence costs.
The changes in the text to allow for large defence industries to benefit from the funds would be permanent once approved by the member states and the Parliament, which might take some time. The impact will be very different in each country because the funds are allocated so that the poorest regions of Europe receive the most.
Because of that, the EU executive refuses to give a figure as to how much could be used, the first senior official said.
The Strategic Technologies for Europe Platform, or STEP fund, also could see some changes by enlarging the scope of technology funded under the scheme.
Stability in fiscal rules
As a first step, the Commission has proposed allowing more flexibility in the bloc’s budget rules for countries that want to invest in defence, via a national escape clause from debt limitations.
This least-controversial idea gets more complicated when it comes to the details. The issue: a larger deficit does not equal higher defence spending. Though, according to the Commission, if all countries were to “increase the expenditure”, it would generate €650 billion.
It is unclear for now whether the idea will apply to all countries, or only those who spend more than the NATO-mandated 2% of GDP on defence.
Plus what helps in the short term does not in the long run. At some point, the governments will have to reduce their deficit somehow.
“The controlled activation of the clause gives the flexibility to raise to a structurally high level, but the expenditure over time will have to be accommodated by raising taxes or reducing expenditure,” a third EU senior official said.
Counting on banks
Considering that the EU loans and repurposed cash will not necessarily lead to enough contracts and orders that justify defence companies launching production lines, businesses will have to count on bank loans for the funding.
The European Investment Bank (EIB) will have to hope that changing its lending policy will motivate commercial banks to also invest more into defence.
In a letter to the EU countries that are its shareholders, the EIB proposed allowing investments in non-lethal defence products, providing unlimited loans to defence companies should EU countries wish it, and motivating commercial banks to join in lending cash to the defence industry.
A Capital Markets Union would free up more funds by putting to work people’s money now in savings. But while the Commission wants to “accelerate” work toward that goal, any results are likely to take months.
The ruled-out options
The proposal also does not mention confiscating Russia’s frozen assets. The EU’s top diplomat, Poland and the Baltic countries also want to use Russian Central Bank assets frozen inside the bloc to fund support to Ukraine and its defence needs. France remains against it, its government repeated today.
Restructuring the EU’s Environmental, Social, and Governance (ESG) criteria and guidance for bank lending (taxonomy) to allow defence industries is not part of the list either. The industry will have to count on commercial banks following the EIB’s new plans.
Other ideas that have floated around were not mentioned, such as granting VAT exemptions on defence procurement to lower the prices, or using the European Stability Mechanism or the brand-new Defense, Security and Resilience Bank.
European Centre for Counterterrorism and Intelligence Studies, Germany & Netherlands – ECCI
