Defence spending could get special status in new EU deficit rules

Defence spending could be granted special status in the EU fiscal rules under the new economic governance review (EGR) in a bid to encourage member state investment in this area, according to a draft compromise seen by Euractiv.

A draft paper tabled by the Spanish presidency of the EU Council last Friday, seen by Euractiv, suggests that member states that increase defence spending should be handled with more leniency if they exceed the EU’s deficit rule that limits member state budget deficits to a maximum of 3% of GDP.

Breaking this rule typically triggers the so-called Excessive Deficit Procedure (EDP), which requires the concerned member state to take corrective action within a certain deadline.

The paper states an “increase of government investment in defence compared to the average over the four years before the plan, where applicable, to be explicitly recognised as a specific relevant factor when triggering an Excessive Deficit Procedure (EDP), alongside other relevant factors”.

Defence over climate?

When the European Commission tabled its legislative proposal to reform the Stability Pact in the spring, such a rule was not on the table.

However, from the beginning, the review proposal aimed to balance ensuring debt sustainability and allowing for investments.

More specifically, the Commission wanted to consider investments in four EU common priorities (the green and digital transitions, social rights, and defence) when deciding whether member states would get an extension of their fiscal adjustment period. This period is supposed to allow countries to get their debt levels downward if they exceed 60% of GDP.

The Spanish Presidency’s ‘landing zone’ paper states that the impact of growth and resilience-enhancing reforms and investments “should be considered, including their contribution to European and global public goods, to ensure an appropriate assessment of fiscal sustainability across different member states”.

However, of the four common European priorities defined in the regulation, only defence is explicitly mentioned in the paper as granting some leniency to a member state faced with an EDP.

If implemented, the move could incentivise the 27 to spend on defence, which requires high levels of investment, following Russia’s invasion of Ukraine in early 2022.

Member states unburdened

“With the war in Ukraine, we have to produce more and therefore spend more,” one EU diplomat said.

In this context, “defence spending would benefit from a ‘good money’ label as opposed to a ‘bad money’ one to incentivise investments”, they also said.

The latest version of the paper also references the four-year spending period before adopting the new rules as a benchmark against which the “increase” will be measured as a criterion for member states to benefit from the new rule.

Earlier versions of the text from September, seen by Euractiv, did not mention this criterion.

Albeit small, the move would, therefore, aim to benefit the member states and be a political message to the industry to ramp up production capacities for the longer term. This could incentivise banks and private funds to provide the industry with better loan access.

“But it is not a real exemption,” one source in the defence industry said when asked by Euractiv what they thought of the rule.

More talks needed

It seems unlikely that finance ministers, who will meet on Thursday (9 November) to discuss the fiscal rules, will reach an agreement this week, as national positions are still far apart.

Two EU diplomats mentioned that member states also need space for green and digital transition investments in their overall calculations, while the proposed draft agreement does not explicitly offer the same leeway as for defence to environment-friendly and climate change mitigation-related investments.

They would not specify whether they would like the same rule for defence and green and digital spending.

A third diplomat said that the EDP “is an instrument aimed at bringing debt under control and any relevant factor other than debt that is mentioned explicitly creates a potential loophole,” hinting they do not favour a waiver.

A fourth diplomat said that since not all 27 plan to increase defence spending, the rule would give an unfair competitive advantage to those who do, while all member states will have to up their green investments in the next few years.

They also said that “government investment in defence” needs a better definition before an agreement is reached to ensure neutral member states can benefit from the additional fiscal space.

The first diplomat also said that the defence investment’s case is linked to a deal on the economic governance review, stating, “Nothing’s agreed until everything’s agreed.”

And “everything” is far from agreed, as Germany still insists on stricter numerical benchmarks on debt and deficit reductions while France and other EU member states insist on more flexibility to invest.

János Allenbach-Ammann contributed to the reporting.

[Edited by János Allenbach-Ammann /Alice Taylor]  

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