EU defence funding plan faces uncertainty ahead of summit

4 months ago 14

Ahead of an EU summit on Thursday (27 June), the European Commission is scrambling to finalise plans that include ‘innovative solutions’ for funding the bloc’s defence industry, with needs assessment awaited to justify a floated €500 billion fund.

The Commission’s proposal to “explore all options for mobilising funding” for the defence industry and boost its production to match wartime needs and give the industry perspective to invest is long-awaited.

While EU leaders asked in March that the bloc’s executive come forward with ideas by their next summit, it is unclear if it will be ready, and what it will entail.

The Commission is currently working on it, several EU sources confirmed to Euractiv, refusing to give a clear time indication as to when it will be presented.

“We have not yet seen the letter from the Commission president,” an Elysée source told Euractiv.

Among the “creative solutions”, the focus is largely on the controversial idea of jointly borrowing cash from financial markets – via ‘Eurobonds’.

It has yet to be officially put on the table, and one source said the proposal is not expected to feature the idea.

While several member states, such as France and Estonia, are expecting the topic to be discussed, frugal countries, especially the Netherlands, have been reluctant.

Since March, other measures have been developed and turned into reality, such as the use of the extraordinary profits coming from sanctioned Russian assets in the EU, and the relaxing of the lending criteria of the European Investment Bank (EIB).

One EU diplomat said that before presenting funding opportunities, the Commission should also do a “proper needs assessment”, a request that other countries have made in the past.

None of the previous defence industry schemes presented by the Commission since the start of the Ukraine war have come with a concrete needs assessment. The EU executive has argued, among other reasons, that the information is classified and urgency did not allow for that extra step.

It is so far unclear how much money the EU executive thinks is needed to develop the bloc’s industry.

But the Elysée source said “various figures are being floated, such as 400 or 500 billion euros”, but said they are “waiting on a needs assessment (…) we need examples of the capacity gaps to be financed”.

A second EU diplomat, briefed on the matter, told Euractiv the Commission has estimated more than €500 billion is needed to scale up both the European (€400 billion) and Ukrainian (110€ billion) defence industries over the next decade.

Internal Market Commissioner Thierry Breton has said €100 billion is needed to develop the European industry.

But as for how to find the funds, several options are on the table.

The Commission should present a “wide range of financing options based on changes in the capacity requirements to be financed,” the Elysée said.

“There are lots of things we could do before we get to a discussion about Eurobonds,” the first EU diplomat said.

“We can do more on joint procurement and removing barriers in the internal market for defence industry,”

They also suggested looking at using private capital, for example through the Capital Market Union, or making sure ESG criteria (environment and social governance) aligns with the need for investment in defence so banks are less resistant to lending, as well as the EIB.

A third EU diplomat told Euractiv they want the EIB to tweak its lending policy further so it can invest even more into defence equipment production.

The EIB continues to exclude funding for purely defence activities, such as weapons production.

Meanwhile, EU leaders are to call on the EIB to “further adapt its policy for lending to the defence industry while safeguarding its financing capacity,” a draft of the summit’s final declaration reads, suggesting more pressure on the EU’s multi-million lender.

Europe’s highest spenders have also been arguing that all should invest at least 2% of their GDP in defence spending, according to the target set by the Western military alliance NATO. Estonia, for instance, has pushed to meet a 3% target.

“Building defence capabilities is a long-term challenge that requires not only long-term planning and funding, but also a concerted effort of both the public and private sector pulling in the same direction towards a common objective,” Jan Pie, secretary general of the defence industry association (ASD), told Euractiv.

“Given the scale of the challenge, we believe the solution must involve a combination of different means, engaging both public and private sectors,” he added.

[Edited by Alice Taylor]