Joint EU defence funding mulled in era of Ukraine war, Trump return

FILE PHOTO: Newly appointed Polish Finance Minister Andrzej Domanski attends the cabinet swearing-in ceremony at the Presidential Palace in Warsaw, Poland December 13, 2023. REUTERS/Aleksandra Szmigiel

BRUSSELS (Reuters) - Poland will make joint defence financing a priority during its presidency of the EU given alarm over matters from the Ukraine war to the return of NATO-sceptic Donald Trump to the White House, Finance Minister Andrzej Domanski said.

European nations including the biggest Germany are scrambling to boost defence spending due to Russia's invasion of Ukraine and Trump's threat not to help a European nation under attack unless it was spending at least 2% of GDP on defence.

"Europe needs to take the threat from the east, from Russia, seriously. There will be no going back to business as usual. A lot has changed," Domanski told reporters, saying a joint approach was needed rather than the current individual policies.

"From my talks with other finance ministers, there is broad support for the view that we need to do way more as Europe."

Poland takes over the rotating six-month leadership of the EU in January.

The European Commission estimates the cost of boosting EU defence at 500 billion euros ($525 billion) or more over the next 10 years and has created a new post of defence commissioner.

EU finance ministers will discuss possible financing models in April in Warsaw, Domanski said.

Without saying how much money was needed, he noted that large projects, like a European air defence system, were not only about money but also about cooperation between nations.

He also stressed the need for more efficiency, pointing to Europe's 12 different tank systems as "insane".

Any joint financing model would most likely entail new joint EU borrowing - a controversial idea in Germany which faces legal obstacles to joint debt.

Diplomats say legal issues can only be bypassed if new borrowing were a one-off response to an emergency, like after COVID-19.

POSSIBLE OPTIONS

Diplomats said talks were along two main strands: one that would involve the EU's long-term budget as security for new borrowing, following the model for the EU's post-COVID 800 billion euro recovery fund.

The other is a special purpose vehicle with paid-in capital that would borrow against that capital, modelled on the euro zone bailout fund, the European Stability Mechanism (ESM), which can lend up to 500 billion euros.

The option involving the EU budget would present more difficulties, because it would require unanimity of all 27 EU countries including Hungary, which has kept close ties with Moscow. The EU budget option would also limit participants to EU members and put the European Commission in charge - a prospect some countries do not relish in the context of defence policy.

Creating an SPV would let the EU invite other nations like Britain and Norway, keep the scheme under control of governments rather than the Commission, and keep the debt raised off the balance sheet of governments.

"There are a couple of solutions on the table. It's way premature to decide which would be chosen," Domanski said.

The size of the EU's financing needs will be better understood after the publication of a report by new EU Defence Commissioner Andrius Kubilius, due by early March.

For now, discussions on financing options are at an early stage. "We may be starting to tie our shoes before going to the starting blocks," one EU diplomat said.

($1 = 0.9519 euros)



(Reporting by Jan Strupczewski; Editing by Andrew Cawthorne)