Fiscal rule reform

Von der Leyen floats fiscal rule reform as ‘game changer’ for EU defense build-up

There is ‘broad support’ in EU to consider increases in defense spending as a factor in assessing excessive deficits, Commission chief says.

BY STUART LAU

European Commission President Ursula von der Leyen hinted on Thursday that EU countries boosting their defense spending should have that taken into account when calculating whether they are running an excessive deficit.

"Our fiscal framework can and should meet two compatible objectives: ensure sustainable public finances, while also supporting member states’ investment efforts in strategic public goods. And this applies also to defense capabilities," von der Leyen said in a speech at the European Defence Agency.

EU rules limit countries to running a budget deficit of 3 percent of GDP, with a public debt ceiling of 60 percent of GDP. But the COVID pandemic followed by the energy emergency is straining public finances at a time when countries are looking to boost their defense spending — potentially falling afoul of the bloc's rules.

"In the [European] Council, there is now broad support to consider increases in defense spending as a relevant factor when assessing whether a member state has an excessive deficit," von der Leyen said. "And there is room for further targeted and time-limited adaptations — to reduce the required near-term fiscal effort for member states that are simultaneously increasing their defense spending. This could be particularly relevant for investments in identified critical capability gaps."

Such reforms, according to von der Leyen, "could be a game changer for the Union’s defense and its defense industrial policy in these exceptional times."

European defense spending has been rising since Russia's 2014 illegal annexation of Crimea and its attack on eastern Ukraine, and accelerated even more following the Kremlin's full scale invasion of Ukraine last year.

Defense spending across the EU hit a record €240 billion in 2022, the European Defence Agency announced on Thursday, up 6 percent from 2021 and the eighth straight year of spending increases.

However, EU spending on defense is still only 1.5 percent of GDP, below the NATO target of 2 percent; 13 EU NATO members still fall short of that goal.

A tweak to the bloc's fiscal rules could incentivize countries to increase their defense spending.

Von der Leyen also called for a "simpler and more efficient" regulatory framework for military projects. "This is even more necessary in a heavily regulated sector like defense," she said.

The goal of that extra cash is to shake off decades of low spending dating from the end of the Cold War and to make the bloc better able to defend itself against possible Russian aggression while also sending crucial arms and ammunition to Ukraine.

"The war in Ukraine is consuming more hardware than any other war in recent history. Russia has fired 10 million shells in a year. Ukraine consumes 10,000 drones per month. This means that Europe's defense industry must mobilize, too," said the former German defense minister. "The reality is that we did not have sufficient weapons and ammunition available. No large stocks. And a lack of spare capacity."

That's forcing the EU to step up and play a larger role in defense, in parallel with national efforts to rearm and build up stocks.

"The strategic environment around us has fundamentally changed. This creates a new kind of responsibility for Europe," she said.