Joint Indebtedness Deters EU States from Common European Defense

The southern EU countries do not want to take out a joint EU loan, and the northern countries do not want to pay more to cover the shortfall. The European Union has been divided on the issue of a common EU defense package from the start, with European Commission President Ursula von der Leyen desperate to get her way, Világgazdaság reports. Hungary is among the countries that oppose joint borrowing and would prefer to strengthen the armed forces at member state level.

Southern European states reject the European Commission’s plan to encourage an increase in defense spending through loans, fearing that this would add to their already heavy debt burdens. The proposal – which includes a €150 billion loan package and an emergency clause to relax EU budget rules – was designed to unlock significant new defencs investment and reduce the EU’s dependence on US defense. However, some countries are raising doubts about whether such indebtedness is even feasible or possible, a senior EU diplomat told Politico.

Heavily indebted countries are calling for the introduction of a so-called defense bond rather than further indebtedness of their own. This means that their defense spending would be financed by joint EU borrowing.

However, joint indebtedness would have to be unanimously approved by all 27 EU countries.

Ursula von der Leyen is reluctant to back the idea for now, given the likely resistance from more fiscally austere northern states such as Germany and the Netherlands, which fear it would set a precedent for a debt community. Dutch Prime Minister Dick Schoof already stressed at last week’s EU summit that there would be no eurobonds.

The EU strategy would allow member states to temporarily increase their defense spending by 1.5 per cent of GDP over four years, and for the EU to jointly borrow €150 billion for arms purchases and support for Ukraine. The Commission presumably hoped that the credit-based system would be particularly attractive to larger southern European economies such as Italy and Spain, whose defense spending falls far short of NATO’s 2 percent of GDP target.

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However, Brussels has underestimated one of the biggest obstacles, writes Világgazdaság. Although they can borrow on more favorable terms at EU level under a common debt, the loans they disburse still count towards national debts – a concern for indebted countries.

The Commission has since acknowledged that there should be significant reallocations in national budgets to cover rising defense spending, but this is politically difficult to do in countries where migration or climate change are more important public concerns.

Italy and Spain in particular are calling for a broadening of the definition of defense spending that can be exempted from EU budgetary rules. The government in Madrid, for example, has proposed that border protection, cyber security and infrastructure resilience should be included. Meanwhile, so far neither Rome nor Madrid has confirmed that it would use the emergency clause. Some EU officials say it is a delaying tactic, hoping that Ursula von der Leyen will make concessions on defense bonds before the EU summit in June.

France has also indicated that it does not plan to activate the clause. Germany, on the other hand, is expected to activate the clause to partly finance its gigantic €500 billion defense development program. However, Berlin is unlikely to accept loans from the Commission as it can borrow on more favorable terms itself, Világgazdaság reminds.

As Hungary Today reported, the Hungarian government is also opposed to joint indebtedness. Prime Minister Viktor Orbán said in his interview with Kossuth Radio on March 14 that

Hungary should not agree to the EU Member States jointly taking out loans, getting into debt, and indebt “not only our children but even our grandchildren.”

He emphasized that Hungary should not be involved in this scheme, adding that we must take part in common defense, in defense policy, and we must also spend money on it, but we must not do it from a joint loan.

Last week, parliament has adopted a political declaration rejecting the idea of joint borrowing by the European Union by 138 votes in favor.

According to the explanatory memorandum, Hungary agrees with the development of European defense capabilities and with the EU’s contribution to providing national financing needs. However, the governing parties are opposed to joint EU borrowing. The parliament also calls on the government to represent Hungary’s interests in the EU institutions in which the government participates, using all legal means.

Gergely Gulyás, the Minister heading the Prime Minister’s Office also spoke about the matter at the Government Info on Thursday. He recalled that there are two types of joint borrowing: the EU does not need our consent for the maximum budget allocation, but for everything else they need it. “We do not support any other type of borrowing,” Mr Gulyás emphasized.

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Via Világgazdaság, Politico; Featured photo via multimedia.europarl.europa.eu/Philippe STIRNWEISS