European Defence Mechanism: New funding frameworks debated

During the informal meeting of finance ministers in Warsaw, the Polish presidency wants to continue the discussion on defence funding. It has been sounding out ideas among Northern European governments and discussing the matter with the British; Politico reported this information last week.

The starting point for the talks in Warsaw will be an analysis by the Brussels-based think tank Bruegel evaluating the current proposals of the European Commission in this area. This includes the SAFE loan programme amounting to £138 billion (161€ billion) and the easing of financial discipline rules.

The analysis, published on Monday, states that the proposals "towards strengthening the supply of military goods but the incentives offered are too small to address the home bias" such as governments' reluctance to make joint purchases or coordinate actions to avoid duplication.

The analysis includes two proposals, which—in the opinion of the Polish finance minister, as stated in an invitation to his counterparts—should serve as a "sincere and constructive basis" for the discussion on further defence funding. The first, more conservative option involves gradually expanding mechanisms that already operate within the EU, such as the European Defence Agency (EDA) or the Permanent Structured Cooperation (PESCO) in defence.

The second option would involve the establishment of a "European Defence Mechanism"—open to non-EU countries, such as the United Kingdom.

This mechanism would serve multiple functions: acting as an exclusive public procurement agency in certain areas, as well as a planner, funder, and potential owner of, for example, satellites. In contrast to existing EU mechanisms, member countries' failure to meet obligations could result in sanctions, including suspension of membership.

This institution would operate on principles similar to the European Stability Mechanism, which supports eurozone countries in maintaining financial stability.

According to the authors of the Bruegel analysis, the EU, following the example of the European Bank for Reconstruction and Development (EBRD), could be a separate shareholder represented by the European Commission. This would help coordinate EU and EDM activities affecting the defence industry and defence capabilities.

Like the EBRD, this institution could also be financed by contributions from member states, determined based on factors such as GDP size or defence expenditures. Decisions would be made based on weighted majority voting.

To create a common defence market, countries belonging to the EDM would have to adhere to two principles: they could not grant state aid to arms companies, and national preferences in purchasing would be prohibited. Additionally, certain areas outlined in the treaty establishing the EDM would be subject to joint procurement.

Bruegel also warned in the analysis that the United States' withdrawal from its role as Europe's guardian could lead to significant increases in armament costs due to growing demand in Europe—to prevent price hikes, countries should collaborate, especially in procurement.

Analysts, however, fear that the European Commission's current proposals for defence funding will only deepen "nationalism" in the defence market.

"The risk associated with allowing EU countries to spend more by loosening the fiscal rules without creating common funding mechanisms is that it may further increase procurement nationalism within the EU." the analysis reads.

The second EU proposal, the SAFE loan programme amounting to £138 billion (161€ billion), aims to promote joint purchases. The loans will be granted on the condition that at least two countries participate in military procurements. However, according to Bruegel, this incentive is too "modest" to reverse the negative trend in joint procurement.