Poland Focuses on Joint Defence Financing During EU Presidency

By Jan Strupczewski
BRUSSELS (Reuters)

Poland will prioritize joint defence financing during its EU presidency due to concerns over the Ukraine war and Donald Trump’s potential return to the White House, according to Finance Minister Andrzej Domanski.

European nations, especially Germany, are increasing defence budgets in response to Russia's invasion of Ukraine and Trump's suggestion that military support for attacked nations depends on their defence spending being at least 2% of GDP.

Domanski emphasized the need for Europe to take the threat from Russia seriously, stating, "There will be no going back to business as usual. A lot has changed," and advocating for a collective approach rather than individual policies.

Poland will assume the six-month EU leadership in January. The European Commission estimates that enhancing EU defence could cost over 500 billion euros ($525 billion) in the next decade, which has led to the creation of a new defence commissioner position.

EU finance ministers are set to discuss potential financing models in April in Warsaw, although specific financial needs were not disclosed. Domanski mentioned that large projects like a European air defence system require both funds and collaboration among nations, stressing efficiency by citing the existence of 12 different tank systems as "insane".

A joint financing model may involve new EU borrowing, a controversial subject in Germany due to legal constraints on joint debt. Diplomatic sources indicate legal issues could be sidestepped if new borrowing is framed as a response to an emergency, similar to COVID-19 measures.

Possible Options

Diplomats have highlighted two primary options for financing:
1. Utilizing the EU's long-term budget as security for new borrowing, following the post-COVID recovery fund model.
2. Establishing a special purpose vehicle (SPV) that would borrow against its paid-in capital, similar to the European Stability Mechanism (ESM).

The first option poses challenges due to the necessity for unanimous approval from all 27 EU countries, including Hungary, which maintains close ties to Moscow. Additionally, it could limit participants to EU members and place the European Commission in control, a situation that some countries may resist regarding defence initiatives.

Creating an SPV would invite participation from non-EU nations like Britain and Norway, allow government control rather than Commission oversight, and keep raised debt off the national balance sheets.

Domanski acknowledged multiple potential solutions are being considered but stated that it is too early to determine a final choice. The actual financing needs will be clearer after a report by EU Defence Commissioner Andrius Kubilius, expected by early March.

Currently, discussions on financing are still in preliminary stages. "We may be starting to tie our shoes before going to the starting blocks," remarked one EU diplomat.

($1 = 0.9519 euros)