Faced with defence budget threats, EU eyes new money sources

EDA chief Jorge Domecq and EIB vice-director Alexander Stubb in Brussels, 09.12.2019. [European Defence Agency]

The ongoing EU budget negotiations have revealed the intention to enforce substantial cuts in Europe’s external action agenda. This could represent another drawback for the bloc’s defence ambitions and will be discussed by EU leaders at a summit on 12-13 December.

**This article has been updated with the position of European industry.

On Monday (9 December), the European Defence Agency (EDA) and the European Investment Bank (EIB) signed a new funding framework, the Cooperative Financial Mechanism (CFM), for supporting cooperative defence programmes whose funding is at risk due to temporary budget shortfalls by its participating member states.

So far, multinational cooperation on defence capabilities development and research has often been delayed because of different budgets between partners, unexpected budgetary constraints, slow parliamentary approval or a change in national policy priorities.

As a result, countries wishing to undertake a deeper joint defence cooperation project have been unable to join or had to postpone their participation.

According to an EDA assessment, approximately 10-20% of collaborative program funding is affected by these disparities among member states.

The main goal of the new initiative is to ensure a steady stream of money for multilateral defence capability development programmes in cases where willing countries cannot participate because their national bureaucracies have yet to clear the required funds.

“In the future, mismatching budget cycles or temporary funding gaps should no longer exclude member states from participating in transnational defence programs,” EDA chief Jorge Domecq said of the benefits of the CFM.

Under the mechanism, the EIB will not provide additional funding or grants in the traditional sense but rather approve potential lending in line with its lending policy, EDA officials clarified.

“Europe has to be at the forefront of the development of key strategic defence technologies, including AI and digitalisation,” EIB Vice-President Alexander Stubb said upon signing the agreement.

“With cooperation, we can improve EU efficiency and innovation ability and strengthen EU capacity to prevent and respond to hybrid threats,” he added.

Through the CFM, the EIB intends to strengthen its lending in support of public sector projects in the fields of dual-use defence or cybersecurity technologies, including projects envisaged under the EU’s Permanent Structured Cooperation PESCO.

“A lack of access to suitable financing solutions allowing to better synchronise joint resources is seen as one of the major impediments to the launch or implementation of defence-related cooperative projects – this is where the EU bank comes into play,” Stubb added.

With 10 member states participating for now – Belgium, Bulgaria, Cyprus, France, Greece, the Netherlands, Lithuania, Hungary, Portugal, Spain – it is so far a voluntary mechanism to which other member states have expressed interest to join in the coming weeks.

It will enter into force on the date of signature of the last country which has announced its intention to join.

EDF headaches

The EDA-EIB agreement comes at a time when the future EU budget funding for the bloc’s security and defence spending will be limited to €14.6 billion, as a draft budget proposal seen by EURACTIV earlier this month suggested.

According to this proposal, the EU’s new flagship framework, the European Defence Fund, is supposed to be cut in half from the €13 billion initially proposed in negotiations to approximately only €6 billion.

The fund aims to strengthen Europe’s defence industry and reduce duplication in defence spending by co-funding defence research with member states.

But the so-called “negotiating box” developed by the Finish Council Presidency in charge of the EU budget negotiations also involves cuts for military mobility from €6.5 billion to €2.5 billion, the European Peace Facility from €10.5 billion to €4.5 billion and space from €16 billion to €12.7 billion.

So far, the proposal is not fixed in stone and potentially to be adjusted by member states, with the next discussion taking place this week at a European Council meeting dedicated to the EU’s next long-term budget.

EU officials have repeatedly expressed concerns that the announced budget limitations come at a moment, in which European defence initiatives have started to show progress towards more European autonomy.

European Commission President Ursula von der Leyen told reporters last week in Brussels she is especially “concerned about the severe cuts compared to the Commission’s proposals for policies pursuing key objectives of the Strategic Agenda such as Frontex, defence, digital and funds for greening economy” and would raise the issue during the European Council meeting on Thursday.

“It is incomprehensible how, after the announcement of aiming to be a ‘geopolitical’ Commission, funding is meant to be cut in exactly those areas which would actually lift the European Union finally to this level of ambition,” a senior EU official told EURACTIV ahead of the EU leader’s budgetary discussion later this week.

Several European industry officials also described the sudden decrease as a “surprise”.

“At a moment when security and defence are becoming more important, the message sent is totally not in line with ambition,” Eric Trappier, ASD President and Dassault Aviation CEO, told reporters in Brussels.

According to him, there is the additional concern that in the event of Brexit, when the UK contribution will be taken out of the EU’s budget, it is questionable whether member states will keep the same budget or reduce further.

As regards the European Defence Fund, the budgetary uncertainty is also raising other political concerns.

After EU lawmakers signed off on the deal establishing the multi-billion European Defence Fund (EDF) in April, giving up parliamentary oversight of the EU’s military subsidies programme, many opposed to the fund sense the possibility of reopening the negotiation on the contents of it.

“We would be more than happy to re-open issues that have been closed at last trilogue, such as the scandal that the agreement reached so far means that there will be zero parliamentary control over a seven-year-long defence fund,” Michael Bloss, Greens/EFA shadow on the European Defence Fund told EURACTIV.

“We would love to re-introduce so-called ‘delegated acts’ for the work programme, a demand by the Parliament during the last term which would allow the European Parliament to veto problematic technology or poorly efficient projects,” he added.

According to Bloss, other issues, such as lack of arms licensing control by the Commission of EU-funded military technology or the lack of independent ex-ante ethical review, could be also re-discussed.

European Parliament sources, however, are less convinced that a renewed discussion is a likely scenario.

[Edited by Zoran Radosavljevic]

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