Financing a European defence fund with debt?

A system to finance France’s defence spending whilst reducing its overall public debt was suggested recently by Thierry Breton, former finance minister and current CEO of Atos, the European leader of information technologies, at a hearing by the French Senate’s Commission on Foreign Affairs, Defence and Armed Forces.

Thierry Breton, former French finance minister and current CEO of Atos

Thierry Breton, former French finance minister and current CEO of Atos (Photo credit: Sipa)

To date France has accumulated a public debt of €2,103.2bn (96% of GDP), whilst the debts of the rest of the eurozone total €9,000bn, Breton stated, citing figures from Eurostat. But, since the creation of the euro (1999) France has spent almost €720bn on defence and security. “This debt is thus also the result of positive policies: thanks to our efforts we have lived through a period of exceptional peace,” he noted. As the same applies to the other members of the eurozone, Breton has an ambitious solution: the creation of a European security and defence fund to finance the eurozone’s €2,330bn in defence debts accumulated since 1999.

According to Breton, the countries in the eurozone could pay off these defence debts by pooling them in a common fund which would be refinanced on the market by issuing bonds at a lower rate than those supported by national debts over a period of 50 years “as long as the States guarantee [the fund] and make certain fiscal arrangements,” he said.

By benefitting from very low, even negative rates, the counterpart for very long term security, countries in the eurozone could pay off their defence debts at minimal cost. These types of bonds, strongly covered by the emitting states and thus rated “AAA”, are particularly popular with major financial institutions such as the European Central Bank or BNP. The indebtedness of the Euro zone where defence is concerned would thus be cut: “France would drop from 96% to 61% of GDP while Germany would fall from 71% to 56%,” Breton explained. Once a Franco-German balance attained, the kernel formed by this heavyweight duo would lead to a momentum which might motivate sceptical countries to join the fund. Because, Breton argued, not only would such a fund reimburse their debts but it would also finance half of each contributing nation’s defence spending “as long as that half was mutualisable.” This “half” could include “coast-guards, European customs officers, cyper-security spending, some spending on digital or satellite intelligence, foreign platforms for foreign operations, for helicopters, aircraft or transport ships,” he suggested. Side-stepping the question of the necessary schedule, he said : “I’ve calculated that it takes two and half years to put a fund into place with €2,300bn in it, that is the equivalent of the debt of a country like France or Germany.

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Because, even if, according to Breton “this would be a win-win situation”, the creation of such a fund raises numerous questions. For the positive effects to be felt each State would have to increase its military spending to reach the NATO recommended 2% of GDP. And this is far from the case for all but two (Greece 2.46% and Estonia 2.04%) eurozone nations; France’s defence spending currently accounts for 1.8% of GDP putting in third place. Germany is at 1.18%. Similarly, a number of East European nations, led by Poland (which is not in the eurozone) and the Baltic countries, have founded their defence policies on NATO and not on Europe. Other countries would have to be convinced that France is not simply trying to restructure its debt, and that’s not even considering how such a fund might be governed…

Despite these obstacles, the idea of a European fund is quite appealing and could doubtless be something a number of European countries facing growing security concerns might be interested in.