ECB's Rehn calls for joint European investment in air defence, drones

HELSINKI (Reuters) - Europe must adopt common policies such as joint procurement of air defence equipment and drones to support Ukraine and strengthen its own defence despite large public deficits, Finnish central bank Governor Olli Rehn said on Tuesday.

Rehn was speaking after European Union finance ministers on Monday began discussing how to pay for defence through new joint borrowing, existing EU funds and a greater role for the European Investment Bank.

On Tuesday, the ministers are expected to discuss how to change EU fiscal rules to provide room for more national spending.

"It is justified at this moment to implement the flexibility elements included in the EU's new fiscal rules, provided that long-term debt sustainability is maintained," Rehn, an ECB policymaker, said in a speech in Helsinki.

He called for common European financing solutions, implemented with rules that would effectively strengthen Europe's common security and accelerate joint procurement and production.

"I am thinking, for example, of air defence and drone production," he said.

The European Central Bank cut interest rates last Thursday for the sixth time since June but raised the prospect of a pause amid uncertainty over U.S. tariffs, increased defence spending and volatile energy prices.

Rehn said the Bank of Finland's estimates showed that import tariffs imposed by the United States on EU countries and China could reduce global output by more than 0.5% this year and in 2026.

He said the bank's calculation assumed, as suggested by U.S. President Donald Trump, 25% tariffs on all U.S. imports from the euro area and 20% tariffs on U.S. imports from China as well as reciprocal tariffs by the two regions.

Uncertainty stemming from U.S. policies had both deflationary and inflationary implications for Europe, Rehn said.

"It's worth recalling that if growth were to slow down in the world economy and euro area economy compared to forecasts, that would weigh on inflation downwards," Rehn said. The ECB stood ready to continue or pause rate cuts in April, depending on fresh data, he said.

(Reporting by Anne Kauranen in Helsinki, editing by Stine Jacobsen, Terje Solsvik and Susan Fenton)