Italy proposes EU guarantees to boost defence without raising debt

By Giuseppe Fonte

ROME (Reuters) -Italy has proposed to its EU partners a common guarantee scheme triggering defence and aerospace private investments in the bloc worth up to 200 billion euros ($216.48 billion), while limiting any impact on state coffers.

The plan was detailed by Economy Minister Giancarlo Giorgetti during meetings of European finance ministers in Brussels late on Monday, as the bloc weighs options to boost defence spending in the face of a potential threat from Russia.

"We cannot devise defence funding to the detriment of health spending and public services," Giorgetti said, according to his office.

"This is at the root of the Italian proposal for a European guarantee mechanism to attract private capital and strengthen defence and security capabilities without increasing national public debt," he added.

Italy's debt, at about 135% of gross domestic product (GDP), is the second highest in the euro zone after Greece's.

The bloc is studying options including new joint borrowing, the use of existing EU funds and a greater role for the European Investment Bank (EIB), with a view to taking decisions in June.

Under the scheme championed by Giorgetti, dubbed the European Security and Industrial Innovation Initiative, EU countries should set up in stages a guarantee fund worth 17 billion euros which is expected to trigger 200 billion of private money over up to five years.

EU accounting rules establish that public guarantees drive up the debt only if they are tapped by the benefiting companies.

The European Commission has proposed to let all 27 EU governments increase defence spending by 1.5% of GDP each year for four years without triggering any disciplinary steps under the EU's debt rules that underpin the euro.

Italy however has limited budget leeway, as the government already sees debt rising through 2026 to almost 138% of GDP due to the lingering effect of a costly state-funded home renovation scheme, the so-called Superbonus, even though it has been largely phased out.

Rome is currently projecting its defence spending at 1.61% of gross domestic product (GDP) in 2027, below a current 2% NATO alliance target which U.S. President Donald Trump wants raised to 5%.

Giorgetti said EU countries should identify sectors in which factories could be converted to defence production before clearly designing tools to support investments.

Unused car plants across the bloc are seen as a quick way of ramping up military production while reviving a suffering industry.

($1 = 0.9239 euros)

(Reporting by Giuseppe Fonte, editing by Gavin Jones)