Joint European defence borrowing could bolster euro's global role, ECB's Rehn says

By Balazs Koranyi

SINTRA, Portugal (Reuters) -Europe should pool its defence investments since that would reduce cost, expedite the process and create a new safe financial asset that could bolster the international role of the euro currency, ECB policymaker Olli Rehn said.

ECB President Christine Lagarde has argued that erratic U.S. economic policy creates room for the euro to take market share from the dollar on the global stage, but that would require the bloc to resume a long-stalled process to complete its financial architecture.

Joint defence borrowing could bolster Europe's and the euro's prospects on two fronts: it would create a large, liquid safe asset required in the smooth functioning of the financial sector and would improve defence capabilities, a necessity for any bloc issuing a major reserve currency.

"Defence is also an opportunity for creating another safe asset that could bolster Europe’s financial architecture," Rehn, Finland's central bank governor, told Reuters. "If we deem that common defence spending is a public good, then we also need common solutions."

While such spending would bolster already high national debt levels, the EU could possibly create a defence development bank to own some of the assets, so these do not burden national balance sheets, Rehn argued.

Although Europe has long discussed moving on with its stalled financial integration, Rehn said that bold steps by the new German government give him hope that progress could finally be made.

"I am encouraged by recent movements. The German decision to massively increase defence and infrastructure spending is pivotal," he said. "NATO countries' decision to also boost spending will provide an important fiscal stimulus and increase growth."

Europe should also set a clear timeline for finishing its savings and investment union, and look to complete the process by January 1, 2028, Rehn said.

"The current environment represents an important moment for the euro and we shouldn’t waste it," he said.

The ECB is already doing its part in the process and most importantly, it has finally achieved its price stability objective after a decade of under and overshooting it.

The bank should now remain vigilant, since global economic turmoil risks creating inflation volatility and price growth could once again undershoot the 2% objective.

"There are risks to the outlook on both sides, but the risk of staying below target is greater in my view especially as our projections see price growth under target for 18 months," Rehn said.

"The exchange rate, energy prices, tariffs are all disinflationary and hold back economic growth, so we need to be mindful of the risk of inflation staying persistently below 2%," he said.

(Reporting by Balazs Koranyi;Editing by Alison Williams)