Higher defence spending will weaken Europe finances without counter steps, says Scope Ratings

By Yoruk Bahceli

LONDON (Reuters) -Higher defence spending will weaken European governments' credit profiles unless they are able to cut spending elsewhere or increase their revenues, ratings agency Scope said on Friday.

NATO allies agreed on Wednesday to raise their collective spending goal to 5% of output over the next decade, citing the long-term threat posed by Russia and the need to strengthen civil and military resilience.

"Higher defence expenditure will lead to higher borrowings and deteriorating debt-to-GDP trajectories in most EU countries, and thus weaker sovereign credit profiles, unless governments reduce spending elsewhere or increase revenues," Scope analysts said in a note due to be published on Monday.

The additional spending burden will significantly raise pressure on countries such as France, Belgium and Italy that already face disciplinary measures from the European Union due to their high budget deficits, Scope added.

Such fiscal constraints means defence spending could shift towards the European level, the analysts said.

"Centralising EU security and defence financing could provide more sustainable and coordinated financing across member states while also creating economies of scale in defence and security procurement," they added.

The EU is already creating an up-to 150-billion-euro ($175.85 billion) fund financed by joint borrowing for defence, but economists have said more common funding will likely be necessary.

($1 = 0.8530 euros)

(Reporting by Yoruk Bahceli; editing by Dhara Ranasinghe)