Explainer-Europe's plans to pay for surge in defence spending

By Jan Strupczewski

BRUSSELS (Reuters) - The European Commission provided new details on Wednesday of proposals to finance a jump in defence readiness to deter any future attack from Russia and become less dependent for security on the United States.

The Commission says the proposals could mobilise some 800 billion euros ($870 billion) over four years. Below are the ideas put forward:

NEW JOINT EU BORROWING

The EU wants to borrow 150 billion euros against the security of the EU budget to provide loans with a maturity of up to 45 years to governments for defence investment. Countries can apply for the loan programme, called Security Action For Europe, or SAFE, until the end of 2030.

The funds would be for projects that EU leaders think are a priority: air and missile defence, artillery systems, missiles and ammunition, drones and anti-drone systems, strategic enablers and critical infrastructure protection, including in relation to space, cyber, artificial intelligence and electronic warfare, and military mobility.

Only contractors and subcontractors from the EU, European Economic Area and European Free Trade Association (Iceland, Liechtenstein, Norway) and Ukraine will be eligible to benefit.

Orders for equipment would have to come from at least two or more eligible countries, one of which must be from the EU.

SAFE will also allow EU candidate countries, potential candidates and countries having signed Security and Defence Partnerships with the EU to join common procurements and contribute to aggregated demand.

They can also negotiate specific agreements on the participation of their respective industries in such procurements.

At least 65% of the total cost of the equipment bought with the loans will have to be for parts originating in the European Union, EEA, EFTA or Ukraine.

Governments have to ensure they have the legal option of replacing components made outside the EU with their own equivalents if the original producer places restrictions on the use of this equipment.

The Commission estimates that the loans could be attractive to around 20 of the EU's 27 governments because the Commission borrows more cheaply with a AAA rating, while most European countries have a lower rating.

FISCAL LEEWAY IN EU SPENDING RULES  

The Commission proposed that defence spending be exempt from EU laws that put annual spending limits on governments to protect EU public finances and the value of the euro currency. The exemption will be valid for four years, starting in 2025, with each year allowing 1.5% of GDP of extra spending.

After the four years, governments will have to adjust their budgets to accommodate the higher defence outlays.

EU officials said that if every EU country used this option to the maximum from this year for four years, it would generate around one trillion euros of new spending. Because not all EU countries are likely to use that option to the full and not immediately, the Commission said 650 billion euros of additional spending was a realistic estimate for the measure.

MONEY FROM THE EU'S 2021-2027 BUDGET

The current seven-year EU budget of 1.2 trillion euros, created well before the Russian invasion of Ukraine, has no substantial funds for defence.

But around one-third of it is earmarked to equalise the standard of living between EU regions - the so-called cohesion funds - and some of that cash can be used for projects that would be linked to defence, like shelters for civilians or strengthening roads and bridges to allow the passage of tanks.

It would be up to governments to decide if they want to use this option.

EIB AND CAPITAL MARKETS

EU governments also want their huge European Investment Bank to chip in and lend much more for defence projects.

The EIB has a AAA rating when it borrows on the market, therefore EIB loans are cheaper than other options. The involvement of the EIB in a project also attracts private investors because of the bank's good reputation.

The EU will also launch a fresh push to better integrate its fragmented capital markets.

The so-called Savings and Investment Union (SIU) aims to put to better use trillions in private savings earning small interest on savings accounts in banks rather than financing higher-yielding investment in new technologies and industrial development.

(Reporting by Jan Strupczewski and Andrew Gray; Editing by Hugh Lawson, Christina Fincher, Alexandra Hudson)