Madrid (Brussels Morning Newspaper) – Spain proposed establishing a new defense fund to provide non-refundable grants to increase Europe’s defense lines and extend support for Ukraine, utilising Russia’s immobilised central bank assets, Bloomberg reported.
The EU nations’ finance ministers explored ways to fund the region’s rearming efforts over the weekend as suspicions about the US commitment to NATO’s mutual defense clause and the increasing threat posed by Russia push the EU to accelerate its preparedness.
Spain’s Economy Minister Carlos Cuerpo urged his European Union counterparts to make such a temporary tool to fund large-scale European-wide projects.
Will Spain’s plan reshape EU military spending policy?
“This is the time for European solidarity to support Ukraine and Eastern frontline countries,”
He mentioned during a meeting with his EU colleagues in Warsaw.
“We need to invest together in defense, which is a genuinely European public good that benefits our citizens and bolsters our economic security.”
Unlike the previous proposals focused solely on soft loans, Spain aims to also offer EU grants to countries, especially in the East, which face a greater risk from the Russian threat.
Spain proposes a special-purpose vehicle funded by contributions from member states, joint EU debt, and the European Stability Mechanism rescue fund. Furthermore, Madrid indicated that a portion of the €200 billion in frozen Russian central bank assets in Europe might also be allocated to finance military projects benefitting Ukraine.
Could the EU use Russian funds to support Ukraine’s fight?
According to sources, to date, the EU has utilised frozen Russian assets, primarily held in the Brussels-based clearing house Euroclear, to generate revenue that finances Ukraine’s budget within a $50 billion loan package from the Group of Seven. However, the European Commission, which serves as the EU’s executive arm, is exploring additional ways to leverage these assets to bolster support for Kyiv, particularly in light of rising European apprehensions regarding U.S. aid.
Will defense grants ease the burden on Eastern EU states?
Additionally, the commission is ready to “forgive” as much as 1.5% of GDP from national defense expenditures under its fiscal oversight. This action could potentially unlock around €600 billion in military investment from member states, as reported by Brussels.
However, certain economies like Spain, France, and Italy are seeking alternative solutions that wouldn’t strain their budgets, which the markets are closely monitoring. This includes proposals for fiscal transfers from the EU budget or EU-led guarantees to leverage private funding.
The commission has suggested modifications to the European Investment Bank’s lending practices to allocate more resources to this sector and adjustments to its €392 billion cohesion fund, allowing capitals to utilise certain EU funds for targeted defense projects. Simultaneously, banks are beginning to investigate ways to boost their financing for arms firms, long viewed as problematic.
Ministers also talked about establishing a European Defense Mechanism aimed at joint procurement and supplying essential defense assets in targeted areas, alongside funding sources for these initiatives, as suggested for discussion by Bruegel, a think tank based in Brussels.
