By Yoruk Bahceli
LONDON (Reuters) -European Union countries should be able to spend only about 500 billion euros ($540 billion) on defence in coming years, Fitch Ratings said on Friday, less than the bloc’s plans to create the scope for up to 800 billion euros in spending.
The bloc is considering a dramatic rise in defence spending because member states worry that the U.S., which has guaranteed Europe’s security since the end of World War Two, is no longer keen to do so.
But its proposals leave the lion’s share of the funding to national governments, easing EU rules on public finances to mobilise 650 billion euros of spending, topped up by 150 billion euros of defence loans that the EU will provide member states.
That is a big challenge at a time when some of its biggest member states face high debt and deficit levels.
“500 billion is what we estimate is doable or possible in the next four to five years,” Federico Barriga-Salazar, senior director, sovereigns at Fitch, told a webinar.
“(We’ve been) getting news in the recent couple of weeks about governments pledging targets, but what we’ve tried to do here is … assess what’s the capacity of governments to do so.”
Barriga-Salazar added that countries further away from Russia may see less need to spend, while Italy has sounded cautious on additional spending.
The rating agency forecast that defence spending would reach 3.3% of output in the long-term on Germany, which is overhauling its constitutionally enshrined borrowing rules for a vast spending effort, and a similar level in France.
But it would only reach just 2% in Italy and Spain, which currently spend the least on defence in the bloc at less than 2%.
Defence spending in Europe as a whole will stay at 2.5-2.6% of GDP by 2028, Barriga-Salazar estimated, also falling short of NATO ambitions to raise spending above 3%.
Barriga-Salazar added that governments will need measures to offset the rise in spending to prevent budget deficits in the EU rising to 6% in the medium term, from under 3% currently, as the costs of not only defence but climate, ageing populations and interest payments mount.
($1 = 0.9284 euros)
(Reporting by Yoruk Bahceli; editing by Alun John, William Maclean)
