EU should use frozen Russian assets to boost defence, Spain says

Spain proposed setting up a new defence fund to provide non-refundable grants to beef up Europe’s defence lines and provide support for Ukraine using Russia’s immobilised central bank assets.

Economy Minister Carlos Cuerpo urged his European Union counterparts on April 12 to create such a temporary instrument to finance large-scale European-wide projects. 

“This is the time for European solidarity to support Ukraine and Eastern frontline countries,” he said on the sidelines of a meeting with his EU peers in Warsaw.

“We need to invest together in defence, which is a genuinely European public good that benefits our citizens and bolsters our economic security.”

EU financial chiefs

explored ways to finance the region’s rearming efforts

over the weekend as doubts about the US commitment to Nato’s mutual defence clause and the growing threat posed by Russia push the bloc to accelerate its preparedness.

The cash-strapped state of some member countries means that the EU needs to find additional options to finance years of underinvestment and the creation of new pan-European instruments was among topics discussed. 

In contrast with options put forward so far based only on soft loans, Spain wants to provide also EU grants to countries – in particular the East, which is more exposed to the Russian threat.

Spain’s proposed tool, designed as a special purpose vehicle, would be financed by contributions from member states, join EU debt, and the European Stability Mechanism rescue fund.

In addition, Madrid said part of the immobilised €200 billion (S$300 billion) Russian central bank assets held in Europe could also be used to finance military projects to benefit Ukraine. 

This would represent a bolder and more controversial step as some countries, including Germany and Belgium, still resist using the underlying assets fearing consequences for the financial stability of the region and the role of the euro.

EU economy chief Valdis Dombrovskis told reporters after the meeting that the commission “is ready to explore new ways and options” and Spain’s focus on supporting the region’s East “fits well in the discussion we are having”.

Speaking alongside the commissioner, Polish Finance Minister Andrzej Domanski – who chaired the meeting – said that a large majority of ministers considered that additional defence financing tools may be needed. And he described as “encouraging” the solidarity expressed by some Southern members of the bloc.

So far the EU, where most of the assets are held in Brussels-based clearing house Euroclear, has used the frozen Russian assets to generate proceeds to finance Ukraine’s budget as part of a US$50 billion (S$66 billion) loan package from the Group of Seven.

But the European Commission – the EU executive’s arm – is considering options to further use the assets to support Kyiv amid European concerns about the US aid.

The possibility of such a fund would come on top of the new €150 billion loan-based instrument in the pipeline to reinforce Europe’s defence industrial capacity around some strategic fields in liaison with some of its closest partners, including Ukraine.

In addition, the commission is prepared to “pardon” up to 1.5 per cent of the gross domestic product of the national defence spending under its fiscal oversight in a move that could mobilise up to €600 billion in military spending from the capitals, according to Brussels.

But some economies including Spain and Italy are calling for different options that would not inflate their budgets, closely watched by the markets, including fiscal transfers from the EU budget or EU-led guarantees to mobilise private funding. 

“Some countries are more willing to participate in some tools than others,” said Mr Domanski, “Our job is to find a good compromise, a good solution that would serve all of us.”

The commission has also proposed changes to the European Investment Bank’s (EIB) lending practice to facilitate more resources to this industry and tweaks to its €392 billion cohesion fund so capitals can use some EU resources for specific defence projects.

In parallel, banks have started to explore how to increase their financing to arms-producing firms long seen as a toxic. 

Ministers also discussed setting up a European Defence Mechanism that would undertake joint procurement and provide key defence assets in specific areas, with firepower to finance them, as proposed for the meeting by Bruegel, a Brussels-think tank.

Bruegel’s paper said that this new mechanism, designed outside the EU treaties and mirroring the existing ESM, could own some of the strategic assets and charge usage fees to its members, reducing the budgetary impact of rearmament and facilitating large-scale projects. 

The EDM “was viewed positively by some and rather skeptically by others, because it is important to talk not only about money, but also about skills, efficiency, and better cooperation in procurement – and not just about the Nato quota,” German Finance Minister Joerg Kukies said.

Other ideas have also been circulating for a more permanent mechanism, some under the EU umbrella financed by euro bonds while others have proposed creating special purpose vehicles that could be managed by third parties, including the EIB, which would facilitate the participation of like-minded partners like UK, Norway or Canada. 

Despite the flux of ideas, some member states prefer to wait and implement the numerous initiatives under discussion so far before tackling new initiatives, diplomats said.

More permanent instruments are still divisive – especially as Germany faces constitutional limits and Austria and Ireland both are neutral – and require further discussions in the coming months, they said. BLOOMBERG