European defense mechanism: A bold proposal for unity

During the informal meeting of finance ministers in Warsaw, the Polish presidency aims to continue discussions on defense funding. It has been gathering ideas from Northern European governments and discussing the matter with the British, according to a report by Politico last week.

The starting point for the talks in Warsaw will be an analysis by the Brussels-based think tank Bruegel, which evaluates the current proposals of the European Commission in this area. This includes the SAFE loan program amounting to $170 billion and the easing of financial discipline rules.

The analysis, published on Monday, states that the proposals "represent progress towards strengthening the supply of military products, but the incentives offered are too small to solve problems" like governments' reluctance to make joint purchases or coordinate actions to avoid duplication.

The analysis includes two proposals that, in the opinion of the Polish finance minister, as stated in an invitation to his counterparts, should serve as a "sincere and constructive basis" for the discussion on further defense funding. The first, more conservative option involves gradually expanding mechanisms that already operate within the EU, such as the European Defense Agency (EDA) or the Permanent Structured Cooperation (PESCO) in defense.

The second option involves the establishment of a "European Defense Mechanism", which would be open to non-EU countries, including the United Kingdom.

This mechanism would serve multiple functions: acting as an exclusive public procurement agency in specific areas, as well as a planner, funder, and potential owner of, for example, satellites. Unlike existing EU mechanisms, member countries' failure to meet obligations could lead to sanctions, including suspension of membership.

This institution would operate on principles similar to the European Stability Mechanism, supporting eurozone countries in maintaining financial stability.

According to the authors of the Bruegel analysis, the EU, following the example of the European Bank for Reconstruction and Development (EBRD), could be a separate shareholder represented by the European Commission. This would help coordinate EU and EDM activities impacting the defense industry and capabilities.

Like the EBRD, this institution could also be financed by contributions from member states, determined by factors such as GDP size or defense expenditures. Decisions would be made based on weighted majority voting.

To create a common defense market, EDM member countries would need to adhere to two principles: they could not provide state aid to arms companies, and national preferences in purchasing would be prohibited. Additionally, certain areas outlined in the treaty establishing the EDM would be subject to joint procurement.

Bruegel also warned in the analysis that the United States' withdrawal from its role as Europe's guardian could lead to significant increases in armament costs due to growing demand in Europe—to prevent price hikes, countries should collaborate, especially in procurement.

Analysts, however, worry that the European Commission's current proposals for defense funding will only deepen "nationalism" in the defense market.

"The risk of allowing EU countries to spend larger amounts by easing fiscal rules, without creating common financing mechanisms, is that it could further increase nationalism in public procurement in the EU," the analysis reads.

The second EU proposal, the SAFE loan program amounting to $170 billion, aims to promote joint purchases. The loans require at least two countries to participate in military procurements. However, according to Bruegel, this incentive is too "modest" to reverse the negative trend in joint procurement.