Italy optimistic EU will relax fiscal rules to boost defence spending #ItalyFinance

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Italy is increasingly hopeful the EU will relax fiscal rules to allow members to increase military spending, as US President Donald Trump piles pressure on the bloc to pay more for its own security.

“The political stance in Europe is moving,” Giancarlo Giorgetti, the Italian finance minister, told the Financial Times. “You have to consider this exceptional situation — these are not usual times.”

Ursula von der Leyen, the European Commission president, earlier this week floated the idea of temporarily pausing the bloc’s deficit and debt rules at a summit of EU leaders, as one of several options to encourage more defence investment.

Italy, Greece and Poland have been pushing, so far unsuccessfully, for defence spending to be excluded from the countries’ deficit calculations when assessing their compliance with EU rules.

Giorgetti said the “grave” geopolitical context with Russia’s ongoing war in Ukraine and the US pressure for European allies to increase defence spending constituted an emergency similar to the Covid-19 pandemic, when rules were put on hold for four years to allow governments to spend more and shield their economies.

During Covid, Brussels agreed to suspend fiscal rules “because the situation was exceptional”, he said. “If all countries consider it strategic, and crucial for the future of Europe [to strengthen defence]Europe must move in this direction.”

“We must be realistic and the reality is that we have a war in Europe,” Giorgetti said. “We have to take political decisions that consider this reality.”

With its large public debt and low economic growth, Italy is one of Nato’s biggest laggards on defence spending, having been unable to meet the alliance’s 2 per cent GDP target.

Trump has said he will push allies to spend at least 5 per cent of GDP on their militaries — a target Giorgetti called “impossible” if Rome is to abide by the EU’s fiscal rules capping public debt at 60 per cent of GDP and the budget deficit at 3 per cent of GDP.

“If you have to cut health spending to spend on defence, it’s a political problem. We support a common European policy to finance defence expenses,” said the Italian finance minister.

Brussels appears more open to granting capitals greater leeway, after Trump moved the goalposts on defence spending, and Greece and Poland — which spend more than 3 per cent of GDP on their militaries — also backed Rome’s call.

The revised EU fiscal rules, which came into force last year, allow for some flexibility over how defence expenditure is assessed when the commission evaluates the countries’ budgets and efforts to maintain fiscal discipline.

Under a new proposal, the commission could take a “bolder” interpretation of that existing flexibility, which could see military salaries and investments in defence-related infrastructure given lenient treatment, said three people briefed on the discussions.

Alongside the idea of increasing the flexibility of the fiscal rules, at the informal summit on Monday, EU leaders and von der Leyen discussed various options to increase defence investment, including tapping new public and private financing sources.

The commission is expected to include some of the ideas in a formal proposal next month, with EU leaders set to decide on the option that garners the most support at a summit in June.

Italy and 19 other EU states wrote a joint letter ahead of the summit calling for the European Investment Bank, the world’s largest multilateral lender, to relax its lending rules and allow direct investments in the defence sector.

“Investment in defence needs technology . . . weapons, drones — and this investment needs time,” Giorgetti said.

Proposals to exclude defence spending from deficit calculations or water down the rules have traditionally faced strong opposition from the EU’s most fiscally conservative members, including Germany and the Netherlands.

Giorgetti said another option was for the EU budget to be redesigned to free more resources for defence.

“If today, all countries decide that it is important to increase our spending on defence, then perhaps in the European budget we could increase these funds,” he said. “Europe has historically financed agriculture, cohesion, fisheries. If Europe decides now it’s important . . . then it should finance defence.”

Additional reporting by Henry Foy in Brussels

Data visualisation by Keith Fray and Martin Stabe