Budget rules and structural defense spending: the EU dilemma

Brussels – Common budget rules should prioritize defense as a public expenditure rather than penalize it. However, it is necessary to translate into practice an agreement that is in principle. Eurozone economic ministers are starting a discussion that, for now, has remained in the background but is now emerging as a key topic. How and to what extent should structural components of debt and deficit be given special consideration? This question will have to be answered in 2025.

Defense spending “is a major factor under the new budget rules, but the specifics of what that entails have not been clarified,” qualified EU sources acknowledge. On the one hand, it aims to prevent national governments, especially the most indebted ones like Italy, from using this pretext to open spending taps without keeping it under control and reducing it. The sources add that the defense factor “cannot be a reason to violate spending rules or ignore that there are budgetary costs.”

On the other hand, it is essential to follow up on agreements and promises. The political and budgetary goal is to enable countries to invest in security and defense without widening macroeconomic imbalances. It is necessary to find a formula for this without delay. Amid new EU needs and evolving NATO policies, “defense spending risks becoming permanent and therefore must be managed in a way that does not jeopardize debt sustainability.”

The crux lies in the nature of expenditure. Even before the reform of the rules of the Stability Pact, there was always a principle that differentiates temporary (one-time) and permanent (structural) costs. The former, precisely because they do not recur over time but are exceptional, are not included in deficit and debt levels since they are non-recurring. On the other hand, permanent expenditures continue to affect budgets and their sustainability, and it becomes difficult, if not impossible, to disregard them.

“Defense spending is spending,” they curtly say in Brussels. While it may be considered differently from other budget items, it still represents an outflow for state coffers — in Italy or any other EU country. It will be necessary to find a balance between those in the EU who have always preached austerity and budgetary discipline and those who instead call for more flexibility. A dichotomy and debate, which usually pits the North against the South of Europe, that has never been closed. “It is up to the member states to have this discussion.” In Brussels, people observe and wait.