De Guindos: higher defence spending risks straining debt-laden countries

Brussels – Caution on pushing defence spending, as it could lead to an adverse fallout for the sustainability of public accounts. The European Central Bank issues a warning that sounds like a criticism of the European Commission’s insistence that countries like Italy participate in the EUR 150 billion SAFE programme, as it risks leaving them in unsustainable situations.

“The need for increased defence spending and higher funding costs could further strain sovereigns with structurally high debt and
deficits,” ECB Vice-President Louis De Guindos said at the presentation of the Financial Stability Review Update. A warning that was spelled out in the slides released for the occasion.

In the all-political tug-of-war between Rome and Brussels, the strongest arguments are those of the Italian government. It is no coincidence that the Minister of the Economy, Giancarlo Giorgetti, insisted on the need to strengthen the InvestEU programme to avoid further burdening Italian public accounts. Not even Prime Minister Giorgia Meloni liked the idea of increasing the country’s debt further for defence. In the end, under increasing pressure from the European Commission, Italy gave in and requested a EUR 14.9 billion loan, the fifth-largest contribution.

Italy already has the burden of EUR 122 billion in loans to repay under NextGenerationEU, the post-pandemic recovery programme that finances recovery plans. Italy’s exposure to the EU from these two programs alone amounts to €136.9 billion that will have to be repaid. A burden that is additional to the second-highest public debt in the EU, which, moreover, is expected to grow, and which risks surpassing even the Greek debt, which, on the contrary, is on a downward path. It is legitimate for the ECB to ask questions and sound the alarm. Not least because, De Guindos continues, debt in itself is a brake on growth and risks triggering a vicious circle.

 “Fiscal capacity to address any risks to economic growth might be limited by high public debt levels in some countries,” the Eurotower’s number two warns. In short, investing in defence is possible, but under certain conditions. The impression is that the ECB’s warnings amount to a rebuke of a Commission that advocates prudence yet encourages countries such as Italy to incur even greater debt.