EU finance ministers to discuss joint fund to buy and own defence gear

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Bruegel think tank proposes European Defence Mechanism

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EDM aims to reduce EU's military dependence on the US

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Could include non-EU members like Britain, Ukraine, Norway

By Jan Strupczewski

BRUSSELS, April 7 (Reuters) - European Union finance ministers will discuss this week the setting up of a joint intergovernmental defence fund that would buy and own defence equipment, and charge members a fee for its use, a paper prepared for the ministers' discussions showed.

The paper, drafted by the Bruegel think tank, was commissioned by the Polish presidency of the EU and could generate large defence funding without boosting national public debt levels - a worry of many high-debt countries.

The paper is part of an EU discussion on how to finance preparations against a potential attack from Russia as European governments realise they can no longer fully rely on the United States for their security.

The EU is already looking to boost military spending by 800 billion euros ($876.40 billion) over the next four years by loosening its fiscal constraints on defence investment and jointly borrowing for large defence projects against the security of the EU budget.

The defence fund, to be discussed on Saturday during an informal meeting of EU finance ministers in Warsaw, would come on top of the already announced financing initiatives.

The fund, called the European Defence Mechanism (EDM), would be established under an intergovernmental treaty and have substantial paid-in and callable capital, allowing it to borrow on the market.

The EDM, which could also issue loans, would admit members from outside the European Union, like Britain, Ukraine or Norway.

The added benefit of the Bruegel idea would also be to promote a single European market for defence equipment to lower costs and pool resources.

Defence procurement and production in the 27-nation EU is highly fragmented with at least seven different types of tanks, nine types of self-propelled howitzers and seven different types of infantry fighting vehicles, which increases costs, reduces interoperability and hinders economies of scale.

FOCUS ON "STRATEGIC ENABLERS"

The Bruegel proposal said the fund could focus on "strategic enablers" - costly military infrastructure and equipment armies need to operate, now often provided by the United States.

These include joint command and control systems, satellite-based intelligence and communication, development of expensive new weapon systems such as fifth- or sixth-generation fighter jets, integrated weapon systems needed by multiple countries like strategic air defence, strategic large-scale air transport and maritime logistics, missiles and nuclear deterrence.

"The European Defence Mechanism ... would serve as an exclusive procurement agency in specified areas, as planner, funder and potentially owner of strategic enablers, and as a legal commitment to observe defence single market rules within the jurisdictions of its members," the Bruegel proposal said.

Bruegel said Europe had a chance to reduce its military dependence on the U.S. by 2030 only if it pooled procurement to the greatest extent possible and created a common European defence market including Britain as a major industrial defence player to boost competition.

To boost Europe's own defence industry, the EDM would buy only from contractors from EDM countries, or from consortia with a defined minimum degree of participation by contractors headquartered in EDM countries.

A majority of the EDM board could override this rule to accommodate circumstances in which the desired military capability cannot be bought from an EDM country, or only at a much higher cost.

Crucially for high-debt EU countries, the EDM would allow them to keep their public debt from increasing because as the owner of the defence assets, the debt incurred to acquire those assets would remain on the EDM's books, rather than national accounts. This is important for countries like Italy, Spain, Greece, Belgium, Portugal or France.

Bruegel said that when lending to its members, the EDM could apply a standard rate, and a subsidised one for "frontline states" with contributions from a trust fund replenished periodically by all members.

Frontline states are those with a common border with Russia or Belarus, a high level of national military spending, or both. ($1 = 0.9128 euros) (Reporting by Jan Strupczewski; Editing by Richard Chang)