EU open to bending fiscal rules to boost defence spending

Good morning. European Commission president Ursula von der Leyen last night said Brussels would be “very pragmatic, engage early, and discuss and debate” with Donald Trump over his threat to impose tariffs on the EU — just as the US President halted his imminent trade war with Canada and Mexico.

Today, we explain the shift towards easing EU spending rules to allow governments to increase defence spending, and our Athens correspondent reports on the earthquakes shaking one of Greece’s most popular tourist islands.

Flexing

Brussels is open to increasing the “flexibility” of the EU’s rules governing national debt and fiscal deficits to allow capitals to spend more on defence, in what would be a significant shift from the European Commission, following a summit of EU leaders to “brainstorm” ways to increase the continent’s security.

Context: The EU’s spending rules limit deficits to 3 per cent of GDP and debt to 60 per cent. The rules were recently reformed to give countries more wriggle room, but several member states have been asking the EU to exempt military spending from the thresholds altogether.

Making this a reality took centre stage at yesterday’s meeting, where trade with the US and UK-EU relations were also discussed.

António Costa, the EU Council president who chaired the meeting, said afterwards that EU leaders expected the commission to propose ways “to create more fiscal space . . . for more defence spending”.

“I am willing to explore and will use the full range of flexibility in the new stability and growth pact to allow for a significant increase in defence spending,” said commission president Ursula von der Leyen, referencing the new EU fiscal rules.

“It’s obvious that we need more resources to build up and strengthen our common defence. It’s a fact. At the national level but also at European level,” Finnish Prime Minister Petteri Orpo told the FT after the summit. “At the national level, the flexibility of fiscal rules is one tool, and I hope that we can use that, it’s [the] fastest way to boost spending to defence.”

Orpo also said that while his government had previously been against common funding, the “existential question” of Russian aggression meant that he was now “open to different kinds of solutions”.

German Chancellor Olaf Scholz endorsed the fiscal flexibility demands, but stopped short of endorsing common EU debt to finance them.

“We see a big fragmentation between many defence projects . . . this has to change,” Scholz said. During the summit he also proposed reforming the EU’s competition rules on defence, for countries to co-operate on the same tenders.

Scholz said that some countries faced greater hurdles than others in raising their military spending. “And that is why it is a very common view that there needs to be more flexibility . . . also for example through borrowing,” Scholz said.

But he specified that the EU “does not have the prospect of taking on joint debt. It is about creating more flexibility for the individual countries” — including for Germany, where he called for a reform of the strict debt brake.

But Scholz’s colleagues noticed a change in tone: “The approach of the German chancellor is today now much more positive [than in previous discussions],” said Polish Prime Minister Donald Tusk.

Chart du jour: Uptick

Prices in the Eurozone unexpectedly rose by 2.5 per cent in January, although the increase in inflation is not expected to alter policymakers’ plan to continue lowering interest rates.

Trembling

Greece has imposed emergency measures in Santorini as the popular tourist destination has been hit by hundreds of earthquakes over the past four days, writes Eleni Varvitsioti.

Context: Santorini, a volcanic island, is known for its seismic activity. The last volcanic eruption near the half-moon shaped island happened in 1950.

Experts said that the current tremors were not linked to volcanic activities, but to ongoing seismic activity between Santorini and nearby Amorgos. The quakes yesterday reached a magnitude of about 5 on a Richter scale, meaning they were felt everywhere. Some areas were cordoned off because of falling rocks, though buildings have so far not been damaged.

Local authorities have ordered schools in Santorini to remain shut this week, restricted public gatherings and urged hotels to empty their pools. The number of flights was increased for people trying to leave the island, and disaster response units have been deployed as a precaution.

Prime Minister Kyriakos Mitsotakis yesterday urged calm, calling the phenomenon “very intense” but manageable.

While tremors could continue over the next few days, Vassilis Karastathis, director of the Institute of Geodynamics at the National Observatory of Athens, said that the epicentre was moving north-east, reducing the risk of damage.

As most hotels are shut during the off-season, tourism has not been greatly affected so far. Antonis Iliopoulos, a hotel owner and former president of Santorini’s hotelier’s association, said that the industry was monitoring the developments closely.

What to watch today

1. Second day of informal meeting of EU trade and industry ministers in Warsaw.

2. UK EU minister Nick Thomas-Symonds and EU trade commissioner Maroš Šefčovič speak at the EU-UK forum conference in Brussels.

Now read these

• Pushing ahead: The EU is moving forwards with regulations to control AI despite increasing pressure from Donald Trump over treatment of US big tech.

• Green club: China, the EU and the UK should form a grand coalition on climate change action without the US, says the head of a global business coalition.

• Hijacking the body: Brain tissues analysed last year had much higher levels of microplastics than samples from 2016, a new study has found.