Why France and Italy are sparring over the EU’s loans-for-arms scheme

Good morning. News to start: The EU is preparing to apply much higher tariffs on Ukrainian imports within weeks, hitting Kyiv’s economy at a crucial time in its fight against Russian aggression, diplomats told the Financial Times.

Today, our finance correspondent reports on the latest battle over how EU cash can be spent on weapons, and I preview a gathering of Nato foreign ministers focused on ratcheting up defence spending.

Number crunching

The EU’s largest countries are battling over the extent to which non-EU arms producers should be allowed to take part in a €150bn defence loan scheme backed by the EU budget, writes Paola Tamma.

Context: The EU is rushing to re-arm in response to Russia’s invasion of Ukraine and threats by US President Donald Trump that if the bloc doesn’t, he could reduce American security guarantees to the continent.

The European Commission’s “SAFE” proposal, which would provide loans to capitals to spend on weapons, is set to limit non-EU countries’ participation to a maximum 35 per cent of the value of each purchase, unless third countries sign defence-related pacts with the bloc.

But on top of that, France is supporting an additional restriction that would limit the participation of any third-country subcontractor to 15 per cent of the value of the contract, three diplomats and officials told the FT.

That, however, is too restrictive for countries including Italy, Germany and Poland, whose defence companies have significant partnerships with British, Turkish, American and Korean contractors. 

There are concerns that some key defence projects in those countries would not qualify for the EU loans if the French threshold is agreed.

The clash is the latest iteration of a long-standing discussion pitting Paris’ emphasis on self-reliance or “strategic autonomy” in the field of defence, against other large EU economies with strong ties to third-country defence contractors which argue for a focus on the cheapest and fastest means of rearmament, regardless of nationality.

Poland, which holds the rotating EU council presidency and thus is tasked with brokering an agreement, is going to make a new proposal to EU ambassadors in the coming days to try to reach a compromise by the end of the month.

“We need to unlock €150bn loans for defence investments as a matter of priority,” Andrzej Domański, Poland’s finance minister said yesterday after discussions with his 26 counterparts on the issue. “We’re really optimistic and we’ll manage to get a consensus on this file during the Polish presidency, hopefully in May.”

Chart du jour: Drinking problem

Moët Hennessy, the wine and spirits empire owned by France’s LVMH, has been hit hard by a global downturn in sales of alcoholic drinks, compounding strategic mis-steps that have hurt its profitability.

Show me the money

Foreign ministers from Nato allies will gather in Turkey’s tourist capital of Antalya today for their traditional “informal” summit. US President Donald Trump’s spending demands will mean the mood is rather less relaxed.

Context: Trump has ordered Nato countries to spend at least 5 per cent of their GDP on defence, up from the existing target of 2 per cent. During his first term, he threatened to pull out of the alliance if they didn’t increase spending.

Just one member — Poland, at 4.7 per cent this year — is anywhere near that. The US (2.9 per cent) is some way off. Eight allies don’t even hit 2 per cent.

“Make no mistake, this ministerial is going to be different,” US ambassador to Nato Matthew Whitaker said yesterday. “You’ve all heard the president and vice-president call for Nato members to adopt a new 5 per cent of GDP defence investment plan. And we look forward to getting more details this week on how allies intend to make this happen.”

The Antalya gathering is the last Nato ministerial before its leaders’ summit in The Hague next month.

“We’re asking our allies to invest in their defence like they mean it . . . we’re asking our European allies to be more capable and to be equal partners,” Whitaker said.

Most officials expect that a promise to reach 5 per cent won’t be too hard to agree. The issue will be in how that is calculated, and whether Nato’s defence spending criteria will be heavily rewritten to allow countries to include defence-related costs and pad their numbers.

Whitaker said yesterday that the US would be fine with things such as “[military] mobility, necessary infrastructure, cyber security” being included alongside core defence spending on things like tanks, soldiers and missiles.

“It’s got to be defence related,” he said. “It’s not a grab bag for everything that you could possibly imagine.”

What to watch today

1. Nato foreign ministers meet in Antalya.

2. European Council President António Costa meets Montenegro’s President Jakov Milatovic in Podgorica, and then meets Kosovo’s President Vjosa Osmani in Pristina.

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