At the Nato Summit Defence Industry Forum on 9 July, Major General Enrico Credendino of the Italian Navy was questioned about a proposal from the Italian Defence Minister Guido Crosetto to exclude defence expenditure from the constraint of the Growth and Stability Pact within the EU.
Allowing defence expenditures outside the SGP constraints would enable countries to invest more robustly in their military capabilities, ensuring better preparedness against modern threats. Countries like Italy, which face significant fiscal pressures, would benefit from this flexibility, allowing them to meet defence needs without compromising on economic stability.
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The war in Ukraine has forced a revision of Italy’s defence posture in the face of a likely long-term confrontation with Russia. GlobalData’s ‘Italy Defense Market 2023-2028’ report states that Italy is continuing to invest in new platforms across all domains and to support modification of its older system, including acquiring augmented systems for its mechanised brigades, constructing several new naval vessels, inducting the F-35 fighter jet, and partaking in the next-generation Tempest programme.
The Stability and Growth Pact (SGP), established in 1997, is a set of fiscal rules designed to ensure that EU countries maintain sound public finances by keeping budget deficits below 3% of GDP and public debt below 60% of GDP. These rules are enforced by the European Commission and the Council of the EU, which monitor member states’ compliance and can implement measures to tackle persistent breaches.
As Credendino points out, the COVID-19 pandemic led to the activation of a general escape clause in March 2020, suspending these rules to allow member states to address the economic fallout without the constraints of the SGP. He argued that excluding defence spending from the SGP would give EU countries the financial flexibility needed to enhance their defence capabilities without breaching fiscal limits.
Critics may argue that excluding defence spending could lead to fiscal indiscipline, risking higher debt levels and economic instability in the long term, and that adjusting the SGP rules would require extensive negotiations among EU member states, many of whom have differing views on fiscal policy and defence priorities. Loosening fiscal constraints could reduce the EU’s ability to enforce sound financial practices among member states, potentially leading to misuse of funds.
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By GlobalDataThe German Finance Minister Christian Linger told the German Press Agency in June 2023 that he had yet to give support for making exemptions for defence spending. “Capital markets do not distinguish between the motives for making debt,” said Lindner. “For capital markets, debt is debt, and too high debt leads to instability. It is potentially fuelling inflation and reduces the sustainability of our public finances.”
