LIVE MARKETS-How to fund more European defence spending - Goldman

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HOW TO FUND MORE EUROPEAN DEFENCE SPENDING - GOLDMAN

European leaders are holding an emergency meeting in Paris later on Monday to discuss the region's role in a possible ceasefire in Ukraine.

Consensus is both that European states need to increase their spending on defence, and that there isn't a lot of spare money sloshing around with which to do it.

Goldman put out a note on Sunday that takes a look at where those extra funds could come from, and the positives and negatives of each. They expect the EU to use a bit of each of them.

- The first option is funding increased defence spending through national debt. The problem here is this would create tensions with fiscal consolidation required under new rules, particularly a problem for France and Italy, but also Spain.

A short-term fix is that EU President Ursula von der Leyen has proposed exempting defence from EU limits on government spending, a useful work around, but Goldman say this is only a temporary solution.

- Option two is a repurposing of the spare financial capacity within the 'Next Generation EU" post-COVID recovery package. This also can be done fairly easily, but the amount involved reaches only 0.4% of EU GDP and extends only until 2026.

- Option three is a new European programme targeting defence funding. That would be long-lasting and potentially allow non-EU states such as Britain and Norway to get involved.

Goldman say the problem with that is a new programme issuing EU debt requires the commitment of additional contributions to the EU budget by member states to prevent that debt from derating.

These contributions then require approval in all national parliaments, in addition to the EU Parliament, extending the setup process further.

What will happen? Goldman expects the EU to use all of them in succession.

"National debt issuance combined with the repurposing of spare NGEU financial capacity could fund higher military spending until 2026. This would grant enough time for setting up a new European programme targeting military spending and funded by permanent guarantees of member states like in the current EU budget."

(Alun John)

EARLIER ON LIVE MARKETS:

QUIET DAY, EXCEPT FOR DEFENCE CLICK HERE

BEFORE THE BELL: EUROPE STEADY, DEFENCE CHARGES UP CLICK HERE

HEY, ASIA HAS TECH SHARES TOO CLICK HERE CLICK HERE