Can defense equipment investments be taken out of the European public deficit account?

In an 21 July 2019 article, the opex360.com blog makes the link between the investment necessary for Bulgaria to acquire 8 F16V to replace its Mig29 for an amount of $ 1,256 billion, and the widening of the country's public deficit, which will drop in 2019 from 0,5% to 2,1 % due to this investment. However, for several decades, many French politicians have campaigned in Brussels to remove investments in defense equipment from the public deficit. Why has this measure never had the ear of the European Commission? and would it be possible to propose a mechanism to justify such an approach?

If since the first oil shock, France has become accustomed to evolving with public spending higher than revenue, this is not the case for many other European countries, for which a balanced budget is a doctrine worth a postulate. This is the case, for example, of Germany, the Netherlands, the Scandinavian countries and, surprisingly, many Eastern European countries, which have applied marked budgetary restraint since their entry into the EU. . This positioning, which moreover will not have prevented drifts and growing indebtedness of many states, especially Germany, partly explains the refusal to consider the French proposal. It is true that, in a single currency like the Euro, the public deficit of some has repercussions on the stability of the currency, and therefore on the economic stability of all the countries of the Euro zone. The case of Greece, then fears about the solvency of Spain and Italy, show to what extent this paradigm is justified.

Several European countries recently acquired the US Patriot PAC-3 system at the expense of SAMP / T Mamba Franco-Italian

In addition, the French proposals took place while all European countries were engaged in a massive reduction in the formats and resources of their armed forces, on the altar of the “benefits of peace”. The French position, which also did not escape the general impetus, was perceived as an anachronism by many capitals, even if France justified them by the need for interventions and external operations, whether in Cotes Ivoires, Rwanda, Chad and Lebanon, theaters considered very distant by European leaders.

Since the beginning of the current decade, with the Russian intervention in Georgia in 2008, the Arab Spring and the intervention in Libya, and especially the annexation of Crimea and the support for Russian-speaking separatists in the Donbass by Russia, the European countries gradually became aware of the need to rebuild their military arsenals. Since then, investments in equipment programs have increased, with, notably, a very significant use of American equipment, even when European solutions existed. However, for many countries, as is the case of Bulgaria, Greece, and even of France and Germany, this effort is limited by the need to respect the convergence criteria of the euro zone, and in particular a maximum public deficit of 3%. (Bulgaria is not part of the euro zone but must join it in the years to come).

As the opposition of economic and security needs has not made it possible to get out of the current status quo, it would be saving to imagine an alternative approach that would make it possible to release this investment, so as to respond to the defense challenges that are emerging today. sometimes with very short deadlines.

Defense equipment contracts in Europe are largely constrained by the objectives of controlling public deficits in member states

Let us first remember that, as we have repeatedly established in the “Positive valuation defense” doctrine, the budgetary return of investment in the defense economy in France is today equal to 145% of the amounts. invested by the State. Parallel studies establish that this budget return rate was greater than 100% in the majority of European countries with a defense industrial and technological base. Therefore, the investment made by a European country to acquire equipment whose value chain is produced in Europe will create a positive budgetary return in the country producing the equipment, which, from the point of view of the euro zone, neutralizes this investment, if the positive effects in the manufacturing country are also neutralized.

This paradigm therefore makes it possible to propose three approaches allowing European countries to neutralize their investments in defense equipment in the calculation of the public deficit, as soon as the equipment is actually produced in Europe:

  • It is possible to go through a double entry, one to neutralize the expenditure of the acquiring country, the other to transfer this investment to the "calculation" deficit of the country manufacturing the equipment, on the share of the value of the equipment. equipment actually produced on its soil.
  • It would also be possible for the State manufacturing the equipment to make a direct contribution to the price of the equipment acquired, corresponding to a portion of the revenue and budgetary savings generated by this investment, for the benefit of the acquiring country. (This is how the United States proceeds, and the Bulgarian bill has gone from $ 1,7 billion to $ 1,25 billion)
  • Finally, it is possible to mix these two approaches, by making a contribution of, for example, 35% on the selling price, and a budget compensation of 65% of the amounts invested.

It should be noted that this approach, balanced from the point of view of monetary policy in the Euro zone, would also greatly favor European manufacturers in Europe. In addition, it can also be applied to "domestic" acquisitions, namely acquisitions of Defense equipment passed to its own BITD. It would thus make it possible to free up the investments of all European countries to accelerate the modernization of the continent's defense forces.

It should also be noted that, if budgetary compensation cannot be used for the sale of defense equipment outside Europe, the partial contribution can represent a very effective means of countering the very aggressive pricing policies of countries like China, Russia, the United States and even South Korea or Turkey, to capture markets. It would simply neutralize the additional cost of European equipment linked to the higher tax burden in our countries.

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