Greek central bank chief says the ECB can discuss support for the defense industry if the EU declares higher spending is a goal.
The European Central Bank may be able to play a role in helping Europe rebuild its defense capabilities, after U.S. President Donald Trump signaled that the continent may have to fend for itself, one of its top policymakers said.
“If there is going to be a common objective of the EU to boost defense spending, we can discuss what the ECB can do to support that goal,” Greek central bank chief Yannis Stournaras said, stressing that this is a personal view, rather than the Bank’s. “According to the Treaty, we should assist EU policies, it is part of our mandate.”
Stournaras’ comments, in an interview with POLITICO last week, hint at some desperately-needed help for European governments which need to re-equip their armed forces in a hurry after running them down for 35 years since the end of the Cold War. But they also illustrate how hard it is getting for the ECB to stay focused on its primary goal of keeping inflation down, at a time when Europe faces an array of expensive challenges, including digitization and the green transition.
Whatever direction EU policy takes, Stournaras was careful to stress the best contribution the ECB can make to is still to safeguard price stability and foster an environment favorable to sustainable growth.
The ECB has already courted controversy by using the leeway of its ‘secondary mandate’ to involve itself in policy on climate change policy, which it argues can affect both inflation and financial stability through various channels. It has skewed its purchases of corporate bonds in favor of greener companies and projects, and come down hard on banks that don’t have a full view of the way climate change could hurt them, for example through extreme weather events.
President Christine Lagarde’s enthusiastic embrace of the green agenda has irked the European Parliament, which issued a stern warning last month to the Bank to pay more attention to geopolitical risks, and to “treat all potential sources of external shocks equally.”
“For the green transition we have a mandate, because it is a declared policy objective of the EU. Do we have a common policy goal to boost defense spending in the European Union? We do not know yet,” he said.
However, Stournaras has left little doubt of where his thinking is going, telling EU ambassadors in a speech in Athens earlier this month that “We cannot thrive in an environment where security is fragile or compromised. Reinforcing the EU’s civilian and military preparedness must be a priority.”
Transatlantic challenges
Stournaras was speaking toward the end of a week when Europe was shaken by a series of announcements from Trump and other senior U.S. officials that threw the whole of the post World War 2 security architecture in Europe into doubt. The shocks continued this week, as the U.S. pushed through a UN resolution calling for a quick end to the war in Ukraine by voting together with China, Russia and North Korea, while its democratic allies abstained in stunned silence.
Over lunch in the Bank of Greece’s Banquet Hall with a view of the Acropolis — the symbol of ancient Greek democracy and of Western civilization — Stournaras acknowledged the scale of the challenges created by the sudden shift in U.S. policy, but nonetheless tried to look for a
silver lining.
He argued that if Trump manages to broker a peace deal in Ukraine, cheaper food and energy prices would quickly bring down inflation and boost growth prospects down the line. “Irrespective of the details of a peace deal — leaving politics aside — peace will be an absolute
positive upside for the economy,” he said.
He also stressed that the turn of events “is an opportunity for Europe to act and speak for itself,” and is a wakeup call that should be used to boost investment and competitiveness.
But how?
Those countries that have the room to raise spending at national level should do so, Stournaras said. And there are already such plans in the offing: Friedrich Merz, set to become Germany’s next chancellor after winning the country’s elections at the weekend, gave his blessing on Tuesday to plans to rush through a €200 billion boost to national defense spending, even before the new government is formed.
But with many capitals already hitting the limits of what they can borrow, he argued, the EU may have to repeat the approach it took to the pandemic, and borrow in its own name to rebuild defense capabilities that have atrophied since 1990.
“We must spend more but we must also spend more wisely,” he said, noting that this implies both enhancing Europe’s defense industry and devising a common defense procurement policy. Such initiatives would be consistent with the vision laid out in former ECB President Mario Draghi’s broad-brush review of the EU’s challenges last year, but — as Stournaras conceded — would have to overcome stiff resistance from the EU’s largest members.
“Are we prepared to discuss and agree these issues? In particular, are Germany and France, which are usually the initiators of such discussions, willing to agree on such an agenda?”
The ECB could theoretically contribute in a number of ways. It could, for example, tweak the conditions on which it lends to banks, making it cheaper for them to lend to companies or projects in the defense sector (it has considered something similar for green companies for years). And should the EU opt to issue joint debt to finance defense spending, it could also prioritize such bonds in its management the vast holdings of public debt that it still holds after nearly a decade of bond buying.
In an emergency, it could also resort to a new program of ‘quantitative easing’, effectively funding governments the way that it funded them through the pandemic, although its struggle with the inflation that that helped cause would make this very much a last-resort option.
