By Jan Strupczewski
BRUSSELS (Reuters) - The European Union is close to agreeing provisions in revamped fiscal rules to enable extra military spending in the wake of Russia's invasion of Ukraine, officials close to the talks said.
EU fiscal rules underpin the euro currency used in 20 nations by limiting government borrowing. They set a ceiling on budget deficits at 3% of GDP and on public debt at 60% of GDP. The bloc's executive European Commission is supposed to start disciplinary steps against countries that exceed these limits.
Currently only nine EU members meet a NATO alliance defence spending goal of 2% of national output, with four - Finland, Romania, Hungary and the Slovak Republic - above that only in 2023.
France, Germany and Italy, the EU's biggest economies, are all below the NATO threshold.
After Moscow's invasion of Ukraine in early 2022, many European countries neighbouring Russia called for military spending to be excluded outright from EU deficit calculations.
"This did not fly, but there is agreement that while defence spending would still be part of the deficit calculations, the Commission would categorise such outlays as 'relevant factors' that allow it not to start any disciplinary steps even if the 3% limit is exceeded," one EU diplomat close to the talks said.
The German government has committed to the 2% NATO spending target, but this will only be achieved through to 2027 with the help of a 100 billion euro ($107 billion) special fund for the modernisation of the German armed forces.
From then on, the fund will likely be exhausted and it is unclear what happens afterwards.
'NOT HEARD A NO'
Opposition to a full exemption from EU calculations stemmed from concern that military spending could be a very broad category that could help hide a lot of ordinary expenses.
By stipulating that military spending would only be a "relevant factor" that could help avoid disciplinary action, the new rules would leave it to the Commission's judgement what spending would be eligible.
"So far, I have not heard a 'no' from anyone, including the Germans, on this," a second EU diplomat close to the talks said. "I have hope that on defence we can agree on some limited room, especially for countries with fiscal space."
The proposal has won backing among the committee of finance officials from EU capitals looking at how to reform the budget rules. The rules have been suspended since 2020 to allow higher public borrowing during the pandemic and the energy crisis but are to be reinstated from 2024.
EU finance ministers are to have an initial discussion on changes to the rules next week and then again in October with a view to reach a deal by the end of the year, though some see that deadline as very ambitious.
Before they kick in again, EU governments also want the rules to reflect new economic realities of high public debt and investment needed to make economies more "green" and digital
($1 = 0.9338 euros)
(Reporting by Jan Strupczewski; editing by Mark John and Andrew Cawthorne)