Nursing NATO hangovers at the EU summit

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The EU summit in Brussels had the feeling of a hungover group brunch after a wild night out. European leaders tended to their throbbing headaches, mortification, and wounded pride while trying to fill in the gaps on exactly what occurred in The Hague. Everyone agreed to 5%, right?
They’re also checking their credit cards to see just how much they spent during their NATO bender. From what Firepower heard, lots of ideas were tossed around for how the EU can make the financing work: more "flexibility" on budget rules to "Eurobonds" to more defence cash stuffed in the EU’s next budget. They didn't find a miracle hangover cure, but know they must make it work somehow. More on the possibilities below.
What's in today's edition:

DANES TAKE CHARGE. Copenhagen will take charge of the rotating Council presidency on Tuesday, and from what we’ve heard, they’re putting defence at the top of the agenda. Until 2022, Denmark had an opt-out on EU defence policy, so their embrace of the issue underscores its importance – and the huge shift in thinking Europe has seen over the past few years.
That said, the COUNCIL CONCLUSIONS on defence were rather thin on substance even after EU leaders spent nearly three hours discussing the topic in Brussels. Firepower overheard one person quip that the meeting was more of “a post-NATO therapy session” (perhaps they discussed their daddy issues). EU leaders come back in October for a progress review of the defence readiness agenda. Until then, watch out for the presentation of the Commission’s proposal for the EU’s next seven-year budget (the Multiannual Financial Framework, MFF) on 16 July.
MORE FINANCING? Now that (almost) all Europeans have committed to the 5% target, it’s time to ask how to fund the scale up. Several EU countries raised the idea yesterday of getting more flexibility around the EU’s Stability and Growth Pact budget rules. Currently, 16 countries have asked the Commission to activate the national escape clause, allowing them to go beyond their deficit cap and borrow an extra 1.5% of annual GDP for defence over the next four years.
Another option batted around in Brussels is repurposing cohesion funds for dual-use “defence-related” projects (think tech or infrastructure). The idea was raised once again by Ursula von der Leyen and Kaja Kallas in a joint letter. That spending, by the way, would now count towards NATO’s new accounting that counts spending of up to 1.5% of GDP on defence-related items.
DEFENCE BANK COMING UP? The possibility of creating a publicly backed multilateral bank to provide financing to the arms industry has been gaining traction, according to the man pitching the idea. Rob Murray, a former NATO official and current defence industry executive, spoke with Firepower recently about his pitch to create the Defence, Security & Resilience Bank (DSR), which he believes could start “initial operations” as early as the end of the year. Poland proposed creating a defence bank at a meeting of EU defence ministers in early April, but it’s yet to gain enough support to become a reality.
WHY A BANK? There have been widespread complaints from defence industry leaders that they’ve struggled to secure financing for ramping up production and innovation – partly because investors are unsure whether rearmament will remain enough of a long-term priority to justify major outlays. Murray said an institution like the DSR could step in to provide cheaper credit and a long-term perspective to allow industry to increase capacity and invest in innovation. He envisioned launching the bank with €100 billion in capital.
Murray declined to say WHICH LEADERS have expressed a willingness to sign up, but said that none of the “dozens of countries I talked to" appeared uninterested in the project. Europe is a focus, but Murray said it would make sense to involve countries like Canada, New Zealand, Japan, South Korea, and Australia. Those countries host important production capacities, and would also bring scale. What matters, he said, is "less about the number but rather about the size of GDP – we need a blend”.

RARE EARTH MINERALS are becoming a European defence headache. China dominates global production and processing, and Russia is a major player in other key raw materials. As our data deep dive shows, that puts Europe’s grand military ambitions at risk since rare earths are important in components for a huge range of modern military hardware.
In April, China turned up the heat by restricting exports of crucial minerals, underscoring the potentially serious strategic vulnerability for defence industry production.
Europe has been eyeing deals in Central Asia and Ukraine to secure alternative supplies, but let’s be real: there’s no quick fix. This is a modern arms race where the weapons are mined and refined, not made.

HIDDEN SURPRISE. Europe’s €500 million plan to boost European ammunition production (ASAP) expires in just a few days, and the final chance for ambassadors to extend comes on Monday. That looks pretty unlikely, even though sources had told Firepower that EU countries informally pledged hundreds of millions to keep it going. A source close to the file said the spirit of ASAP – which has sought to boost production in order to supply Ukraine and replenish arsenals – will be part of the long-term European Defence Industry Programme (EDIP) as planned.
For now, countries will focus their attention on using large parts of the EU’s €150 billion SAFE joint procurement loan scheme specifically to BUY AMMO AND MISSILES FOR UKRAINE, two other sources told Euractiv.
SPEAKING OF EDIP. Negotiations over the text of the proposed programme will start on Monday between the Council and Parliament, two sources told Firepower. Ambassadors settled on their preferred text last week while Parliament agreed on their version back in April.
OMNIBUS DEADLINE? Parliament President Roberta Metsola said yesterday that MEPs plan to finalise legislation on the Commission’s so-called defence omnibus proposal by the end of the year. The omnibus would roll back some existing EU laws on procurement and sustainability in hopes of boosting production, and it contains two legislative proposals as well as a proposed directive that all need to be negotiated with the Parliament and Council.

The European Commission pitched its long-awaited EU space law, which establishes rules to prevent cyber and physical threats to space assets. Get the official documents here.

Latvia is one of Ukraine’s fiercest supporters.
But Andris Sprūds, Latvia’s defence minister, expressed hesistance in an interview with Firepower about Zelenskyy’s request for allies to each contribute 0.25% of GDP to Kyiv's DEFENCE INDUSTRY, on top of other military aid. There “should be some balances”, Sprūds said when asked if he supports that idea. Latvia’s national defence budget “will also support national industry” (a newfound interest for Europe after decades of under-investment).
Sprūds also told Firepower that Riga wants MORE FROM NATO's PLANES and is hoping for an expansion of NATO’s air surveillance force in the country, deployed to keep an eye on Russian aircraft coming close to the military alliance’s airspace. He wants an expanded mission for the NATO patrols – which he described as “air policing plus” – to monitor more than just Russian jets. The allies need to react against risks and threats which previously had been deemed secondary – such as drones – he said.
Sprūds also repeated calls from the Baltics for NATO allies to place AIR-DEFENCE SYSTEMS in the region on a rotating basis to protect the eastern flank with expensive kit that otherwise takes years to acquire.

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