EU to cut spending amid rising defense investment

High-ranking EU officials stated on Monday that Eurozone countries are committed to reducing net government spending while simultaneously pledging to increase defense investments.

Eurogroup President Paschal Donohoe told reporters that the overall fiscal stance of the single currency area this year is still expected to be “slightly contractionary,” as previously agreed upon by Eurozone ministers in December.

“Is this [December] statement and this guidance still valid? Yes, it is,” said Donohoe, who also serves as Ireland’s Finance Minister.

Donohoe added that ministers acknowledged they were in “a very, very different world” compared to before Donald Trump’s potential return to the White House in January, a situation that has upended decades-old assumptions about Washington’s commitment to Europe’s security.

Valdis Dombrovskis, the European Commission’s Executive Vice President for An Economy that Works for People, also speaking alongside Donohoe on Monday, similarly stated that the Eurogroup’s December statement “remains valid,” referring to the need to control inflation, which is slightly above the European Central Bank’s 2% target.

Dombrovskis and Donohoe had previously clashed over whether new defense investments would require a change in the bloc’s overall fiscal outlook.

At a meeting of Eurozone ministers in Brussels last month, Donohoe said the December statement “remains unchanged,” while Dombrovskis argued that the bloc’s fiscal stance would “certainly shift towards more expansion.”

Monday’s comments followed Germany’s announcement last Tuesday of a €1 trillion defense and infrastructure package.

Last week, Germany’s EU ambassador also told ambassadors of other member states that the rules threatening EU countries with fines if they run deficits of more than 3% of their annual GDP should be changed rather than just suspended.

However, German State Secretary for Finance Jörg Kukies said before Monday’s Eurogroup meeting that Berlin’s view on whether the rules need to be changed “will depend on the exact formulation of what the Commission will propose.”

Dombrovskis suggested that the rules would not be revised in the near future, noting that a revised version had only come into effect last year and that renegotiations would “take time.”

“We are dealing with challenging security issues that we need to address. We need to react now,” Dombrovskis said.