By Gabriela Baczynska and Robin Emmott
BRUSSELS (Reuters) - The European Union's commissioner for industry will propose later this month that EU states issue joint bonds to expand the European defence industry, as part of the response to Britain's decision to leave the bloc.
Greater EU cooperation on defence has been frequently proposed but never materialised. The individual EU countries jealously guard their national defence industries, and Britain in particular opposed such proposals.
With Britain's decision to quit the EU, ideas for creating - and paying for - closer security and defence ties are re-emerging. Among them is a joint, permanent command headquarters for EU civilian and military missions.
"Our defence budgets are shrinking ... If you look at Russia increasing its defence budget by 97 percent and China by 160 percent, while the EU's has fallen 9 percent, it is really frightening," Industry Commissioner Elzbieta Bienkowska said in an interview.
"We are considering pooling national budgets to fund common defence projects and issuing joint EU bonds," she said, adding she would present the proposal to 27 EU defence ministers on September 27 in Bratislava, when they meet without Britain.
"Britain never expressed support, there was always resistance. But with Brexit we found interest, we have the momentum. The mood is quite different," Bienkowska told Reuters on Friday.
Bienkowska, who is in charge of the industrial part of the EU's new defence and security strategy, wants to create a European Defence Fund that could finance development of technology that the 27 states agreed they all need.
She said the funding could initially come from a new line in the existing European Fund for Strategic Investment (EFSI) specifically for development of defence projects.
The EFSI was set up last year as a three-year scheme to finance infrastructure, energy, research and development in the EU. It works by leveraging 15 times its own 21 billion euros with private investor money. Brussels wants to increase the fund and extend it, although member states have yet to endorse that.
Bienkowska said EFSI could start funding defence projects next year but did not have a date for joint defence bonds. Germany has in the past opposed issuing common EU debt.
FINANCING
The European Commission has already proposed assigning 90 million euros in 2017-2020 for joint defence research, an idea awaiting approval by EU states and lawmakers.
Bienkowska hopes her proposals will help develop joint EU defence capabilities to make it less reliant on imported technology.
Ideas include developing a European drone, cyber defence or maritime surveillance technology. She wants to offer more VAT exemptions for joint EU defence programmes but opposes allowing deducting new defence spending from national debt, as some countries have proposed.
Italy has called for financial incentives for both technology development and joint purchases, proposing scrapping sales taxes for purchases and allowing deduction of some defence spending from national deficit calculations.
France and Germany, however, said in a recent joint proposal that any fiscal measures to build up a common defence market should not distort competition.
In addition, the European Investment Bank, a key source of funding for EFSI, has so far refused to invest in defence projects. Bienkowska hopes to change that.
"It's not only about using momentum of Brexit. It is about global challenges, technological shifts and the different threats we face ... There is growing awareness that some common idea of defence is really needed," Bienkowska said.
(Writing by Gabriela Baczynska, editing by Larry King)
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