With escalating global tensions and the ongoing conflict in Eastern Europe, European nations are grappling with the challenge of meeting their defense spending commitments. Many NATO members are falling short of the 2% GDP target, creating a significant funding gap for crucial defense modernization efforts.
The European Commission estimates a staggering $524 billion is needed over the next decade to address evolving security threats. However, with national budgets already strained, finding these resources presents a significant hurdle. The EU budget cannot directly fund defense, prompting exploration of alternative financing mechanisms.
One proposed solution gaining traction is the establishment of a global defense bank, often referred to as a Defense, Security, and Resilience (DSR) bank. This institution would issue highly-rated bonds, enabling financially constrained countries to access capital for defense upgrades. It would also provide guarantees for commercial banks lending to defense suppliers.
Proponents argue that this DSR bank wouldn't replace national defense spending increases, but rather serve as a supplementary tool. Giedrimas Jeglinskas, chairman of Lithuania's national security committee, views this as a potential opportunity even for the United States, which has historically expressed concerns about the effectiveness of international financial institutions. He emphasizes the need for clear performance indicators and a focus on tangible defense improvements.
The United States' substantial defense budget dwarfs the combined spending of all NATO allies, raising questions about Europe's future defense capabilities, especially with a renewed focus on China. Several EU officials have suggested joint debt issuance through bonds to fund military projects, but concerns about national sovereignty and potential financial imbalances persist, particularly in countries like Germany.
The Atlantic Council has published a report detailing the DSR bank concept, highlighting its potential to facilitate equipment leasing, currency hedging, and support for critical infrastructure in conflict zones like Ukraine. The report's author, Rob Murray, emphasizes the bank's role in underwriting risk for commercial banks, thereby expanding financing options for defense companies, particularly small and medium-sized enterprises often facing funding challenges.
Jeglinskas suggests the bank could provide predictable and sustainable funding for modernization, aligning investments with collective security goals. He draws parallels with the UK-led Joint Expeditionary Force as a model for collaborative defense initiatives. He points to the vast amount of European assets under management, arguing for a shift in investment priorities towards defense.
While the European Investment Bank provides long-term loans and guarantees for projects aligned with EU policy, it faces limitations in funding dual-use technologies. Jeglinskas stresses the need for a new mechanism like the global defense bank to effectively mobilize capital and direct it towards critical defense programs, essentially creating a new multilateral lending institution focused on security.
