NATO member states are struggling to meet their defense spending goals as war continues in Europe’s eastern front. Eight countries did not meet the 2% target for defense spending in 2024, and as many of them face financial constraints, meeting these goals is proving difficult. The European Commission estimates that about 500 billion euros will be needed in the next decade to defend Europe against evolving threats. Calls for increased defense spending are not being met quickly, leading to concerns about the region’s security.
The EU’s budget cannot directly fund defense, so there are proposals for the creation of a global defense bank to provide funds for military modernization. This defense, security, and resilience (DSR) bank would issue bonds backed by AAA ratings to financially struggling countries to upgrade their defenses. It would also provide guarantees for commercial banks to offer credit to defense suppliers. The idea is viewed as a supplemental tool and not a replacement for increasing defense spending in member states. The return of President Trump has raised concerns about the U.S.’s willingness to defend Europe and its focus on China, leaving Europeans uncertain about future security arrangements.
The idea of a DSR bank has gained traction among EU defense chiefs and foreign ministers, with proposals for the issuance of joint debt through bonds to fund military projects. However, countries like Germany have expressed concerns about sovereignty and financial burdens in this proposal. The goal of the DSR bank, as outlined by defense experts, is to offer financing for defense modernization, including equipment leasing and infrastructure projects in conflict zones like Ukraine. The bank would also underwrite the risk for commercial banks, enabling them to extend financing to defense companies along the supply chain.
The DSR bank aims to provide loans with extended maturities to small and medium-sized defense companies that often struggle to access funds. The governance structures of the bank would align funding with collective security goals, such as technology upgrades and arsenal improvements. By leveraging the 33 trillion euros in European assets under management, the bank could raise funds through sovereign ratings and bond markets to finance defense programs. Other institutions like the European Investment Bank have provided loans and guarantees for EU projects but are limited in funding dual-use technologies.
The creation of a global defense bank could mobilize capital and direct it towards defense needs in Europe and beyond. With the increasing challenges faced by NATO member states in meeting defense spending goals, the DSR bank offers a potential solution to provide funds for military modernization. This proposal is seen as a way to supplement existing defense spending efforts and ensure that Europe is better equipped to address evolving threats and security challenges. By aligning funding with collective security goals and leveraging European assets, the DSR bank could play a crucial role in enhancing defense capabilities and ensuring the region’s security.
