Europe considers creation of a “rearmament bank” or defense fund with British participation - FT

European officials are rushing to develop proposals for a special fund aimed at helping the region increase defense investment after US President Donald Trump threatened to cut US support for the continent, the Financial Times reports, according to UNN.

Details

"European finance ministers gathered in South Africa for the G20 meeting this week are discussing proposals including a European Defense Bank or a joint fund with the UK," European officials said.

On Sunday, several EU leaders will join UK Prime Minister Sir Keir Starmer for meetings on his return from Washington and ahead of an emergency summit in Brussels next week - all of which will focus on European defense.

"Everything is moving fast," said one official. Others recalled the diplomatic wave that preceded the EU's joint borrowing during the COVID-19 pandemic, or the rescue plans agreed upon during the eurozone sovereign debt crisis.

"Bank of rearmament"

The UK and Poland are convening a meeting of European finance ministers to discuss several options on the sidelines of the G20 meetings in Cape Town. The British minister wants to discuss opportunities for like-minded countries to "mobilize private finance" for defense, the Treasury Department said.

One proposal by a group of experts, including former British general Sir Nick Carter, is for a "rearmament bank." The state lender would be modeled after the European Bank for Reconstruction and Development, which was created after the fall of the Iron Curtain to stimulate investment in Eastern Europe.

The new instrument could provide loans for the purchase of military equipment, as well as industrial projects in the defense sector, with the possibility of lending to the private sector and governments, the publication writes.

Only a portion of the capital - the proposed €10 billion - would be paid upfront, which would mitigate short-term budgetary costs, and it could offer favorable rates due to its first-class credit rating backed by government guarantees. Poland, which holds the EU presidency, has supported this as an option.

Other ideas

Another idea that has been circulating is the creation of a "special purpose vehicle" (SPV), through which governments would pool national guarantees and borrow money on the markets to lend money for defense purposes. The instrument could be opened to EU countries and others.

The limited scale of an SPV or ad hoc fund could allow it to be set up faster than a bank, analysts say, although participating countries would still need to provide paid-in capital. This would be "easier, from an administrative point of view," said Luigi Scazzieri of the Center for European Reform.

Either structure could help to quickly increase defense spending, he added. "A large, coordinated injection of capital," Scazzieri said, would signal "a strong political will of European countries to reinvigorate European defense.

Analysts say the use of a jointly financed mechanism could mitigate some of the initial costs of increased defense investment. The mechanism could potentially borrow at relatively low rates if it receives the support of AAA-rated member states such as Germany and Norway.

But the most important alliance goal is to optimize the large-scale procurement efforts of several governments. This can be achieved by making loans conditional on joint procurement, proponents of the model have suggested.

If European governments act together as a powerful "buyers' club," it could contribute to more effective defense procurement efforts, said Jeromeen Zettelmeier of the Bruegel think tank.

Another advantage would be to provide manufacturers with a long-term order horizon to stimulate investment in production expansion.

What other initiatives exist

The European Commission is exploring the possibility of reallocating existing funds, such as the €93 billion in loans left over from the COVID-19 pandemic, as well as tens of billions from EU regional development funds. Brussels has also promised to exempt defense spending from the bloc's deficit and debt rules.

However, the continent's total defense needs, estimated by European Commission President Ursula von der Leyen at €500 billion, will require a much larger investment push.

"We need to ensure more targeted and efficient defense spending through a designated European instrument," von der Leyen said.

What will the fund be spent on?

The trust fund should focus on "areas of European strategic interest, such as European integrated air defense, deep and precision strike capabilities, drones and UAVs, missiles and munitions, or of course the military use of AI," von der Leyen said.

The "coalition of the willing" that contributes to the fund would also solve the problems that arise from the need for unanimity at the EU level if the bloc were to increase its common debt. This would bypass the governments of Hungary and Slovakia, which are friendly to Russia, as well as neutral countries such as Austria and Ireland, the newspaper writes.

But none of this reduces the long-term costs that taxpayers will face as Europe is forced to step up its self-defense efforts, the publication points out.

"You can't borrow long-term to increase defense spending," said Ben Zaranko of the Institute for Fiscal Studies. - "Eventually, we're going to have to spend less on other things or tax more.