As NATO member states struggle to meet their defense spending goals, calls to bolster defenses with hundreds of billions of dollars in investments are not being quickly heeded. Eight countries did not meet the 2% target for defense spending in 2024, leading to concerns about Europe’s ability to defend against evolving threats. The European Commission estimates that around 500 billion euros are needed in the next decade to strengthen Europe’s defenses. Some officials are proposing the creation of a defense, security, and resilience (DSR) bank to provide funding for military modernization and upgrade defenses in financially strapped countries.
The proposed DSR bank would issue bonds backed by AAA ratings to help countries improve their defenses and provide guarantees for commercial banks to offer credit to defense suppliers. While the bank is not seen as a substitute for increasing defense spending, it could serve as a supplemental tool. Some officials believe that the creation of this bank could also benefit the U.S., which has expressed skepticism about the impact of institutions like the World Bank and the IMF. With the U.S. contributing half of total defense spending among NATO member states, there are concerns about the country’s commitment to defending Europe, especially with a focus on China.
The return of Trump to the White House and a U.S. pivot towards China have raised questions about the future of U.S. involvement in Europe’s defense. Some EU defense chiefs and foreign ministers have suggested issuing joint debt through bonds to finance military projects, but concerns about sovereignty and financial burdens have been raised, particularly by countries like Germany. The DSR bank proposal, outlined in an Atlantic Council report, aims to provide low-interest loans for defense modernization and help small and medium-sized defense companies access funds for upgrading technologies.
The goal of the DSR bank is to offer predictable and sustainable funding for defense modernization, aligning with collective security goals and investing in emerging technologies. By underwriting the risk for commercial banks, the bank could facilitate financing for defense companies across the supply chain. The European Investment Bank, which currently provides long-term loans and guarantees for projects aligned with EU policy goals, has struggled to shift towards funding dual-use technologies. Jeglinskas, a proponent of the DSR bank idea, believes that creating a new multilateral lending institution could help mobilize capital and direct it towards defense projects, similar to the U.K.-led Joint Expeditionary Force structure.
Overall, the proposal for a DSR bank represents an innovative approach to addressing Europe’s defense funding challenges. With NATO member states struggling to meet their spending goals and facing evolving security threats, a coordinated effort to secure investments for military modernization is critical. By creating a mechanism to rally capital and prioritize defense projects, European nations could enhance their collective security posture and ensure they are adequately prepared to address emerging threats.
