21-05-2025
Starmer and EU to arm West with new global defence bank
Sir Keir Starmer and the EU are poised to launch a global defence bank to rearm the West against Vladimir Putin.
Ministers are considering backing a new institution that would pool resources from Western countries to fund weapons, planes and ships, and make it easier for defence companies to secure private loans.
A 'defence, security and resilience bank', modelled on institutions such as the World Bank, could command as much as £100 billion in capital and would be funded by Western governments.
The plans come amid government concerns that the cost of basic munitions and equipment has increased dramatically since Russia invaded Ukraine, leaving Western countries competing for scarce supplies.
The precarious state of the Western defence industry threatens to hold back the rearmament of Europe, after the US asked Nato allies to commit to increasing their defence spending to 5 per cent of GDP at the alliance's annual summit next month.
But individual countries face high costs and domestic restraints on spending, including fiscal rules that restrict borrowing.
This week's defence and security deal between the UK and EU promised that both sides would 'strengthen co-operation and regular consultations on multilateral affairs'. Insiders said it paved the way for a defence bank announcement later in the year.
Whitehall sources said the defence deal has given Britain and EU member states diplomatic space to work on setting up the new institution, although the ambition is to also attract other Nato countries including Canada, and Indo-Pacific allies including Australia, New Zealand, South Korea and Japan.
The bank would complement the EU's €150bn (£126bn) Security Action For Europe (Safe) fund, some of which will be used to procure equipment from UK firms after this week's agreement with Brussels.
Member countries could use the bank's funding for defence procurement, while the institution itself would underwrite commercial loans given to defence companies, lowering interest rates.
The high cost of private finance for defence companies has been a major driver of inflation in the defence sector since Russia invaded Ukraine.
A 155mm artillery shell cost around £1,700 before the war, but now costs more than £6,800 because defence companies cannot manufacture them fast enough.
The price of a German Leopard 2A8 tank has increased by around 30 per cent since October 2024, orders from the Netherlands and Austria suggest.
Meanwhile, defence companies including Britain's BAE Systems are unable to secure low-interest loans from private banks because they are considered too risky.
A report by the International Institute for Strategic Studies, a think tank, found that if the US withdraws entirely from Europe, countries will be required to spend $1 trillion (£747 billion) to retain the same level of security.
Without a greater supply of military hardware, the extra money set aside by allies will only inflate prices further, officials fear.
Treasury and Ministry of Defence (MoD) officials have begun work on plans for the new bank, which would pool the resources of member countries and let them procure defence equipment together to save money.
It could eventually be headquartered in London, and would allow countries to move some defence investment spending off national balance sheets – removing the fiscal headache created by long-term projects at Rachel Reeves's autumn Budget.
Supporters of the plan say it would also 'crowd-in' private investment, multiplying government defence spending without additional cost to the Treasury.
Polish discussions
The idea was discussed by Ms Reeves with European counterparts in Poland last month, and conversations have continued between EU and other Western states since then.
But Monday's EU deal contained a clause on working with Britain on 'multilateral' institutions, which sources said was a diplomatic 'hook' to lay the groundwork for a defence bank.
The bank, first proposed by Rob Murray, the former senior British Nato official, has been discussed by officials and ministers across the G7, including in the UK, France and Germany, Italy and Canada.
Sources said the bank could be announced as soon as this summer in the UK's defence industrial strategy paper, or in a communique at the Nato summit in June.
Mr Murray has already established a 'development group' for the bank, and is engaged with Western governments on its design and potential membership.
The model would see partner countries donate around £20 billion of its funds and commit to buying military hardware together to give confidence to defence suppliers.
One defence industry source said their firm hoped to increase investment in the UK but would benefit from financial 'cover' from a defence-focused bank underwritten by nation states.
Firms have told military buyers they face a seven-year waiting list for some equipment, such as a full battalion of tanks, because of a backlog of orders caused by the wars in Ukraine and Russia and low production capacity.
Meanwhile, around half of the Russian national economy is now dedicated to defence, as it fights to keep hold of parts of eastern Ukraine with the help of supply chains that run through China, North Korea and Iran.
On Tuesday the UK and EU announced 100 new joint sanctions on Russia's military, energy and financial sectors, after the Kremlin refused to give a timeline for ceasefire talks with Ukraine.
The sanctions will target the supply of Russian weapons, including Iskander missiles, along with anti-Western information operations and Kremlin-supporting banks.
Dame Fiona Murray, a professor at the Massachusetts Institute of Technology (MIT) and vice-chair of the NATO Innovation Fund, said the UK and its allies 'must rearm their economies, not just their militaries' with a 'commitment to new financial institutions'.
Writing for The Telegraph, she said: 'Britain is a financial superpower. But it has yet to apply that ingenuity to one of its most urgent national priorities.
'A DSR Bank – backed by the UK's financial expertise and Europe's institutional heritage – would show that Britain can lead not only in contracts and commitments, but in capital.'
The idea has also been backed by Alex Baker and Luke Charters, the Labour MPs who questioned ministers about UK plans to join the bank in Parliament earlier this month.
Emma Reynolds, a Treasury minister, confirmed that her department was 'looking carefully at the proposals' and discussing a 'range of options' with allies.
Mr Charters said: 'A global defence bank backed by Britain, Nato, and our allies could be the most powerful move for our collective security in almost 80 years.
'This isn't just about security, but also driving growth, building resilience, and delivering a defence dividend for Britain.
'The PM was right to bolster defence spending, and we can use this initiative to supercharge that commitment.'
DSR Bank best solution to Chinese and Russian threat
By Dame Fiona Murray
On May 19, Keir Starmer and Ursula von der Leyen signed a landmark UK-EU Defence Pact. The symbolic commitment to shared defence and security is significant. But what follows will hinge not only on politics, but on economics.
To sustain credible deterrence over the long term, the UK and Europe must rearm their economies, not just their militaries. This will require a commitment to new financial institutions, not simply a revival of old military ones. If implemented effectively, today's emphasis on defence could become a powerful multiplier for economic renewal – far beyond the boundaries of conventional security policy.
The benefits of greater defence spending are clear: more modern, reliable capabilities to deter and defend. But the economic dividends will not come from procurement alone – and without broader structural reform, they may never materialise.
In recent months, defence contracts awarded to traditional primes – from Rheinmetall to BAE Systems – have run into familiar bottlenecks. A sudden increase in demand cannot be absorbed by a defence industrial base designed for peace-time tempo.
Scaling production takes time. Meanwhile, rising tensions with China threaten tariffs or embargoes on key components, further straining supply chains. The cost of 155mm artillery shells has jumped from $2,000 (£1,490) before Russia's invasion of Ukraine to over $8,000 (£5,980) today. When Europe exerts simultaneous pressure on a low-output system, the result is predictable: we pay more and get less.
There is growing recognition that procurement must expand beyond the legacy giants to include the wave of defence ventures scaling-up across Europe. Startups like Kraken, building autonomous boats, or Tiberius, rethinking missile design, are increasingly engaged through rapid contracting and innovation partnerships with defence ministries. Backed by private risk capital, these firms bring novel capabilities and fresh thinking to the sector.
But expanding the supplier base is not enough. Europe's problem is not a shortage of ideas – it is a shortage of capacity, and above all, a shortage of financial infrastructure. The Defence, Security and Resilience Bank (DSR Bank) – to be anchored in Europe but designed to include like-minded partners such as Canada, Australia and Japan – could help do just that. European at heart, global in reach, it would represent a new coalition of the willing for shared security.
One of its core functions would be to provide liquidity. At a meeting of EU and UK finance ministers in Warsaw last month, the European Commission's €150 billion (£126 billion) Safe programme was welcomed as a step in the right direction. But it is also a temporary measure.
What the sector lacks is permanence – a standing institution capable of stabilising defence finance across economic cycles. The DSR Bank could guarantee working capital loans, enabling commercial banks to offer affordable credit to suppliers and allowing SMEs with government contracts to access supply-chain financing on better terms.
With a balance sheet of €100 billion (£84 billion) – of which only 20 per cent would be paid in cash across shareholder nations – it could unlock vast pools of private capital, transforming fragmented risk into collective readiness, as well as contributing to a nation's defence spending GDP target.
It could also reduce the structurally high cost of capital in the defence sector. Today, even the most vital manufacturers pay elevated rates. BAE Systems, the UK's largest defence contractor, carries a BBB+ rating. Saab, Sweden's defence and aerospace champion, is also rated the same. These are not isolated anomalies – they are symptoms of a system that treats strategic industries as if they were speculative.
For BAE, that lower credit rating translates into a potential extra £90 million a year in interest payments – equivalent to 11,000 artillery shells lost to financial drag.
Banks are not ideologically opposed to defence: they are structurally misaligned with its financing needs. Many emerging firms in frontier technologies, and those further down the supply chain, are treated as high-risk outliers and often shut out entirely.
Yet equity interest is surging: venture capital into European defence startups rose tenfold from $62 million (£46 million) in 2022 to $626 million (£468 million) in 2024. The DSR Bank would help reprice this risk by passing on its AAA borrowing cost to both firms and nations with lower ratings.
A third imperative is industrial readiness. Europe and the UK must not only produce more today but be prepared to surge production tomorrow. Yet building latent capacity – factories, tooling, long-lead inventory – is difficult to justify within annual fiscal cycles. The DSR Bank could directly hold such assets on its own balance sheet, giving governments the headroom to rearm without immediately increasing public debt. This is not a subsidy. It is a strategic investment in resilience.
Britain is a financial superpower. But it has yet to apply that ingenuity to one of its most urgent national priorities. A DSR Bank, backed by the UK's financial expertise and Europe's institutional heritage, would show that Britain can lead not only in contracts and commitments, but in capital.
This is not without precedent. The post-war institutions of European recovery – the European Investment Bank, the European Coal and Steel Community, and their British equivalents – rebuilt prosperity through shared tools and pooled risk. The logic of the DSR Bank is no different.
The political groundwork is already in place. The London summit marks a reset in UK–EU cooperation on defence and resilience. But if rearmament is to lead to renewal, we must go further. Establishing the DSR Bank as an outcome of the UK–EU Defence Pact would send a powerful signal: that the UK, Europe and their partners are ready to treat defence as a shared economic endeavour rather than a national burden.
