How can Europe Fund its Defence without Breaking the Bank?

Europe is in a tight spot. With Russian aggression testing the Continent's security resolve and the trade turbulence of recent weeks shaking its foundations, the need for bold, unified action has never been greater. Yet, across European capitals, governments are scrutinising their balance sheets. Despite serious willingness to increase defence spending, often by adjusting fiscal rules, Europe faces a tough financial balancing act. Rising healthcare costs, housing crises, and populations frustrated by years of stagnation add to governments' mounting pressures.

Compounding this is Europe’s fragmented procurement system, which drives up costs and limits efficiency by placing national interests over collective European solutions. It is in these circumstances that the Defence, Security & Resilience Bank, a World Bank-style financial vehicle, could revolutionise how Europe funds its defence. When UK and EU leaders meet in London next month, they will face a familiar dilemma: How can Europe defend itself without breaking the bank? This may just be the answer.

Lessons from History

For the UK, this is not the first time the country has faced security challenges in Europe amid serious economic pressures. The 1966 Labour Defence White Paper pivoted strategy towards the Soviet threat in Europe and reduced Britain’s global commitments to cut costs. Following the cancellation of the British Aircraft Corporation’s TSR-2, the government opted for the American F-111 bomber, negotiating offset agreements to mitigate balance-of-payments risks, which required the US to purchase British goods to offset dollar outflows for the F-111. However, the 1967 sterling devaluation inflated the F-111’s effective cost, contributing to its 1968 cancellation. This left the UK with neither option: by opting to buy off the shelf instead of nurturing British industry, the UK was left reliant on older aircraft and limited exports.

As with much of Western Europe, the UK’s defence industry today is significantly smaller than in the 1960s following decades of underinvestment and reliance on foreign suppliers. As a result, the financial pressure on new defence projects is now even more acute.

We must draw lessons from the 1960s and avoid a repeat of the dynamic whereby global shifts and economic turmoil forces the government to abandon British industry. Similar vulnerabilities were exposed following Liz Truss's disastrous mini-budget in 2022, which caused a sharp devaluation of the pound against the dollar. This sudden currency fluctuation significantly increased the cost of Ministry of Defence contracts priced in USD, showing how volatile economic conditions can render even defence strategies suddenly unaffordable.

Today, projects like the Global Combat Air Programme (GCAP) face similar cost inflation risks as long-term initiatives are reliant on stable funding. Likewise, European defence companies now have record-high order backlogs, with demand far exceeding their ability to deliver in the required timeframe amid supply-chain constraints and limited production capacity.

We must avoid repeating past mistakes; the UK cannot afford for GCAP to fail. Likewise, if Europe continues to rely on foreign suppliers to meet its defence needs or fails to mitigate currency instability when doing so, it risks failure. The revitalisation of European industry needs long-term, stable funding to ensure our security and independence for the future. This is where a Defence, Security & Resilience Bank comes in.

A Path Forward: The Defence, Security & Resilience Bank

A European Defence, Security & Resilience Bank offers innovative financing mechanisms designed to prevent a repeat of the failures of the 1960s. A multilateral defence bank, able to mobilise AAA-rated capital and long maturities, it could stabilise Europe's defence supply chains. Unlike cyclical annual defence budgets, which are subject to political and economic volatility, the Defence, Security & Resilience Bank would be owned by nation-states and would finance defence projects through its balance sheet rather than relying on individual state financing.

Instead of each country borrowing on its own to pay for military equipment, the DSR Bank pools their financial strength, allowing them to borrow collectively at much lower interest rates, thanks to the group’s combined creditworthiness. This approach reduces fiscal pressure on individual nations by keeping the debt (liability) on the DSR Bank’s balance sheet, with their share of the Bank becoming an asset on their national accounts. Likewise, the Bank would help underwrite the risk for commercial banks, encouraging them to lend to defence supply chain firms. This would enable commercial banks to extend credit to smaller suppliers in the supply chain.

This approach ensures greater fiscal stability and predictability, allowing for long-term industrial growth without straining national budgets or being vulnerable to sudden economic shocks. This is important because Europe's main adversary, Russia, is able to leverage dominant domestic production, lower input costs and an insulated economy to fund its defence spending more efficiently than Europe, which relies heavily on external financing mechanisms tied to global markets.

By providing long maturities and government-backed guarantees, the Defence, Security & Resilience Bank offers a way for European governments to square the circle between tight budgets and the need for serious defence investment. Most importantly, the bank could offer a solution to one of the most persistent frustrations in UK defence: procurement inefficiencies. For years, Ministries of Defence across allied nations have struggled with spiralling costs and delays to critical defence projects. The Defence, Security & Resilience Bank could improve some of these structural procurement issues and provide better value for taxpayers by aligning procurement incentives to financial loans from the bank.

Critically, the bank would not centralise procurement decision-making authority. Instead, it would pool the financial risks and compliance burdens associated with defence borrowing, for both governments and commercial banks, while standardising cross-border financing. This shared framework would ease regulatory complexities (e.g., export controls, licensing), and enable more efficient capital allocation without eroding national control over procurement. As a result, unlike the response to the crises of the 1960s, the DSR would enable sovereign decision-making and procurement.

The bank's potential extends beyond procurement. It could help secure Europe's vulnerable defence supply chains and bolster its strained industrial base. Securing access to critical raw materials, essential for defence technologies like aircraft sensors and avionics, is paramount. The EU has already established an agreement with Ukraine on critical raw materials, and in 2024, the UK forged its own 100-year security partnership with this ally.

These bilateral efforts could be bolstered through a coordinated, multilateral financial mechanism such as the DSR Bank. As a multilateral institution pooling demand from multiple nations, the DSR Bank could negotiate long-term supply contracts for critical minerals at scale. Likewise, with multilateral governance, the bank could help to enforce supply chain standards and share intelligence on vulnerabilities.

Such multi-level engagement with allies is not a favour we do for others; it is in our national interest and would be far more effective than fragmented or ad hoc approaches. Our forces already train and operate alongside European allies, the next step is to tackle the shared challenges of securing affordable, joined-up, large-scale funding needed to deter the threat from Russia.

The UK is uniquely positioned to lead the creation of the Defence, Security & Resilience Bank, capitalising on London’s position as a financial centre and the Labour Government’s parliamentary majority to drive this initiative forward. While Germany’s government is not yet fully formed and France grapples with domestic resistance to defence spending increases and Presidential uncertainty, Britain enjoys political stability and a proven ability to mobilise capital.

Spearheading the DSR Bank would also cement the UK’s leadership in European defence at a time when strategic autonomy is paramount. We have already demonstrated our pivotal role in military partnerships in the Baltic region, the High North, and Ukraine. Extending this leadership role to finance is the logical next step. The excellent credibility of our armed forces is already a massive draw for defence exports. When the Royal Navy uses a platform, the world takes notice. Our troops are the ultimate ambassadors for UK-made equipment and their endorsements carry weight in international procurement deals. But to succeed, Britain must partner with EU states and demonstrate the leadership and courage our allies expect from us in the face of political anxieties around Brexit and US disengagement.

This is a moment for bold action, not hesitation. Escalating global threats and mounting economic pressures demand solutions like the Defence, Security & Resilience Bank to secure Europe’s future. History has repeatedly shown the dangers of neglecting domestic industry, whether it was Britain’s abandonment of the TSR-2 under cost inflation and balance-of-payments pressures or the broader failure in this century to consistently invest in our defence sector.

These mistakes have diminished our resilience, left us reliant on foreign suppliers, and made us vulnerable to external shocks. Today, we must learn from the past and prioritise revitalising and funding European industry to safeguard our security and independence. The Defence, Security & Resilience Bank is not merely a financial tool; it represents a decisive step toward achieving Europe’s strategic autonomy in an increasingly unstable world. European governments must rise to the challenge and act with urgency. Britain must take this opportunity and lead.

© Calvin Bailey and Graeme Downie, 2025, published by RUSI with permission of the authors.

The views expressed in this Commentary are the authors', and do not represent those of RUSI or any other institution.

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