Competing theories on how to guarantee that European countries can defeat Russia in a potential future conflict without U.S. support are circulating amid calls for Europe to rearmament. There may be some attraction to the concept of a rearmament bank, but it is unclear if there will be any additional funding for what is probably going to be a very costly venture.
Recently, the European Commission announced a €800 billion ($876 billion) REARM plan. In essence, the plan calls for forcing each member state to increase its defense budget significantly. Each of the 27 countries would contribute about €650 billion ($712 billion), which would increase defense spending by an average of 1.5% of GDP beyond present levels.
Given how heavily indebted many European nations are, it is difficult to think that such an increase would be politically acceptable. For instance, with its debt currently at 113% of GDP, France would have to raise its military spending by over $47 billion annually. Similarly, with its present debt at 136% of GDP, Italy, the third-largest defense power in the EU, would need to raise spending by $34.7 billion annually.
Therefore, European nations are frantically looking for creative ways to increase defense spending, including off-balance sheet methods. The establishment of a Rearmament Bank, often referred to as a Defence Security and Resilience Bank, is one current concept. It would be made to encourage the development of defense capabilities by utilizing private investment.
The establishment of a bank to finance investments in new defense programs and acquisitions seems to have strong economic appeal. As I previously mentioned, NATO presently spends an astounding $472 billion annually on equipment alone, with the EU contributing $113.4 billion of that total. The EU amount might rise to $195.1 billion if a REARM hike is implemented.
A bank established on commercial principles would be helpful in overcoming systemic sclerosis in Europe-wide defense procurement. This issue is not specific to Europe; the Department of Defense also has trouble adequately accounting for its $4 trillion in assets and $800 billion or more in annual spending.
While removing direct development expenditures from government balance sheets, the bank would assist European governments in shifting more of the risk of cost and project overruns onto defense contractors. But rather than necessarily cutting expenses or adding capabilities, that would, at most, help control costs that are on the rise.
The equipment program's costs rose by 27%, or $83.8 billion, between 2022 and 2023 based on the "most likely" spending scenario. Approximately $102 billion will be the total cost increase in the "worst case." When you factor in other projected cost overruns that the MoD says can be offset by efficiency savings, the total cost exceeds $133 billion.
The military ministry has consistently failed to keep control over the fast rising costs and delivery deadlines of over 1,800 defense projects, according to a March 2024 report by the Parliamentary Public Accounts Committee. A 59% delivery delay for the Challenger 3 tank, a $3.2 billion overpaying on new aircraft carriers, or a $550 million overspending on the Warrior armored vehicle program are just a few examples of the MoD's dismal past.
The program most affected by fiscal pressure is the nuclear program, which is currently 62% overspent. The AUKUS program is a collaborative effort between the United Kingdom and the United States to develop a new class of submarines to counter the perceived threat from China, despite the fact that the present generation of the UK's Astute class fleet submarines has only been in service for ten years.
Given that Europe's forces are significantly smaller than those of both Russia and Ukraine, troop density is by far the greatest threat facing European militaries considering a potential conflict with Russia. With probable opposition to the suggested spending increases, it is still unclear if the attention-grabbing $876 billion European REARM proposal would result in noticeably larger armies.
For the time being, Poland and the UK seem most eager to promote the concept of a Rearmament Bank. Britain's exclusion from the Commission's plan to provide $150 billion in defense loans over four years under the REARM program is one factor contributing to the problem. The two programs, however, seem to have different goals: the loans program is a Commission-led effort to assist states in acquiring more weapon supplies for Ukraine at affordable interest rates; the proposed bank seeks to encourage new investment in defense equipment development and procurement while producing a commercial return.
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