Trio of European states set up new fund to boost defence spending

The United Kingdom, the Netherlands and Finland have joined forces to fund joint defence procurement through a new multilateral mechanism, in an effort to boost value for money as Europe undergoes a massive rearmament drive.

The mechanism would “strengthen collective deterrence, expand defence industrial capacity and increase defence capability through joint procurement”, the countries wrote in a statement.

It would operate like an international financing institution, with a mix of guarantees and paid-in capital from participating countries that could attract private investment by issuing bonds.

The goal was to broaden membership from the three countries to other Nato members and “like-minded partners”, one official with knowledge of the discussion said.

Admitting new members would be subject to a unanimous decision by the core group of countries, the official added.

“We are still at the exploratory phase,” said another official, adding that the next steps would include work on a treaty to underpin the new structure.

The goal is to reduce defence procurement costs and unlock economies of scale from pooling orders of tanks, munitions and missiles instead of competing for defence companies’ limited supply, which pushes up prices.

UK chancellor Rachel Reeves said: “Now, more than ever, we must deepen co-operation with our allies. It’s in our long-term interests to strengthen our defence industries, make it easier for our armed forces to work together, and make sure taxpayers get value for money.”

Finland’s defence ministry said work to set up the mechanism was “prompted by major shifts in the security environment”, particularly Russia’s invasion of Ukraine.

Yet the idea has failed to convince Germany of its financial merits; a final decision on membership by Berlin had not yet been taken, said one official.

Berlin is undergoing a defence spending splurge worth €650bn between 2025 and 2030, intended to turn Germany into the strongest conventional army in Europe. Its financial firepower and defence industry would be crucial to any joint rearmament effort.

Guntram Wolff, senior fellow at the Bruegel think-tank and author of a paper last year that described a similar multilateral mechanism, said that by aggregating demand, costs per unit could be halved.

“Deeper defence co-operation across European countries is necessary to reduce costs for taxpayers and ensure technology is developed and controlled in Europe. This new initiative is a right step and I hope more countries will eventually join,” Wolff told the FT.

This is not the first time that European states have entertained the idea of a multilateral funding instrument, with ideas for a rearmament bank being considered but later discarded by countries including the UK.

Reeves has been seeking ways of increasing defence spending as the UK grapples with a delayed 10-year defence investment plan and pressure from the US to boost its contribution.

Britain and its Nato allies have promised to increase defence spending to 3.5 per cent of GDP by 2035, but the UK’s tight fiscal position means it has yet to lay out how it will achieve that goal.

This has prompted the UK to look at a range of innovative solutions, including the defence mechanism concept.

Bruegel’s paper suggested that weapons paid for by a “European defence mechanism” could be temporarily stockpiled, keeping the associated debt off participating countries’ balance sheets.