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Britain will this week join EU leaders in groundbreaking talks about setting up Europe-wide defence funding arrangements, as the continent struggles to beef up its military amid fears of a disappearing US security blanket.
UK chancellor Rachel Reeves will hold talks with other European finance ministers at a G20 meeting in Cape Town this week, as the war in Ukraine enters its fourth year.
“It could be a fund or a bank. For example, there is the concept of the Rearmament Bank, which we are also considering,” Polish finance minister Andrzej Domanski said.
Domanski told the Financial Times that discussions had been taking place with the UK for months, adding: “Without Great Britain, the defence of Europe is difficult to imagine.”
The UK Treasury confirmed that Reeves would “raise defence financing proposals with her European counterparts” at the G20, but said talks were at an early stage.
Donald Trump has demanded European Nato allies increase defence spending to 5 per cent of GDP, from an existing 2 per cent target that some still do not reach, or risk losing US protection.
The US president’s rapid re-engagement with Russia, a country that most European countries see as an existential threat, has sparked frantic discussions on how to collectively bolster Europe’s defensive capabilities and reduce reliance on American troops and weapons.
On Sunday Germany’s incoming chancellor Friedrich Merz declared that Germany had to fundamentally remake its security arrangements and end a decades-long reliance on Washington, saying Trump was “largely indifferent” to Europe’s fate and the continent needed to “achieve independence”.
Collective European defence spending was broadly discussed during a call this weekend between European Commission President Ursula von der Leyen and UK Prime Minister Keir Starmer, and a separate call between von der Leyen and Norway’s Prime Minister Jonas Gahr Støre, according to a person briefed on the discussions.
European countries are looking for ways to increase defence capabilities at a time of tightly constrained national budgets. By leveraging national guarantees, a bank would allow countries to boost spending without increasing their balance sheets upfront.
The UK is seeking ways of increasing defence spending from 2.3 per cent of GDP to 2.5 per cent, costing at least £5bn extra a year, when its ability to boost outlays is heavily constrained by its self-imposed fiscal rules.
Among the proposals is one from General Sir Nick Carter, former head of the British military, who has suggested a “rearmament bank” to tap into Europe’s savings pool, modelled on the European Bank for Reconstruction and Development — the lender set up after the fall of the Iron Curtain to support central and eastern Europe.
“The Treasury is interested in it,” said one person involved in discussions with Reeves’ team. However, Treasury officials said there were many models of multilateral financing on the table and that Reeves had an open mind on the next steps.
Experts said a benefit for Reeves of Carter’s “rearmament bank” was that it would mitigate the impact of extra defence spending on the fiscal rules.
Andy King, a former UK official who is now at Flint Global, a consultancy, said such a bank had the potential to raise “significant resources for defence without materially impacting the fiscal rules”. He added: “That’s not a certain outcome: the detail would matter in terms of how the entity was structured and how it used its lending capacity.”
The EU leaders meeting in late March will discuss common defence needs, and Poland’s goal would be to make progress on the funding needs at an EU finance ministers gathering in April, ahead of a decision by leaders in June.
The European Commission said this month it would partially lift EU fiscal rules to allow countries to invest in defence, a move that would allow countries to borrow without incurring sanctions.
Von der Leyen has also opened the door to “common European financing” on common defence projects, and is expected to detail funding options in March.