The UK could establish a ‘supranational institution’ with European nations to help finance a significant boost in defence spending across the continent.
Treasury officials have drawn up plans for a multilateral fund that would allow nations to borrow money for defence spending at favourable rates and purchase weapons for a common stockpile.
Backed by equity and sovereign guarantees from the coalition of countries involved, the new fund would both lend money for defence projects and enable the acquisition of military assets that could be used by any participating nation.
The paper, which was sent to European officials last week, suggests the fund could run up to ‘hundreds of billions of euros’, according to the Financial Times.
European nations have been under intense pressure to increase their defence spending from the US amid growing fears of Russian aggression.
President Donald Trump has demanded nations on the continent spend at least five per cent of their GDP on defence, despite most countries aiming for two to three per cent.
If enacted, the proposed fund could help create a common stockpile of weapons that member states would only pay for when they use them.
Under the financing structure, governments would not be hit with upfront investment costs, meaning there will be less worry around financial capacity.
Potential purchases noted in the paper include spare parts for tanks and aircraft, artillery shells, air defence munitions, explosives and logistics aircraft such as helicopters and carriers.
Treasury officials have drawn up plans for a multilateral fund that would allow nations to borrow money for defence spending at favourable rates and purchase weapons for a common stockpile
European nations have been under intense pressure to increase their defence spending from the US
‘The institution would be designed to be classified to the rest of the world sector in the national accounts and the equipment purchased by the institution would be recorded on its own balance sheet and not the contributing countries,’ Treasury officials wrote.
‘This would avoid the upfront capital cost of purchasing equipment scoring to member countries’ budgets,’ the paper said, adding that it would be done in a way ‘consistent with sound fiscal management.
The fund could also lend to defence firms at favourable rates and to some governments at lower rates than they would be able to borrow on their own.
Some European officials have already cast doubt on the plan, however, with one saying: ‘My sense is that it isn’t very practical, because it could take a long time.’
But earlier today MPs welcomed the idea.
Tan Dhesi, who chairs the Parliamentary Select Committee on Defence, told MailOnline: ‘With the geopolitical picture increasingly volatile and unpredictable, our Defence Committee current inquiry into the UK’s contribution to European security asks how Britain can best contribute to its and its continent’s defence in this new uncertain world; and we have already been discussing the important question of how rearmament will actually be funded, especially given the economic challenges being faced.’
Calvin Bailey, a Labour MP who sits on the Defence Select Committee, told MailOnline: ‘Given the urgent security situation we are facing in Europe it is right to look for a structured, long-term mechanism that ensures that re-armament is not only faster but also more financially efficient than going at it alone.
‘This is a positive and proactive step to reach out to our European allies and support British industry.
‘A joint fund could allow us to urgently close the capability gaps we have in Europe and ensure we are ready as the U.S shifts focus to the Indo-Pacific.’
Chancellor Rachel Reeves will join a meeting of EU finance ministers in Warsaw next week focused on defence financing.
The UK announced in February that they would hike defence spending to 2.5 per cent of GDP by slashing the foreign aid budget, while EU leaders agreed plans to jointly borrow €150billion to lend to individual governments for military expenditure.
European Commission President Ursula von der Leyen said the announcement was part of a ‘Rearm Europe’ plan to unlock up to €800billion of additional defense spending over the coming years.
European Commission President Ursula von der Leyen said the announcement was part of a ‘Rearm Europe’ plan to unlock up to €800billion of additional defense spending over the coming years
Military off-road vehicles are seen on the assembly line of Spanish company Urovesa
‘Europe is ready to massively boost its defense spending, both to respond to the short-term urgency to act and to support Ukraine, but also to address the long-term need to take on more responsibility for our own European security,’ she said last month.
Some of the measures proposed by the EU could prioritise procurement from defence companies on the continent, with American firms potentially phased out.
In recent days US officials have told their European counterparts that they want them to keep purchasing American-made arms.
A State Department spokesperson told Reuters that Trump welcomes recent efforts from European allies to ‘strengthen their defense capabilities and take responsibility for their own security,’ but warned against creating new barriers that exclude U.S. companies from European defense projects.
‘Transatlantic defense industrial cooperation makes the Alliance stronger,’ the spokesperson said.
The UK Treasury have been contacted for comment.
