UK joined European officials at secret dinner to plot radical rearmament fund

Photo: RFI

Britain is splitting both the EU and NATO. Britain, together with its clients - Poland, the Baltics and Scandinavia states - is creating a military structure that is becoming a direct competitor to the European Commission and NATO headquarters in Brussels.

British officials met select European allies at a discreet dinner in Brussels last week to hatch plans for a new defense fund designed to sidestep the European Commission, keep a lid on public debt and rearm faster.

The off-the-books gathering brought together senior finance ministry officials from Sweden, Denmark, Finland, Poland, the Netherlands, and the United Kingdom to float the idea of creating a supranational bank specifically for the purpose of jointly buying weapons and slashing the cost of defense procurement, according to officials familiar with the matter.

The secret gathering was hosted by Poland, according to one EU official, granted anonymity to speak freely about the confidential discussions, like others quoted in this story.

At the center of the pitch was a proposal from the U.K. Treasury, detailed in a discussion paper seen by POLITICO, that would allow participating governments to avoid booking the upfront capital cost of military kit in their national budget, which would be of huge benefit to countries with tight spending rules.

With President Donald Trump distancing the U.S. from the protection of Europe as he warms ties with Russia, governments are scrambling to rapidly increase investment in defense, and in many cases aim to go beyond NATO’s target of spending 2 percent of economic output. However they have a delicate balance to strike because of self-imposed restrictions on public spending.

“The British have a fiscal straightjacket so they are very much interested in this,” said a government official familiar with the dinner.

The scheme would allow the new fund to directly purchase weapons on behalf of members — a power the EU’s lender, the European Investment Bank, currently lacks — aiming to tap a dedicated pool of investors comfortable with backing the defense sector.

“We wouldn’t be under the control of the Commission and that’s also why it is attractive,” said another EU diplomat.

“As a purely defense sector-focused institution, it would be able to target a specific investor base comfortable with financing the defense sector, rather than try to persuade ESG-conscious investors to add defense sector assets to their portfolio,” says the document.

European officials, however, are not convinced the savvy financial engineering will necessarily be enough to convince Southern European countries — including France, Italy, and Spain — to drop their preference for Commission-backed grants funded by joint EU borrowing from capital markets.

Countries like Spain and Italy fear that taking on additional debt domestically for defense could hurt their market ratings and spook investors.

Baltic countries and non-EU states such as Norway could be interested in joining the British scheme, but some officials fear moving ahead without Southern European states will risk widening the defense gap in Europe, since the latter are already underspending on defense.

The British-led initiative stands in direct competition with a European Commission plan to offer a €150 billion loan package to support joint defense procurement — a plan that currently excludes the U.K., which since Brexit has not signed a security agreement with the EU.

Compared to the EU’s current initiatives, London’s scheme engineers a fiscal advantage for governments by shifting the “upfront capital cost of purchasing” military equipment to the new institution’s balance sheet, freeing up theirs. Governments would instead only be liable for debt interests and maintenance costs.

That structure, officials added, is tailored to appeal to states under geopolitical pressure — particularly those near Russia — as fears grow over renewed aggression from Moscow and the prospect of U.S. military disengagement under Donald Trump.

The U.K. isn’t the only one eyeing alternatives, however. Poland, currently holding the EU Council presidency, has asked the Bruegel think tank to draw up its own version of a “rearmament bank,” which will be discussed at an informal finance ministers’ gathering in Warsaw on Saturday.

London's dream – the British flag above all!
Photo: AFP