A Nato bank is the best way to fund defence in a more dangerous world

The writer is a senior lecturer on strategy and leadership at Johns Hopkins University and was previously head of innovation at Nato and a UK army officer

Nearly a decade since Russia’s invasion of Crimea prompted Nato allies to reaffirm their commitment to defence spending, progress remains lacklustre. Since their meeting in Newport, Wales, only seven of the current 31 members have so far achieved the target — a minimum defence investment of 2 per cent of gross domestic product. At this sluggish pace, we might reach the objective by 2073.

Russia’s invasion of Ukraine, its insidious disinformation campaigns and relentless cyber attacks require far more urgent action. Meanwhile, China’s Belt and Road Initiative and its ambitions to mould the security order have left Nato allies increasingly vulnerable. Despite these threats, the politics of boosting defence coffers seem intractable. While alliance members agree on the 2 per cent policy goal, voters in Europe are steadfast in prioritising domestic spending.

Defence spending is primarily a political problem, not an economic one. Nato’s current strategy of pleading and arm-twisting allies to spend more is painfully inadequate. However, there is a better way: by creating an Allied Multilateral Lending Institution — in other words, a Nato Bank. Properly capitalised, this could be a game-changer.

The bank would save nations millions on essential equipment purchases and offer tantalisingly low interest rates on loans to alliance members, breaking the investment deadlock. It could also introduce a new line of financing with longer repayment timeframes than those enabled by standard government borrowing. This would actively encourage strategic investments rather than those limited by short-term domestic tax and spend policies.

Four years ago, while in Nato’s defence investment team, I worked with officials and investment bank experts to devise a feasible model. We proposed that the bank could generate additional resources through interest earned on paid-in subscription capital, funding not only Nato itself but also spin-off projects such as a defence technology venture capital fund. We conservatively modelled the bank’s balance sheet at about $300bn, based on the gulf between existing spending and the 2 per cent target.

When we floated the idea in 2019, it piqued interest among some allies and the secretary-general’s office. However, it also sparked political opposition due to concerns about collective debt and the belief that low interest rates made it unnecessary. Since then, the European Commission has raised collective debt for its post-Covid recovery funds, and inflation has boomed.

Given the onset of a new war in Europe, the bank makes more sense than ever. Capitalised by allies, it would offer lower rates for defence investment and allow for long-term stable financing. It would almost certainly attain a triple A credit status, benefiting the approximately three-quarters of Nato members that fall below this rating. Existing triple A nations would gain increased orders to their domestic defence industries. This would stimulate the creation of new markets for defence technologies, promoting innovation and competitiveness.

The first step — an agreement on structure and operations — requires concerted political negotiations at the highest levels supported by national security and finance ministry professionals. The implementation process would involve drafting and ratifying a legal framework, including articles of agreement, to establish the bank’s governance and functionality.

In an era of rising geopolitical tension and global uncertainty, Nato allies must confront the reality that military deterrence requires innovation. The time for halfhearted cajoling and coercion has long passed. As presidents and prime ministers prepare for this summer’s Nato summit in Vilnius, the bank proposal should be on the agenda. Our collective security and the stability of the world order depend on it.