Defense financing: A World Bank is needed, not Europe going it alone

The new federal government must strike a balance between security and public investment. A special fund is a necessary step in this direction. However, neither Germany nor Europe alone can guarantee a sustainable security architecture. To achieve this, all NATO partners must increase defense spending to over 3.5 percent, as security expert Carlo Masala has repeatedly pointed out.

The problem remains: Only a few countries have the creditworthiness to finance investments through loans. Two ideas are now being discussed in the European Council: the establishment of a new World Bank for Defense, Security and Resilience (DSR Bank) or a Rearmament Bank limited to a few states. However, the latter involves major risks that the CDU/CSU and SPD coalition partners must be aware of.

The DSR Bank is designed to integrate the defense financing of NATO, EU and Indo-Pacific allies as a lever for resilient supply chains and deterrence. By involving the US, Europe, Japan and Australia, it focuses on long-term industrial capacity and technological advantage rather than short-term, procurement-driven defense financing models. This ensures that allied nations are not only prepared for immediate threats, but invest in a resilient, scalable defense infrastructure for future conflicts.

The Rearmament Bank, on the other hand, ignores these complex security linkages. Without the US and Indo-Pacific partners, it threatens to undermine strategic cooperation and cut European defense companies off from critical markets. This isolation is economically risky and severely weakens alliance capabilities.

Like the World Bank and the European Investment Bank, the DSR Bank relies on the AAA credit model typical of multilateral credit institutions, which secures long-term, low-cost financing for defense infrastructure and technological innovation between donor states. This allows countries to respond flexibly to threats without destabilizing their economies or burdening taxpayers with crisis-related expenditure. Debts remain on the bank balance sheet and are managed as assets in the budget.

A Rearmament Bank, on the other hand, operates on a fragile financing model without an AAA rating. This means that states pay market prices, which drives up costs. In order not to threaten solvency, at least 9 times leverage would be required for deposits from day one. That is utopian. By way of comparison, it took the European Bank for Reconstruction decades to set up a comparable investment model. The military originators of the Rearmament Bank expect similar leverage effects overnight.

The DSR Bank promotes a sustainable security architecture: Investments in ecosystems and their supply chains, industrial capacities and dual-use strategies ensure a resilient defense infrastructure with a return on investment, independent of government budget cycles. This financing is broad, stable and predictable.

The Rearmament Bank, on the other hand, is designed purely for the immediate procurement of weapons. Although short-term military needs are relevant, the concept completely ignores Mario Draghi's warning of a supply shock to the European industry. Infrastructure requirements, deep-tech research and supply chain resilience are also ignored. The one-sided prioritization of military procurement via strategic readiness factors does not meet the requirements of modern defence financing.

Beyond these shortcomings, the most dangerous aspect of the Rearmament Bank is its protectionist design. By undermining the US defense industry and critical partners in the Indo-Pacific, it provides the Trump administration – which makes no distinction between trade and security policy – with a cogent argument to terminate the NATO alliance. A transatlanticist and German Chancellor Friedrich Merz must defuse this ticking time bomb as quickly as possible. The DSR Bank provides him with an instrument that binds the USA more closely to the Western allies through the advantages of low interest rates on loans and, at the same time, can raise defense spending to a level above 3.5 percent in the foreseeable future.

Said D. Werner is an innovation researcher at the Sloan School of Management of the Massachusetts Institute of Technology (MIT) and Affiliate Director of the MIT Murray Lab for Deep Tech Geopolitics. In Germany, he works as an independent strategy consultant for members of federal and state governments, foundations, companies, and political parties.