Everyone agrees the UK and Europe need to beef up their independent defence capabilities. That imperative is what has driven defence shares in London and on continental European markets to record highs – even as US stocks have been in turmoil over the Trumpification of economic policy.
The question is: how do we pay for this grand re-armament? In blunt terms, we want to make this country and the rest of Europe strong enough to make Vladimir Putin think twice about his next excursion, so we need to tool up quickly.
One idea is for a multi-lateral ‘bomb bank’ to provide the wherewithal for the defence industry. It appeals to Rachel Reeves and fellow finance ministers in other countries because it would enhance the rationale for excluding defence-linked debt from the fiscal reckoning.
If it works, it would allow capital for re-armament to flow to European countries without pushing up national debts.
David Lammy, the Foreign Secretary, is in favour, but has not yet endorsed any of the several blueprints put forward.
One of these comes from former Nato official and British Army officer Rob Murray, who is advocating a £100billion Defence, Security and Resilience (DSR) Bank. It would issue bonds backed by shareholder countries, which he argues would be higher rated than the credit rating of many Nato members – including the UK.
Making tracks: Small and medium firms in the defence supply chain often have problems obtaining loans and raising capital
Loans with very long maturities would be offered to cover multi-year projects. That could bring down costs and offer greater stability for firms, which at the moment face uncertainty if, say, there is a change of government mid-contract. The DSR could provide commercial banks with risk guarantees and also help with compliance, including checking out firms’ bona fides.
London is the obvious place for such a bank to have its headquarters due to the City’s status as a world financial centre.
Murray, whose blueprint is supported by former chief of the UK defence staff Lord Peach, says the bank would lend to non-Nato members, including Ukraine. He also envisages the US being a shareholder, which would be controversial.
An alternative ‘bomb bank’ plan backed by former head of the Armed Forces General Sir Nick Carter would be limited to Europe. The DSR, claims Murray, could start operations next year. But banks and pension funds could take more immediate action.
Small and medium firms in the defence supply chain often have problems obtaining loans and raising capital.
Of course, lenders must take care not to bankroll firms linked to rogue states, criminal arms dealers and terrorists, but this does not justify a knee-jerk aversion to legitimate defence companies.
As MPs and peers pointed out last week, the shunning of defence companies based on bogus ‘ethical’ grounds has to stop. And as the 100 or so Labour MPs and peers also pointed out in a letter to banks, environmental, social and governance structures (ESGs) need an urgent re-think.
There are lessons, too, from the Covid pandemic when the response by government and banks was marred by waste, fraud and favouritism.
The risk of throwing cash into re-armament in the absence of a robust and well-funded supply chain is it will invite a swarm of profiteers and charlatans and create ‘military inflation’. If that happens, we will not end up with more weapons, merely more expensive ones.
Finding the money for defence is one issue; using it wisely is another.
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