A Joint Expeditionary Force Fund: A Better Way to Finance Defence?

With friends like these: British troops pictured during a Joint Expeditionary Force exercise in Finland in 2022. Image: Defence Imagery / OGL v3.0

In a previous article, the authors argued that the Joint Expeditionary Force (JEF) should be stretched to best meet its growing potential. One proposal was to create a ‘JEF Bank’ to fund capability development, provide sustainable growth in defence spending and incentivise closer cooperation. The JEF provides an ideal framework to develop the concept among a smaller group of countries before potentially scaling up.

Russia’s 2022 invasion of Ukraine has transformed European security. It immediately exposed the poor suitability of most European armed forces for high-intensity warfighting at scale due to decades of underinvestment and distracting expeditionary operations. Developing new capabilities, reequipping depleted stockpiles, and keeping larger formations at higher levels of readiness will be very expensive. For NATO Allies to meet the collective 2% GDP floor, an additional $93 billion investment would be needed, not including restocking arms provided to Ukraine.

Now, more than ever, European defence spending needs to be targeted, complementary and sustainable. Yet almost a decade after NATO's Wales Summit re-emphasised the minimum 2% of GDP defence spending target after Russia's annexation of Crimea, just 11 out of 31 NATO members are likely to meet the benchmark in 2023. The current system is not working. To deliver the necessary step change in funding that Europeans need, one must consider and develop alternative models for innovative financial solutions.

NATO has launched its €1 billion venture capital (VC) backed innovation fund, specifically to fund defence start-ups as an alternative to Chinese investment. The NATO Bank concept is already developed but still searching for political top cover, which may be complemented by an EU Bank if consensus can be achieved – based on an expanded European Investment Bank – to fund military modernisation. Moreover, the war in Ukraine and geopolitical trends have raised the profile of the defence industry and markets, making the sector more attractive for VC investors who are more comfortable backing industries previously seen as ‘taboo’. For example, in late 2022, US defence company Anduril raised $1.48 billion series E funding and has rapidly grown as a consequence.

A Financial Bridge Too Far for NATO

Article 2 of the 1949 North Atlantic Treaty offers an underutilised framework for defence financing which encourages economic collaboration among Allies. Between 2018 and 2019, a small team at NATO HQ engaged with investment bank Multilateral Lending Institution (MLI) experts to devise a feasible model for a NATO Bank. The objective was to provide a complementary financing source for Allies which could even generate additional resources through interest earned on paid-in subscription capital, funding not only NATO itself but also other initiatives, such as a deep technology VC fund (a spin-off idea that Allies signed up to in 2021). It conservatively modelled the bank's balance sheet at around $300 billion based on the agreed capability needs of Allies and the delta of spending versus reaching the 2% minimum.

Despite interest from Allies and the Secretary General’s office, the proposal faced formidable political headwinds – interest rates were low, inflation was manageable, and a war in Europe was deemed unlikely. Ultimately, in 2018, the business case didn’t exist, nor did the political will to tackle the challenges of multilateralism and try to gain consensus among Allies. The situation in 2023 is very different, and calls for collective defence spending through capital markets continue to grow. If consensus within NATO proves elusive, the JEF could advance the Alliance's funding goals and provide an option for additional Allies and like-minded countries to join later, while the European Investment’s Bank potential mandate expansion could further complement such efforts.

Why JEF and What are the Benefits?

The JEF is an ideal framework to develop new financial mechanisms that can subsequently be scaled. JEF members are like-minded and bound together by their shared assessment of the threats to Euro-Atlantic security. London is a European financial powerhouse, and the Nordic and Baltic states have a vibrant, growing tech industry. A JEF Bank would serve as an instrument of economic stimulation and technology job creation to support the links between national security and prosperity, appealing to legislators and policymakers alike.

As an independent and regulated entity, a JEF Bank would operate under a unique charter that would shield it from the political weather in member countries

A JEF Bank would ease defence and security funding challenges in several ways. First, it would provide more stable defence spending levels, sending a strong signal to the defence industry and generating measured production, which would increase resilience during economic downturns (the bank would be a countercyclical tool). Second, it would be economically attractive for all members, regardless of their domestic credit ratings and borrowing costs. Third, economic activity produced by the bank's operations could lead to enhanced domestic production and thereby stimulate job creation. Fourth, by investing in domestic tech industries, it can help JEF members meet the 20% NATO capability development targets and EU Research and Development goals. Finally, it would further incentivise interoperability and joint capability development, producing higher levels of standardisation. The JEF is not Treaty-bound, meaning that these benefits can be realised while respecting the sovereignty of its members.

How Would a JEF Bank Work?

A JEF Bank would allow members to borrow at lower interest rates than their own cost of capital based on an underlying mechanism of an MLI – at present, only four out of 32 NATO members (including Sweden) could borrow at lower rates than an Allied Bank. MLIs are well established, with over 40 currently in existence (such as the World Bank and European Investment Bank), and all JEF members have experience of functioning within MLIs. In essence, MLIs are international financial organisations that can support their members through the issuance of loans, guarantees and grants, by pooling resources, and by sharing risk. Risk-sharing instruments can help members navigate large-scale projects and attract private investment. They offer favourable lending terms and promote economic development, stability, and cooperation among member countries. This is often enabled by their AAA credit rating. Such a rating would make a JEF financial instrument more beneficial in terms of borrowing costs than what many countries can achieve unilaterally.

At its foundation, a specialised legal framework would be needed. As an independent and regulated entity serving its members, the Bank would operate under a unique charter detailing its mission, objectives and guidelines that would shield it from the political weather in member countries. There are no known barriers within national legal structures that would prevent a specialised legal foundation for the Bank.

A JEF Bank should be built on transparency, accountability, and effectiveness. To achieve these, the following design principles should be used:

  1. Capitalisation: Led by JEF members and achieving an AAA rating, the Bank would offer advantageous terms for procuring vital defence equipment, amplifying the impact of each invested dollar, euro or pound.
  2. Interest Rates: Beneficial rates would catalyse increased defence spending – about 60% of JEF members without an AAA credit rating would gain from these lower rates. Securing an AAA credit rating would be crucial to accessing financial markets, raising capital at favourable interest rates, and – in turn – offering low-cost loans which most JEF members could not secure independently. This would enhance the economic feasibility of meeting defence spending commitments and finance the broad mandate of the JEF Bank.
  3. Economic Collaboration: Drawing from the spirit of NATO’s Article 2, the Bank would aim to engender sustained economic cooperation among JEF members, thereby offering a robust, long-term defence financing mechanism.
  4. Credit Ratings: Countries with strong credit ratings would find additional benefits in enhanced intra-Allied defence sales and long-term fiscal planning, including greater levels of defence production.
  5. Market Creation: The MLI could serve as a catalyst for creating new markets in defence technologies, thereby boosting Allied competitiveness and industrial heft.

Beyond issuing debt through capital markets over very long timeframes, the Bank could act as the depository institution for annual monetary commitments from members as part of their NATO common funding contributions. These deposits could be centrally managed and strategically used for capital investment, stockpiling of essential equipment, and R&D projects. This could lead to a more effective, transparent and dynamic resource allocation process than the current annual committee-based model that is fraught with misaligned incentives.

With escalating geopolitical instability, members of the JEF must make substantial investments in military deterrence and societal readiness

Therefore, the Bank would not merely be a provider of preferential interest rates, but could fundamentally reconfigure the current defence financing model. This long-term financing alternative could counteract the fickleness often associated with short-term domestic defence budgets.

How Would it be Structured?

A JEF Bank would be owned and governed by its members. The governance and management structures would replicate best practices from existing MLIs, including a CEO, board of governors, board of directors and executive management team composed of senior financial officials from JEF members, with voting rights being proportionate to financial contributions.

This structure would align the bank's objectives with the JEF's specific defence needs while also providing a framework for policy setting, performance review and budget approval. Overcoming some of the challenges that are often faced by defence ministries when it comes to financial management, the bank would introduce rigorous procedures for loan approval and project financing. To ensure effective governance, a robust oversight mechanism would be put in place, featuring both internal and external audits, a dedicated compliance and risk management department, and routine reporting. Such a governance structure would be essential not only for maintaining the institution's creditworthiness at the highest possible level, but also for ensuring that the funds borrowed are allocated strictly for defence expenditures in accordance with the bank's policy objectives and charter.

A New Way to Fund Defence?

With escalating geopolitical instability, members of the JEF must make substantial investments in military deterrence and societal readiness. Such an ambitious endeavour calls for unequivocal political stewardship, given the unprecedented scope of the proposal – no existing MLI is specifically mandated to focus on defence. The era of incrementally increasing defence expenditures is over, and pioneering strategies are now needed to untangle the Gordian knot of defence financing.

One strategic aspiration could be the establishment of a NATO-wide bank encompassing all Allies. The pragmatic option, however, would be to pilot a JEF Bank as a compelling countermeasure to the longstanding inertia in defence spending that has beset the Alliance for decades, and as a stepping-stone towards a NATO Bank. This would not merely be a financial mechanism but a political solution to a complex political conundrum. It would foster economic collaboration, incentivise enhanced fiscal commitments to defence, and guarantee a stable financial substrate for long-term strategic planning. All the preparatory work, including the bank's structural architecture, financial models and governance framework, has already been thoroughly developed – it’s on the shelf and ready to go. The JEF should seize the opportunity and further demonstrate its value to NATO.

The views expressed in this Commentary are the authors’, and do not represent those of RUSI or any other institution.

Have an idea for a Commentary you’d like to write for us? Send a short pitch to commentaries@rusi.org and we’ll get back to you if it fits into our research interests. Full guidelines for contributors can be found here.


Ed Arnold

Senior Research Fellow, European Security

International Security

View profile

Brigadier (Ret’d) Robbie Boyd OBE

Associate Fellow

View profile

Rob Murray MBA

View profile

Air Chief Marshal Lord Peach KG GBE KCB DL

Distinguished Fellow

View profile


Explore our related content