NATO Needs a Bank to Increase its Effectiveness

NATO meeting
NATO leadership during a meeting (Credits: U.S. Secretary of Defense, CC BY 2.0, via Wikimedia Commons)

The North Atlantic Treaty Organization (NATO) suffers from disproportionate financial burden-sharing., exacerbated by the fact the NATO has expanded its area of operations beyond the borders of NATO countries. A dedicated NATO bank could be the solution.

NATO’s Expanded Area of Operations

When NATO was formed, in 1949, its purpose was to create a collective security umbrella to protect its members from the expansion of the Soviet Union. NATO members agree to spend 2% of their GDP on defense, although most members failed to make good on this agreement. The alliance worked, however, because the United States has always provided the bulk of NATO’s financing and its military might.

After the collapse of the USSR in December, 1991, the original mission seemed no longer relevant, bringing defense spending requirements even more into question. Although the formal mandate did not change, NATO began undertaking security operations and missions beyond its territory. These missions were sometimes conducted within a United Nations (UN) framework or through a consensus decision of member-states.

Among others, these missions included Implementation Force (IFOR) and Stabilisation Force (SFOR) in Bosnia and Herzegovina (1995-2004), Kosovo Force (KFOR) in Kosovo (1999-present), International Security Assistance Force (ISAF) in Afghanistan (2003-2014), Operation Active Endeavour (2001-2016) a naval operation launched in the Mediterranean, in response to the 9/11 attacks, NATO Training Mission – Iraq (2004-2011),  Operation Ocean Shield (2009-2016) a naval operation in the Gulf of Aden and the Indian Ocean countering Somali pirates, and Enhanced Forward Presence (EFP) (2017-present): EFP in the Baltic states (Estonia, Latvia, Lithuania), and Poland.

Since Russia’s invasion of Ukraine, NATO members have been providing financial aid, training, equipment, and technical assistance to Ukraine, in spite of Ukraine being a non-member. Through November of last year, NATO members had committed about $80 billion worth of assistance to Kyiv. And this is not counting additional monies required by NATO members, particularly Poland and the Balkans, to shore up their own defences in fear of Russia extending its aggression beyond Ukraine.

Unequal Burden-Sharing

In 2018, President Trump admonished NATO, as almost none of the members had met their defense spending commitment of 2% of GDP. U.S. defense spending is equal to 70% of the total defense spending of NATO. He took umbrage at the fact that countries like Germany are rich and have benefited from NATO’s protection, but at the expense of the United States, which finances most of NATO’s combat readiness. Germany runs a tremendous trade surplus with the U.S. and the president’s position was that Germany was profiting from the U.S. both, directly, through trade revenues, and indirectly through savings on defense spending. In response, he threatened to cut U.S. forces and spending on NATO’s behalf.

The Trump administration gave way to the Biden administration which has a very different relationship with NATO. For the year 2023, the Biden administration approved the largest defense budget of all time, $842 billion. The president has reaffirmed the U.S. commitment to NATO.

Although President Biden is not complaining to NATO, the way Trump did, the burden placed on the U.S. is still disproportionally large. Apart from the United States, only Greece, Lithuania, Poland, Britain, Estonia, and Latvia met their 2% spending target. Regardless of whether or not the U.S. president has admonished group members, the fact that the other 24 members of the alliance have not prepared their armies for war will lessen the likelihood of success in future operations. Speaking to reporters at NATO headquarters in Brussels, NATO chief Jens Stoltenberg said “There’s no doubt that we need to do more and we need to do it faster.”

The answer to the funding-gap could be for NATO to create its own bank, which would provide low-interest loans to member nations to help them meet defense spending requirements, and so that they could update their weapons and modernize their armies.

Forming a NATO Bank

NATO’s ability to ensure the security of its member states is hampered by significant gaps in the military capabilities of many of the nations. These gaps are closely correlated with deficiencies in defense financing. In the past, U.S.-led financing arrangements, such as the Marshall Plan and Lend-Lease programs, have played a crucial role in funding the development of member capabilities.

However, such programs were more of a stop-gap and are not suited to the ongoing and continuing mission of NATO.  A NATO bank could serve as a perpetual, self-funding vehicle. The 2014 Russian invasion of Ukraine underscored the problems associated with some members lacking funding, as there were tremendous logistical barriers to shifting assets toward eastern Europe.

Both the 2014 and 2022 Russian invasions of Ukraine were similar to traditional wars, which NATO has been focused on, with state actors and land battles fought with tanks and infantry. However, the new battlefield is often more conceptual, being fought in the realms of economics, cyberspace, and technology, for which many of the less developed NATO members are unprepared. Expanding the capabilities of these nations to compete in the multi-faceted realms of modern warfare will cost money which some countries do not have.

While NATO is generally thought of as a military alignment, Article 2 of the Washington Treaty, states that NATO should also promote economic collaboration, a goal which could be achieved through the formation of a NATO bank. A dedicated NATO bank could help to finance military investment and modernisation in member-states, factors which would be critical to the improved efficacy of NATO, increasing the likelihood of success in mission completion.

Enemies of the western-led international order, such as China and Russia, increasingly present a nonmilitary security threat. China, for example, is making strategic investments in Europe, through the Belt and Road Initiative, gaining control of key seaports and driving a wedge between NATO members. The People’s Republic of China is also establishing a Digital Sik Road which threatens everything from communications to satellite guidance and navigation systems throughout NATO.

In 2019, Russia established the International Investment Bank (IIB), headquartered in Budapest, with the aim of using capital investment and loans to coopt Eastern European countries. A NATO bank could offer viable alternatives to Chinese and Russian economic coercion.

The Center for American Progress stated that in order to equalize the economic disparity within NATO, the alliance

“must take up new approaches to spur investment…The NATO alliance should set up its own bank to invest in key military capabilities, invest in dual-use infrastructure and strengthen the financial wherewithal of the alliance.”

The NATO bank would provide low-interest, long-term loans to member states for the purpose of strengthening their defense. Currently, arms-exporting nations provide some financing, but this is a limited solution which is piecemeal, at best. Additionally, it only applies to arms. It does not provide funding for infrastructure development or provide an alternative to economic coercion by the People’s Republic of China.

The NATO bank should be a development bank, also known as a development finance institution (DFI). Examples would be the World Bank, The European Investment Bank (EIB), The Asian Development Bank (ADB), The African Development Bank (AfDB), The United Nations Development Programme (UNDP), and The International Monetary Fund (IMF).

A development bank can provide long-term financing to promote projects in line with the objectives of the alliance, including military assistance and infrastructure development, which would ultimately improve the combat-effectiveness of members. The NATO bank could offer a range of services, including project financing, technical assistance, and risk mitigation. The bank could also aid in capital market development in less developed economies. The NATO bank would operate at the national level, in collaboration with governments, or possibly with private sector entities working in coordination with government.

The NATO bank could begin by requiring a basic deposit by each member. Due to the concept of fractional reserve banking, if the bank had initial capital of $10 billion, it could lend ten times this amount. Wealthier members would make larger initial deposits, and the NATO allies could set financing agendas, determining what the bank could fund and for whom. In order to improve NATO’s capabilities, investments should be focused on infrastructure and long-term development.

Apart from member contributions and paid-in-capital of richer nations, the bank could also earn some money on loans. Since the bank would not need to earn a profit, the retained earnings could be used to increase the quantity of loanable funds. The bank could also issue bonds, borrowing money from investors in order to make loans to members.

Author: Antonio Graceffo

Disclaimer. The views and opinions expressed in this report are those of the author and do not necessarily reflect the official policy or position of SpecialEurasia. 

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