The oil fund can finance Europe's defence

While the rest of the world has debt and is illiquid, Norway sits on the world's largest reservoir of liquid funds. It can be used to defend Norway and Europe.

The Munich Security Conference marked a paradigm shift. Europe finally understood that the region must take responsibility for its own security. This security must be financed. This means having easy access to funds for investments in defense. While Norway is small in a European context – and cannot contribute much in terms of forces and materiel to the region's defense – we have an advantage that other European states do not have: The Norwegian state is wealthy and can reallocate significant liquid funds to an extent that others cannot.

I am not suggesting that Norway should engage in charity and give away money. The proposal is instead to launch defense bonds, where Norway buys these bonds that are earmarked for investments in defense construction in Europe. Such bonds are a well-known institution for states that are rearming, and for example Polish Prime Minister Donald Tusk and EU Foreign Affairs Chief Kaja Kallas have proposed using the tool. The idea of the Oil Fund and defense bonds came to me after a discussion with Kristine Moody.

The Oil Fund currently owns liquid interest-bearing securities worth 5250 billion kroner. Of this, more than half is in the US and 11 percent in Asia. In total, ⅔ of the bonds are placed outside Europe.

Norway can offer Europe to buy defense bonds on condition that the money is used exclusively for building up Europe's defense. By repurposing existing bonds into such defense bonds – which can be issued to countries that want to build up their defense, or possibly to the EU for a joint defense investment – the following is achieved:

(1)   The risk in the Oil Fund is technically the same before as after
(2)   The behavior (linked to defense) is not the same before as after

The resolute measure therefore does not change the fundamental characteristics of the Oil Fund, such as its risk profile. On the other hand, it is the behavior that is being addressed. European states are being encouraged to invest in defense immediately.
The paradigm shift in security policy means that the Oil Fund is not as secure as before. The Fund was established in the wake of the fall of the Berlin Wall and has existed in the safe shadow of the fall of communism. The new security policy risk is not easy to take into account in a conventional model of risk management because the risk is non-financial. Most people nevertheless understand that the Oil Fund is worth little if we lose freedom or even the right to control the Fund. Then it is a small price to pay if, through financially risk-neutral reallocations in the Fund, one contributes significantly to the defense of Europe – and thus makes Norway and the Oil Fund safer by reducing the non-financial risk.

The reallocation of funds from existing liquid interest-bearing securities to defense bonds means that Norway will no longer be as large a buyer of government bonds that cover the state budgets of the issuing countries. Therefore, it may matter where we choose to sell our existing bonds to become a buyer of defense bonds. If we sell existing bonds in Europe, it will be more difficult for the authorities in the European countries to gain democratic support for a hard priority for defense. Even though only ⅓ of the Petroleum Fund's fixed income securities are European, selling off fixed income securities outside Europe will make it easier for the European states to issue new defense bonds without having to worry about other financing. If Donald Trump reacts to the large sale of American bonds, it is a consequence of his own call for Europe to invest in defense.

Norway owns liquid fixed income securities for 3,500 billion kroner outside Europe. This gives Norway a unique advantage that both we and Europe can benefit from by encouraging large investments in the defense of Europe. Norway's contribution can raise morale and optimism in an uncertain time. It gives us a win-win situation if we thereby become a large buyer of defense bonds in the security policy paradigm shift. Norwegians and the Petroleum Fund become safer and we contribute to Europe in a way that gives Norway valuable goodwill.