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(Bloomberg) — Europe’s race to build a war economy has led the bloc to pull spending desperately needed for another crisis: the climate.

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The redirection of billions of euros away from development finance meant to fight the fallout of floods, droughts and cyclones in poorer countries has the potential to fuel European inflation, drive up immigration and weaken the bloc’s standing abroad.

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“We are mutually dependent on these countries,” said Gareth Redmond-King, head of international program at Energy and Climate Intelligence Unit, a nonprofit.

In the UK, Prime Minister Keir Starmer has announced plans to cut aid spending by £6 billion ($7.6 billion) to make room for increased military spending. Germany intends to scale back development finance by almost $1 billion, while the Netherlands has unveiled €2.4 billion ($2.5 billion) of cuts. Across Europe, governments including Finland, Sweden and Switzerland are releasing similar plans.

Redmond-King said the pullback has implications for a whole range of soft commodities in countries that export to Europe. Fewer protections against climate disasters will likely result in higher prices on everything from coffee to cocoa and bananas, he said. He also warns that spending cuts here and now mean future climate costs may rise.

The UK imports two-fifths of its food from abroad, half of which comes from areas where crops face an increase in heat waves, floods and other impacts of climate change, according to the ECIU.

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David Miliband, a former Labour foreign secretary who’s now chief executive of the International Rescue Committee, said the UK’s decision to withdraw development finance marks “a blow to Britain’s proud reputation as a global humanitarian and development leader.” Meanwhile, Anneliese Dodds, the UK’s minister for international development, has resigned in protest.

Ironically, the retreat by western governments from development finance risks ceding soft power in strategically important geographies to nations that Europe considers hostile, according to Redmond-King.

“The world has changed a lot in the last month and there’s no question we have to raise defense spending,” he said. But by cutting climate aid to developing nations “we risk withdrawing something that stabilizes those countries and opens up an opportunity for others – like Russia – to step in.”

Europe’s retreat from development finance adds to the blow delivered by the policies of US President Donald Trump, which froze foreign aid and began dismantling the US Agency for International Development. The agency managed $43 billion of foreign aid in 2023.

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The hollowing out of development budgets comes just three months after the COP29 summit in Baku, Azerbaijan, where rich countries finalized a hard-won agreement to provide $300 billion of annual climate aid to poorer nations.

That pledge is now in jeopardy.

“It will be much more difficult to live up to the commitments signed up to at Baku,” said Redmond-King.

Meanwhile, investors are turning their backs on stocks whose value is tied to climate spending. The S&P Global Clean Energy Index has lost about 40% of its value since Russia invaded Ukraine in February 2022. The S&P Global 1200 Aerospace & Defense Index climbed 64% in the same period.

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