top of page
Search

European Defence Industrial Policy: Make Sure the CEE Also Benefits


The defence industry has always enjoyed special treatment in economic regimes dominated by the free-market logic. This is largely due to the defence industrial protectionism justified by the need for self-reliance or strategic autonomy, as well as for security of supply. It is obvious that states must maintain their ability to defend themselves and safeguard their sovereignty. Even within a deep regional integration organisation that is viewed as a pioneer, such as the European Union (EU), the fundamental treaties allow for derogation from the common rules of the internal market when it comes to the defence sector. In some Central and Eastern European (CEE) Member States, allowing such derogation may have contributed to saving their struggling domestic industries. A new wave of EU-level defence industrial support schemes may revitalise them.

The defence sector in the EU has been allowed to fall under a special regime outside internal market rules. This is owed in large part to the exception contained in Article 346(1)(b) of the Treaty on the Functioning of the EU (TFEU).[1] While not a general exception, it applies on a case-by-case basis where the exception is deemed necessary to protect essential security interests and is proportionate, meaning that the protection of such security interests cannot be achieved through a less restrictive measure. The exception thus allows a certain degree of protectionism to continue as concerns measures related to products intended specifically for military purposes as well as products included in the list adopted by the Council under Decision  255/58 of 15 April 1958. The narrow interpretation of exceptions also means that dual-use items are not included under this provision of the TFEU.

The reason for this special treatment is to be found in the specific characteristics of the defence industry. It is an economic sector in which the main (and often only) buyers are the states, making it highly reliant on political decisions regarding security interests. These decisions often result in the defence companies being removed from the free market and rather being used for national security interests. This is also a two-way street: companies rely on the state to stay in business, whereas the state relies on these companies to ensure strategic autonomy and security of supply for defence equipment. However, government procurement can have a determinative effect on defence industry companies in terms of their size, structure, and evolution. While this does not ring right in terms of free-market logic, it may be the only way for companies in smaller Member States to survive. If left up to the free market, they may easily be outcompeted or––simply––bought out. This is demonstrated, in part, by the fact that the East-West imbalance in the defence industrial landscape only increased with the expansion of the EU in the mid-2000s.[2]

To counter the extensive use of the Article 346 exception, the so-called Defence Package was passed, consisting of the Defence Procurement Directive[3] and Transfers Directive.[4] The former establishes rules whereby non-discrimination, transparency, and competition would become the norm in a legislative setting sensitive to the specifics of defence equipment procurement. They are meant to usher in a European defence equipment market (EDEM).

Despite these efforts, EU Member States continue to use protectionist measures, such as requiring offsets, to attribute defence procurement contracts to the companies they prefer. Offsets are compensatory requirements whereby a Member State acquiring defence equipment will require the supplier to provide more than just the equipment. This often entails transferring technology, investing in the acquiring state, or integrating domestic companies into the contract.[5] Such practices have been deemed by the European Commission to be market-distorting and discriminatory. However, they can still be justified under the Article 346 exception.

Offsets are not the only tools used. Member States may also rely on confidentiality requirements and argue that applying the Defence Procurement Directive may not provide sufficient safeguards in terms of the essential security interests involved. They can also support their decisions by requiring stringent security of supply assurances with which only preferred companies are able to comply. A state endeavours in various ways to obtain some form of industrial cooperation that adds to the development of its defence industry. Considering the ruthlessness of the free market, use of such tools may even be justified.

The other side of the picture is that continued use of the Article 346 TFEU exception has had a significant impact on the fragmentation of the European defence technological and industrial base (EDTIB). Commentators often mention gaps in defence capabilities and the unnecessary duplication of capabilities as weak points of the EDTIB.[6] The Defence Package may not have been sufficient to establish the EDEM; however, it provided a much-needed framework. This framework will likely be used now that funding is made available. Numerous funding programmes aimed at encouraging cooperative procurement, innovation, and research and development have been devised to encourage defence industrial cooperation between Member States. However, synchronising procurement efforts and defence industrial development appears to be challenging. Accessing funding opportunities has proven difficult for EU Member States in the CEE region.

Defence spending has increased in the past 10 years, since the North Atlantic Treaty Organization’s Defence Investment Pledge. However, there is a strong preference for domestically produced equipment. The EU has devised its own ways of incentivising defence spending, seeking to make it more efficient by leveraging economies of scale and avoiding unnecessary duplication. Its attempts are primarily aimed at cooperative procurement, encouraging it through various funding schemes. Less developed EU Member States, feeling more of a threat from the East, have noticeably increased their defence spending. Nevertheless, there is a discrepancy in access to funding, which was confirmed by the results of the 2021 and 2022 European Defence Fund’s calls for proposals.[7] This shows that not only does establishing a common EDEM favour larger Member States, so do EU-level industrial policy programmes. Larger Member States will certainly not miss opportunities to promote their own interests. Nor should they do so. The principles underlying the EU’s economic paradigm certainly favour them. However, this also means missing the EDEM target, as the carveouts in EU rules will be used by smaller Member States to exercise some degree of protectionism to maintain their domestic industries. If true convergence or at least true complementarity is to be achieved, smaller Member States must be given a role and not be treated solely as clients.

These gaps may be closed in several ways. One is the inclusion of incentives in the calls for proposals, as is being done with small and medium-sized enterprises, with consortia that include first-time participants being made eligible to receive extra points. This would encourage more experienced companies to initiate the formation of consortia to include first-time participants, who would, in turn, gather experience for future rounds of funding. One may also envision special criteria modelled on Horizon Europe Widening, which also aims to boost research and development in the CEE region.

Some companies have recognised the opportunities that lie in collaboration and have invested extensively in the CEE region, which has already benefited them.[8] This model may be followed by others. Smaller Member States also have the task of creating a favourable environment that is conducive to meaningful investment in the local defence industry. Through its defence industrial policy, the EU should enable smaller, less-developed Member States to advance their defence industries by designing value chains that connect them to the defence industries of larger Member States.

Broadening the range of participants by extending real access to funding programmes for less-developed Member States and extending value chains from larger Member States to smaller ones spreads the benefits of defence industrial cooperation, making genuine partners out of mere clients.


[1] According to Article 346(1)(b) TFEU,

The provisions of the Treaties shall not preclude the application of the following rules: any Member State may take such measures as it considers necessary for the protection of the essential interests of its security which are connected with the production of or trade in arms, munitions and war material; such measures shall not adversely affect the conditions of competition in the internal market regarding products which are not intended for specifically military purposes.

[2] Briani, V., Marrone, A., Mölling, C., Valasek, T. (2013) The Development of a European Defence Technological and Industrial Base (EDTIB), Luxemburg: European Parliament, Directorate-General for External Policies Publication Office, p. 34; https://doi.org/10.2861/15836.

[3] Directive 2009/81/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of procedures for the award of certain works contracts, supply contracts and service contracts by contracting authorities or entities in the fields of defence and security, and amending Directives 2004/17/EC and 2004/18/EC (Text with European Economic Area [EEA] relevance).

[4] Directive 2009/43/EC of the European Parliament and of the Council of 6 May 2009 simplifying terms and conditions of transfers of defence-related products within the Community (Text with EEA relevance).

[5] Not to mention social policy benefits in the form of job creation, which often help justify large military expenditures.

[6] European Commission (2017) ‘Reflection Paper on the Future of European Defence’ COM(2017) 315 final, Brussels, 7 June, p. 8. [Online]. Available at: https://commission.europa.eu/publications/reflection-paper-future-european-defence_en (Accessed: 4 August 2024)

[7] European Defence Fund (2022) European Defence Fund 2021 calls for proposals – Results. European Commission, 20 July 2022. [Online]. Available at:

European Defence Fund (2023) Result of the EDF 2022 calls for proposals. European Commission, 26 June 2023. [Online]. Available at:

[8] Specifically, the case of Rheinmetall.

Comments

bottom of page