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European Defence Industrial Strategy: Amid New Challenges


Several policy tools and legislative instruments in the European Union (EU), devised with the flexibility required by Member States’ defence industrial policies, serve the development of the European defence technological and industrial base (EDTIB) and creation of a European defence equipment market (EDEM). The Permanent Structured Cooperation, European Defence Agency, and establishment of the Directorate-General for Defence Industry and Space are some of the more significant frameworks for coordinated governance aimed at developing the EDTIB. This is complemented by common rules on the procurement and transfer of defence equipment, contained in the Defence Package[1] of 2009, a legislative framework that has only delivered partial results thus far. Fragmentation of the European defence industry is, in part, a consequence of defence industrial protectionism, the extensive use of offsets in procurement, and the often-cited necessity for Member States to ensure a certain degree of security in the supply of defence equipment that represents an essential security interest (as is often argued based on Article 346(1)(b) of the Treaty on the Functioning of the EU [TFEU]). However, the EU has not given up finding ways to bring its Member States together through financial instruments, despite the limitations contained in its treaties.

The opportunity that lies in developing the EDTIB and EDEM by increasing cooperative spending through funding schemes was identified in 2016. The plan was to make procurement more advantageous by leveraging economies of scale, ultimately covering technological and industrial gaps, and avoiding duplication.[2] However, these programmes have continued to miss their targets. As per the Coordinated Annual Review on Defence (CARD) Report of 2022, co-operative spending in the second CARD cycle (2021–2022), compared to the first CARD cycle (2019–2020), dropped to 18% from 19% in terms of all investment in defence programmes.[3] The percentage of collaborative defence equipment procurement of the total defence equipment procurement is even lower, being at its lowest in 2020 at 11%, which is far from the 35% benchmark EU Member States agreed to.[4]

However, room for manoeuvring in the EU is quite limited. The EU must adhere to several rules in its founding agreements. Most important to the topic at hand is Article 41(2) of the Treaty on the EU, which does not allow the use of the common budget for ‘expenditure arising from operations having military or defence implications….’ However, a new method is proposed. Article 173 TFEU lays down rules for enhancing the competitiveness of European industries. This has been used as the basis for several defence-related funding schemes that foster the competitiveness and efficiency of the EDTIB, enabling defence-related research and development (R&D), common procurement of defence-related products, and development of dual-use items and technologies. In addition, EU Member States may agree to off-budget collaborations that are not limited by Article 41.

Budgetary funding programmes, which must adhere to some of these rules, present certain limitations. For example, the European Defence Fund, which replaced the previous Athena mechanism, now focusses on promoting cooperation and funding R&D programmes, but the creation of novel equipment may only be funded up to the prototype phase. Thus, projects funded under this programme remain in the realm of R&D, and the possible relevance of the subsequent use of the invention remains––at best––secondary.

Over the past few years, new funding schemes have been adopted to increase the efficiency of defence spending. Efficiency in this area requires, first, investing in defence programmes collaboratively.[5] Programmes are also meant to incentivise joint procurement. Ultimately, these schemes should ensure that states obtain the best returns on the money spent by leveraging economies of scale. One central funding instrument is the aforementioned European Defence Fund. It has a budget of almost EUR8 billion, which is made available for collaborative R&D projects for the 2021–2027 period.[6] The year 2019 also saw the launch of the two-year European Defence Industrial Development Programme aimed at supporting competitiveness and innovation capacity in the EU’s defence industry.[7] The EU also has institutions aimed at boosting innovation and industry development, the most important being the EU Defence Innovation Scheme and the Hub for EU Defence Innovation, with programmes such as Galileo targeting defence industrial development.[8] As a direct consequence of the Russian aggression against Ukraine, the EU has used the European Peace Facility, an off-budget fund, to reimburse Member States for ammunition donated to Ukraine, as well as to fund joint procurements and assist in ramping up production capacity.[9] The Act in Support of Ammunition Production, a regulation that was adopted in 2023 based on Article 173 TFEU, was put together particularly to accelerate joint procurement and deliver one million rounds of artillery ammunition to Ukraine in a year.[10] In the context of the ongoing war on its borders, and going beyond the previously mentioned emergency measures, there are framework instruments meant for the long haul. The European Defence Investment Programme[11] establishes rules for forming the so-called European Defence Capability Consortium for joint procurement, which would benefit from value-added tax exemption.[12] Furthermore, the European Investment Bank is now ready to provide loans for defence projects.

Funding from both the EU and its Member States seems to have been resolved. The EU is making efforts to steer spending in the right direction. One of the more recent programmes is the one established by the European Defence Industry Reinforcement Through Common Procurement Act (EDIRPA), which was put forward in July 2022 based on Article 173 TFEU. Although this is a less ambitious funding scheme, with a EUR300 million budget, its aim is to address ‘the EU’s most urgent and critical defence capability gaps and incentivise the EU Member States to procure defence products jointly’.[13] Through this, the European Commission aims to both increase defence spending and make it more efficient, ensuring the budget is available until the end of 2025. This instrument is meant to address the ‘most urgent and critical defence products needs, especially those revealed or exacerbated by the response to the Russian aggression against Ukraine’.[14] The funds are made available to consortia formed by at least three EU Member States (or associated countries: Iceland, Liechtenstein, and Norway) to buy equipment with components originating in the EU and associated countries in the proportion of at least 65% of the costs of the end product. Contractors must also use facilities and resources based in the EU or an associated country, except if the producers do not have the appropriate infrastructure in the prescribed locations.

While small in size, EDIRPA may be appreciated as a pilot project for what it is attempting—ensuring Member States come closer in terms of their defence procurement priorities, bringing with them all the benefits of such cooperation: consolidation, better access to products, and enhanced interoperability among allies. In terms of its objectives of enhancing adaptation to structural changes and ramping up manufacturing capacity, EDIRPA appears to be a complementary instrument to existing strategies.[15] As a short-term instrument, EDIRPA is not meant for industry development but rather for facilitating procurement coordination, maximising economies of scale, and avoiding duplication and competition where supply is limited.[16]

From the above, we can see that the EU focusses on urgent tasks. However, there are also medium- and long-term plans. New strategies and programmes were adopted as recently as March 2024 when the European Commission unveiled its first ever European Defence Industrial Strategy[17] and put forward the European Defence Industry Programme worth EUR1.5 billion.[18] These are aimed at bolstering the EU’s security and defence preparedness and incentivising Member States to ‘invest more, better, together, and European’. The European Defence Industrial Strategy reiterates the need for collaborative procurement. It aims to acquire at least 40% of the defence equipment in a collaborative manner by 2030, with spending focussing on products made in Europe.

The EU demonstrates that it is ready to go beyond its own limits, whether legal or financial, and find ways to tackle immediate challenges as well as initiate plans for the long run. Programmes aimed at harmonising Member States’ defence expenditures, ramping up production, and boosting innovation have mushroomed in recent years. These often emphasise the European dimension of spending, putting forward plans that may be called protectionist, with a view to enhancing European strategic autonomy. This approach is not appreciated by Europe’s principal ally, which brings a set of political challenges to the table[19] that Europe must carefully navigate.

Opportunities abound for companies in the defence sector, from start-ups and small and medium-sized enterprises to large enterprises. From policy guidelines to legal instruments and funding programmes, the EU seems to be pulling out all the stops to steer Member States’ increased defence spending. The EU’s contribution is akin to that of an appetiser, with the main course expected to be served by Member States. After increasing military spending, Member States now want to buy defence equipment more quickly. However, years of low defence spending and a fragmented industry have resulted in low production capabilities. To ramp up production, companies will need off-take agreements, which guarantee that the burden of increasing their output capacity is shared.


[1] 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; 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.

[2] European Commission (2016) ‘European Defence Action Plan’ COM(2016) 950 final, Brussels, 30 November. Available at: https://ec.europa.eu/commission/presscorner/detail/en/IP_16_4088 (Accessed: 28 July 2024)

[3] European Defence Agency (2022) ‘Coordinated Annual Review on Defence Report’, 16 November, para. 22. [Online]. Available: https://eda.europa.eu/docs/default-source/eda-publications/2022-card-report.pdf (Accessed: 28 July 2024).

[4] European Defence Agency (2022) ‘Defence Data 2020–2021 – Key findings and analysis’, Publications Office of the European Union, p. 16. [Online]. Available at: https://eda.europa.eu/docs/default-source/brochures/eda---defence-data-2021---web---final.pdf (Accessed: 28 July 2024).

[5] These priorities have been mentioned in the 2022 EU Strategic Compass as well as the Versailles Declaration of March 2022.

[6] European Commission (2021a) ‘Fact Sheet – European Defence Fund’, 30 June. [Online]. Available at: https://defence-industry-space.ec.europa.eu/document/download/69aa3194-4361-48a5-807b-1a2635b91fe8_en?filename=DEFIS%20_%20EDF%20Factsheet%20_%2030%20June%202021.pdf (Accessed: 27 July 2024)

[7] See European Commission (no date) ‘European Defence Industrial Development Programme (EDIDP)’, no date. [Online]. Available at: https://defence-industry-space.ec.europa.eu/eu-defence-industry/european-defence-industrial-development-programme-edidp_en (Accessed: 27 July 2024).

[8] Most EU Member States also have access to programmes under NATO’s Science and Technology Organisation, and programmes made available via NATO’s Innovation Fund, with its support programme, the NATO Defence Innovation Accelerator for the North Atlantic, which also supports defence innovation.

[9] European Peace Facility, no date.

[10] Act in Support of Ammunition Production, no date. European Council (no date) ‘European Peace Facility’, no date. [Online]. Available at: https://www.consilium.europa.eu/en/policies/european-peace-facility/ (Accessed: 27 July 2024).

[11] Details about the European Defence Industry Programme can be found here: European Economic

and Social Committee (2023) ‘European Defence Industry Programme’, 30 May 2024. [Online]. Available at: https://www.eesc.europa.eu/en/our-work/opinions-information-reports/opinions/european-defence-investment-programme (Accessed: 27 July 2024).

[12] European Commission (2022) ‘Joint communication to the European Parliament, the European Council, the Council, the European Economic and Social Committee (EESC) and the Committee of the Regions on the Defence Investment Gaps Analysis and Way Forward’ JOIN(2022) 24 final, Brussels, 18 May, p. 10. [Online]. Available at: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52022JC0024 (Accessed: 30 July 2024).

[13] Clapp, S. (2023) ‘European Defence Industry Reinforcement Through Common Procurement Act (EDIRPA)’, November 2023. [Online]. Available at:

[14] Article 7(1)(a) of EDIRPA.

[15] The EESC, which was entrusted to give an advisory opinion on the proposal stated that the initiative was ‘rather weak’ as an industrial policy instrument. EESC (2022) ‘European Defence Industry Reinforcement Through Common Procurement Act’, 21 September. [Online]. Available at: https://www.eesc.europa.eu/en/our-work/opinions-information-reports/opinions/european-defence-industry-reinforcement-through-common-procurement-act (Accessed: 30 July 2024).

[16] European Commission (2022) ‘Joint communication to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions on the Defence Investment Gaps Analysis and Way Forward’ JOIN(2022) 24 final, Brussels, 18 May, p. 1. [Online]. Available at: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52022JC0024 (Accessed: 30 July 2024).

[17] European Commission (no date) ‘European Defence Industrial Strategy’, no date. [Online]. Available at: https://defence-industry-space.ec.europa.eu/eu-defence-industry/edis-our-common-defence-industrial-strategy_en (Accessed: 30 July 2024).

[18] EESC (no date) ‘European Defence Industry Programme’, no date. [Online]. Available at: https://www.eesc.europa.eu/en/our-work/opinions-information-reports/opinions/european-defence-investment-programme (Accessed: 30 July 2024).

[19] France24 (2019) ‘US warns EU over ‘poison pill’ defence plans’, France24, 14 May 2019. [Online]. Available at: https://www.france24.com/en/20190514-us-warns-eu-over-poison-pill-defence-plans (Accessed: 30 July 2024); American Chamber of Commerce to the European Union (2022) ‘European Defence Industry Reinforcement through Common Procurement Act (EDIPRA)’, 24 October. [Online]. Available at: https://www.amchameu.eu/system/files/position_papers/european_defence_industry_reinforcement_through_common_procurement_act_edirpa.pdf (Accessed: 30 July 2024).

 

 

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