The European Union Defence Industrial Strategy
The EDIS (European Defence Industrial Strategy) is based on the premise that, after decades of peace following the Second World War, the outbreak of the armed conflict between Russia and Ukraine in 2022 and NATO’s response to it have made it clear that the world order, based on the previous rules, has been fundamentally shaken, and while Europe’s strategic competitors are developing their military forces at an increasing pace and are becoming more prominent in the defence industry, the EU’s defence industry is fragmented and heavily dependent on third countries outside the EU.
The European Defence Technological and Industrial Base (EDTIB), which is designed for peacetime and is therefore underfunded, cannot meet the needs created by the new international defence situation. These combined effects make Europe’s security vulnerable, which is why a paradigm shift is needed at EU level in the defence industry, shifting the EU defence industry from emergency response to defence preparedness, capable of responding quickly and effectively, with strong coordination by the Commission. A key objective of the strategy is to increase competitiveness and develop a resilient defence industry independent of third countries.
The focus of the strategy is to create a European defence industry capable of responding rapidly in all times and circumstances, based on the principle of “more, better, together and for Europe”.
A key element of the objectives set out in EDIS is the strengthening of EDTIB through budgetary and private investment by Member States, which would be implemented at EU level through joint defence industrial procurement coordinated by the Commission to implement projects of common interest, also identified under the coordination of the Commission.
EDIS has set an ambitious target that
- the value of intra-EU defence trade should reach at least 35% of the EU defence market by 2030;
- in addition, the defence sector should spend at least 50% of Member States’ defence procurement budgets on procurement from EDTIB by 2030; and
- at least 60% of Member States’ defence procurement budgets on procurement from EDTIB by 2035, of which at least 40% should be joint procurement by 2030.
The appropriate legislative, institutional and financial framework to achieve the objectives of EDIS would be provided by a Regulation establishing a European Defence Industrial Programme (EDIP).
Although the strategy, presented as a statement, is not legally binding, it would be directly applicable and fully implemented in all Member States if the EDIP Regulation is adopted.
Although the text of the draft EDIP Regulation may change significantly in the legislative process compared to the current version, it is worth examining its provisions, as it details the Commission’s ideas and ambitions as outlined in EDIS.
The EDIP Regulation would establish the European Defence Investment Programme, with a budget of EUR 1.5 billion for the period up to 2027, to stimulate cooperation in the procurement, production and market-entry phases through the financing of identified European projects of common interest. The EDIS requires the Europeanisation of procurement, for which an increase in EDTIB’s capacity is a prerequisite. To ensure this, EDIS foresees several measures: for one, it would introduce a European Military Sales Mechanism, modelled on NATO, to facilitate access to EDTIB products; for another, it would create a centralised, up-to-date catalogue of defence products, based on data provided by Member States, coordinated by the Commission. In addition, the Commission would encourage defence industrial stockpiling through subsidies, as well as the development of “ever warm facilities”, flexible production capacities that can respond rapidly to changes in demand beyond mass production and can be converted to military production at short notice if necessary.
An EU-wide Security of Supply (SoS) regime would be established to identify and effectively address difficulties in supply chains or specific security crises in a timely manner, and would be of two types:
- One is the so-called crisis situation, whereby shortages of civilian or dual-use items or essential raw materials seriously jeopardise the availability of defence industrial goods in sufficient time and in sufficient quantities. A crisis situation could be activated by the Council on a proposal from the Commission, after which the Commission would be entitled to take measures, including the right to oblige companies to fulfil priority rated orders for civilian products, even at the expense of their own contractual obligations, and to provide production data directly to the Commission.
- The second type of supply crisis is a so-called security-related crisis, where a specific security crisis in the EU or its neighbourhood causes a serious disruption in the supply chain of products or impedes trade in defence products. In this case, the Council, acting on a proposal from the Commission, could take measures to ensure the supply of products for military use.
In order to successfully manage crisis situations, the Commission is taking the initiative to set up a monitoring system to identify and monitor critical products.
Joint European action from the programming stage
A key element of EDIS is the promotion of joint action at EU level, with appropriate measures, financial incentives and an institutional set-up to facilitate joint action, both by creating new institutions and by giving new powers to existing institutions. With regard to the latter, the Commission’s strong tendency to stealthily take away powers, which is evident in several provisions of the draft, should be highlighted.
In the spirit of joint action, the existing initiatives will be complemented by a new joint “defence programming and procurement function”, which will establish a Defence Industrial Readiness Board (DIRB) involving Member States, the European Defence Agency (EDA) and the Commission. The DIRB meetings on the joint programming and procurement function are co-chaired by the Commission and the High Representative, while the Commission chairs the DIRB on the EDIS implementation function.
The Commission proposes the creation of a standardised procurement system which would ensure, for one thing, the inclusion of any Member State in existing defence contracts and framework agreement and, for another thing, if justified by the emergence of Member States wishing to join at a later stage, the increase of the quantities procured under the original framework contract and the entry of new suppliers into the framework agreement, provided that they meet the conditions of the original call. In order to overcome the fragmentation of the defence industry, the EU would promote, through its defence industrial programmes and instruments, activities that contribute to the harmonisation of technical requirements, the increased use of standards and the mutual recognition of different certificates, with a view to ensuring interoperability and interchangeability.
The European Defence Industry Group (EDIG) will be set up to ensure efficient cooperation between government and industry, and the Commission will establish the Structure for European Armament Programme (SEAP) as a new legal framework to better organise the current ad hoc cooperation on armaments. The SEAP, which will be created with the approval of the Commission, would have legal personality and the status of an international organisation, enjoying tax exemption and being solely responsible for its obligations, without any underlying liability on the part of the Union. Within the SEAP, Member States can initiate and manage their joint security programmes on the basis of standardised procedures established by the Commission, and benefit from increased financial support, simplified and standardised procurement procedures.
EU strategy pays much more attention than expected to Ukraine’s defence needs
EDIS makes a high-level commitment to the Ukrainian defence industry (Ukrainian DTIB) and, in a long-term support to Ukraine, provides Ukraine, the only non-EU country, with the opportunity to integrate into the EU defence industry, to participate in public procurement procedures, supporting the cooperation and development of Ukrainian defence industry companies within the framework of EDIP. To this end, an EU Innovation Office will be opened in Kiev to provide a link between European start-ups and the Ukrainian military and industry. The Commission, the EDA and the EEAS (European External Action Service) will encourage the exchange of information on standards between the two sides, and the EEAS will explore the opportunities to further expand cooperation between the EU and the Ukrainian defence industry.
An eternal and classic question: “Who pays the ferryman?”
A fundamental prerequisite for the success of EDIS is that the resources required to achieve its objectives are available in sufficient scale and in good time through public and private investment by Member States. To finance EDIP, the draft regulation provides for the transfer of EUR 1.5 billion from the increased European Defence Fund and the use of the proceeds of frozen Russian financial assets to finance the joint procurement of military equipment for Ukraine.
However, as the EDIP is limited in time and clearly insufficient in terms of available resources to finance the objectives of the defence industry at European level, additional resources would be available, inter alia, from the EU’s long-term budget (MFF) from 2028, which is expected to provide significantly more resources for defence industrial purposes than at present. In addition to the MFF, the Fund to Accelerate Defence Supply Chain Transformation (FAST), which would provide loans or capital support to small and medium-sized enterprises (SMEs) producing defence technologies and/or defence products or planning to enter these activities, as well as companies planning to engage in such activities, or smaller, mid-cap companies, is also foreseen to play an important role in stimulating private sector investment. The latter will require a change in the lending policy of the banking sector, in particular the European Investment Bank (EIB) Group, which currently excludes the defence sector from lending opportunities, in order to ensure that the defence sector has access to EU financial instruments by the end of 2024.
In addition to the above, any project receiving other EU funding can also receive support from EDIP, while ensuring that double funding is avoided. The ERDF and ESF+ may, in accordance with their respective regulations, support project proposals submitted to EDIP that have been awarded a Seal of Excellence under the EDIP Regulation.
Regarding financing, EDIS is coyly silent on the issue of joint borrowing, as it has been met with strong opposition in several Member States, but press reports and other documents (including the Letta Report) clearly mention it as a possible source of support for the joint defence industry and the Ukrainian defence industry.
How successful can the vision of a common European defence industry be?
For one thing, the proposals to achieve “more, better, together, European” do not make it clear what the justification for Europeanisation is and how realistic it is, and, for another, the Commission’s stealthy attempts to disempower appear more strongly than any other objective, by which it elevates to EU level, essentially to Commission level, a number of measures and decisions which fundamentally determine the capacity and opportunities for Member States to decide on defence matters falling within their exclusive competence, and their sovereignty.
A central issue for the development of a common defence industry could be the planned centralisation and commonisation of key decision-making points at EU level. Joint action in defence industrial matters implies a high degree of trust and a transcendence above national interests on highly sensitive defence-security issues. Traditionally, Member States (especially the larger ones) have been reluctant to raise the defence industry to a common European level and to relinquish the decision-making powers that determine their defence capabilities.
The idea of joint action could be attractive on the grounds of cost-effectiveness and capacity optimisation, but the inefficiency of recent years, even in other policy areas (e.g. joint vaccine procurement), calls into question its viability.
In modern European history, we have already seen joint military development efforts, a relevant example of which is the initiative launched in the late 1970s, the story of the Eurofighter Typhoon 4th generation fighter developed in a German-Italian-French-English co-production. The project, designed to replace the obsolete Tornado fighter aircraft, which was also jointly developed without the French at the time, did not have the expected results. Due to budget cuts and the changing geopolitical situation along the way, development was very slow, and the French government later withdrew from the project, preferring to focus on its own defence interests and concentrating on the Rafale supersonic multirole fighter-bomber.
Although the Eurofighter successfully competes in terms of technical parameters with similar aircraft, it is the second most expensive aircraft in its class on the market today, behind the US F22.
While around 990 were built of its predecessor, only 592 were built of each Eurofighter variant until November 2023.
By comparison, more than 4,500 were built of one of its biggest rivals, the US F-16, and more than 1,600 were built of the similarly ill-fated MIG 29, which has been used in more than 25 countries.
In theory, joint development could reduce the financial burden on the countries concerned, but in practice it has not. The countries concerned have conflicting interests, all wanting to participate in the development of the military industry and, in turn, in the strengthening of their own economies, which leads to conflicts that are either irresolvable or very difficult to manage. The distribution of the production of certain priority components (engine, airframe, flight control equipment, weapon system and control, sophisticated electronic systems, radar, data integration system) between individual states, while it may seem a logical step, leads in practice to a number of problems compared to a country concentrating only on its own complex development.
When a supplier state adds a new component, upgrade or bug fix to a device under its responsibility, it has to modulate and rebalance the whole system at international level, which leads to a serious loss of time and an exponential increase in costs.
Interestingly, the programme costs (development + upgrade + maintenance) per unit of the French Rafale and Typhoon ended up at the same level.
Joint development does not only entail risks in the production of a particular device. It is clear that in an ever-changing geopolitical and security environment, the sale of the finished product may also face obstacles, as Germany is currently blocking the sale of the Eurofighter to Saudi Arabia at Israel’s request, given the tense situation in the region.
From a funding point of view, there are a number of problems that could divide Member States. On the issue of joint borrowing, Member States are divided: while France (Emmanuel Macron) and Estonia (Kaja Kallas) are in favour, those Member States that advocate more conservative fiscal policies (e.g. Germany, the Netherlands) are skeptical. The use of the proceeds of the frozen Russian assets for Ukrainian military purposes has been the subject of a number of objections, seeing them as a legally and politically risky move. Opponents include EU members of the G7 (France, Germany, Italy) and even the European Investment Bank itself has expressed concerns about the proposal, pointing out that the civil lawsuits that could follow the end of the war could have significant financial consequences and that the decision could discourage foreign investors from investing in Europe, leading to a major loss of confidence and financial losses in the long term.
