The European Commission and the EU’s High Representative presented on 5 March the first-ever European Defence Industrial Strategy at EU level and proposed an ambitious set of new actions to support the competitiveness and readiness of its defence industry.
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Why propose a European Defence Industrial Strategy?
Faced with the return of conventional, high-intensity warfare on European soil, the European Union and its Member States need to step up their preparedness. A crucial element in this respect is the capacity of the European Defence Technological and Industrial Base (EDTIB) to deliver to Member States’ armed forces the defence systems and equipment they require, when needed and in the volumes needed.
Russia’s illegal war of aggression against Ukraine prompted the EU to implement, in record time, two emergency instruments to respectively stimulate joint procurement (EDIRPA) and ramp up the production of ammunition (ASAP), building also on the EU’s three-track ammunition initiative and the successful experience of the Defence Joint Procurement Task Force.
It is now time for the EU to move from these ad-hoc, emergency responses to establishing the structural conditions of the EU’s defence industrial readiness on a lasting basis. Achieving such defence industrial readiness requires a strong and responsive EU defence industry. The Strategy proposes in this respect a comprehensive and ambitious approach, underpinned by the European Defence Industry Programme (EDIP), to support building on already established defence initiatives and tools – the EDTIB’s greater competitiveness, responsiveness and resilience over the next decade.
This ambitious Strategy offers a set of measures that will enable EU Member States to spend more, better, together, and European, to ramp up our defence industry, to enhance our security of supply, and to also build partnerships in support of these objectives.
What are the main objectives of the Strategy?
The Strategy aims at strengthening the industrial pillar of EU defence readiness. Defence industrial readiness, today and in the future, requires more public and private investments across the full spectrum of needs, and greater defence industry responsiveness, in time and scale, to the needs of Member States. Innovation must also remain a constant focus of attention, whilst resilience to external shocks and disruptions must also be ensured through an enhanced security of supply framework.
The European defence industry is a crucial contributor to the resilience, stability and security of the Union and its Member States. But to realise its full potential while Member States are increasing their defence budgets, it is essential that these increases translate into more cooperation at EU level, both in procurement by Member States and at industrial level, to fully enable the EDTIB to serve the EU’s needs. This calls on the Member States to decisively address the persistent trend of demand fragmentation, to make the most out of the additional investments being made.
This Strategy proposes measures to support the Member States’ efforts to invest better, together, and European as well as to increase the availability of defence products and systems, thanks to a more efficient and responsive EDTIB and an enhanced Security of Supply.
Underpinning EU defence industrial readiness requires the development of adequate financial means and the mainstreaming of a defence readiness culture, including across EU policies, where relevant. The Strategy also aims to leverage partnerships to enhance readiness and resilience.
How will the Commission and the High Representative encourage EU Member States to invest more, better, together and European?
The Strategy, building also on existing EU defence initiatives and tools, will propose a range of measures to encourage Member States to invest more, better, together and European, for instance:
- A new joint programming and procurement function, by creating a Defence Industrial Readiness Board bringing together Member States, the High Representative/Head of the European Defence Agency and the Commission, providing for a structured approach to programming and procurement with the objective of reinforcing transparency, coordination and consistency.
- Provisions in the new European Defence Industry Programme to extend the intervention logic of the Regulation on establishing an instrument for the reinforcement of the European defence industry through common procurement (EDIRPA), by incentivising cooperation in the procurement phase of defence products manufactured by the EDTIB. The objective is to help make common procurement the norm whenever relevant.
- A new legal framework made available to Member States, called the Structure for European Armament Programme, as a vehicle to support defence cooperation throughout the capability life cycle, and potentially benefiting from a VAT exemption.
- The launch of European Defence Projects of common interest contributing to secure access to strategic domains and contested spaces.
- The creation of a pilot European Military Sales Mechanism, increasing awareness of the availability of defence products from the EDTIB and facilitating their acquisition, including through government to government’ purchases.
The implementation of this strategy will be done in full complementarity with the existing EU defence initiatives and instruments at Member States’ disposal.
How will the EDIP enhance the responsiveness of the European Defence Industry?
The Strategy aims to create the conditions for the EU’s defence industry to meet Member States’ demand over time and in sufficient scale.
With the European Defence Industry Programme (EDIP) that accompanies the industrial strategy, the EU will facilitate the industry’s market adaptation to the current security context, through the following measures:
- Expansion of the Regulation on supporting ammunition production (ASAP) intervention logic, to support the defence industrial ramp-up in the Union, by expanding its scope beyond ammunition and missiles, and complementing it with the development of ever-warm’ facilities and possible repurposing of civilian production lines;
- Creation, within EDIP, of a Fund to Accelerate Defence Supply Chain Transformation (FAST), particularly targeting SMEs and small mid-caps via debt and/or equity financing;
- Sustained support towards industrialisation of defence cooperative actions initially supported by EDF (bridging the commercialisation gap’);
- Establishment of a modular and gradual EU Security of Supply regime to enhance solidarity and effectiveness in response to tensions along the supply chains or security crises and allow for the timely identification of potential bottlenecks.
How will the Strategy mainstream defence industrial readiness culture?
In particular, the defence industry, notably SMEs and small midcaps, needs access to finance, an appropriate regulatory environment and access to a skilled workforce.
The Strategy proposes measures to take full advantage of existing horizontal EU financial instruments. This encompasses inviting EIB Group’s governing bodies to review this year the EIB Group’s Lending Policies, and to adapt the current defence-related exclusions in line with EU policy priorities and applicable law, to ensure the defence sector has access to and can fully benefit from EU financial instruments. Such a modification will also have positive cascading effects, by giving a significant positive signal to the financial market and private banks.
The Strategy also proposes including or maintaining defence readiness, security and resilience as an explicit strategic objective under future relevant EU programmes to ensure that they support fully the EDTIB, and that the implementing partners and intermediaries (in the case of indirect management) face no obstacles in pursuing those objectives.
What does the Strategy foresee on budgetary means to sustain the EU ambition?
The strategy calls for a renewed ambition when it comes to budgetary means in the current MFF (notably via the EDIP) as well as the next MFF. A strengthened budgetary support is crucial to implement a new ambition for defence industrial readiness at EU level. The proposal for a Regulation establishing EDIP includes a budget of 1.5 billion, which should be complemented by additional amounts for the development of the Ukrainian DTIB and its closer integration with the EDTIB and the Union defence equipment market. Subject to a decision by the Council upon a proposal by the High Representative, a share of the windfall profits derived by central securities depositories from immobilised Russian sovereign assets could be used (as and when immediate Ukrainian defence needs permit) to fund support under the proposed EDIP for Ukraine and its defence technological and industrial base.
In light of the scale and the efforts needed to ensure defence industrial readiness across the Union, the present EDIP budget should be considered as a bridge towards the next MFF. In this regard, the strategy outlines the importance for the next MFF to include an ambitious financial envelope on defence, with relevant budgets for the successors of both EDF and EDIP for the period from 2028 onwards.
In view of this objective, the strategy calls for the launch of a discussion to quantify the EU’s financing needs for defence industrial readiness which would be commensurate with the change of the security paradigm. This requires initiating soon a joint exploration with Member States to assess needs and options to boost the financial support for available instruments that serve to implement the strategy’s ambition.
What is foreseen for Ukraine in this Strategy?
The Ukrainian and the European Defence Industrial and Technological base can mutually benefit from their strengthened cooperation.
In this regard, it is proposed that the Ukrainian industry be able to participate in the Union’s programme in support of the defence industry. The proposed EDIP thus provides the possibility for Ukraine to participate in cooperation on common procurement and for Ukrainian defence companies to be supported in their industrial ramp-up and cooperation together with the European Defence Industrial and Technological Base.
The Strategy also aims to stimulate cooperation between the Ukrainian and the European industry and to foster dedicated information exchange on standards and on respective lessons learned. The EU will also host an EU-Ukraine Defence Industry Forum in 2024, to bolster cooperation between Ukrainian and EU defence industries.
To ensure matchmaking between the Union’s start-ups and innovators and Ukraine’s industry and armed forces, the EU will open an Innovation Office in Kyiv.
What does the Strategy propose regarding partnership with NATO and third countries?
The Strategy underlines that a stronger and more capable EU in security and defence will contribute to global and transatlantic security and is complementary to NATO, which remains the foundation of collective defence for its members. The Strategy proposes enhanced staff-to-staff structured dialogue with NATO on defence industry-related activities and topics of mutual interest, including on circular economy, interoperability, industry aspects of climate change, interoperability, standardisation and cross-certification, and responses to new and emerging threats. It recalls in particular that the NATO standards (STANAGs) are the main reference for the work in this area by the EDA, and that the EDF promotes the use of defence standards such as the STANAGs.
The Strategy also proposes that both organisations should continue to exchange views and explore synergies and complementarity of efforts in the realm of supply chain security essential to capability development and delivery.
The Strategy highlights the importance of strengthening mutually beneficial partnerships with like-minded third countries and strategic partners whether European, trans-Atlantic or beyond – as they can amplify the Union’s efforts towards defence industrial readiness.
It proposes flexible cooperation, varying in form, scope and types of participants in areas of shared interests. Such a cooperation should contribute to further secure supply chains, reinforce the EDTIB and reduce EU’s strategic dependencies, without creating new (or perpetuating existing) ones.
What is the relationship between the Strategy and the European Defence Fund? And with EDIRPA and ASAP?
The Strategy aims to build on and complement existing instruments. For instance, by acknowledging the success of the European Defence Fund in enhancing defence research collaboration between Member States, EDIS proposes measures to sustain support towards industrialisation, to ensure EDF projects become a tangible reality beyond the R&D phase.
Similarly, the Strategy, through the proposal for a European Defence Industry Programme, aims at extending the logic of existing emergency instruments, such as EDIRPA and ASAP, both over time and in scope, to support the defence market adaptation to the new security context.
Both emergency instruments, ASAP and EDIRPA, and the EDF will end in 2025 and 2027 respectively and will need to be followed by longer term instruments. The idea is for new longer-term instruments to build on the experience and lessons learned deriving from the existing programmes.
What will be the role of the Board?
The Defence Industrial Readiness Board will bring together, in full respect of their respective competences, Member States, the High Representative/Head of the Agency, and the Commission – to perform the EU defence joint programming and procurement function envisaged in the Joint Communication on Defence Investment Gap Analysis and to support the implementation of EDIP.
First, to perform the EU defence joint programming and procurement function, the work in the context of the Board will be co-chaired by the Commission and the High Representative/Head of Agency. This format will build on the work of the Defence Joint Procurement Task Force, and provide a forum to discuss and refine identified priorities at EU level. This format should also support the coordination and de-confliction of Member States’ procurement plans and provide strategic guidance in view of more effectively matching demand and supply. In this regard, the Board should support increased Member States’ visibility on the EDTIB production capacities.
Second, for the purpose of supporting the implementation of EDIP, the Board will be formally established within the EDIP Regulation notably to ensure security of supply at EU level but also inform and assist in the implementation of the different supporting measures to the EDTIB established in EDIP. In this configuration, the Board itself will be chaired by the Commission.
Complementing this effort, to ensure an effective government-to-industry co-operation and to establish a closer dialogue and engagement, the Strategy envisages a high-level European Defence Industry Group. This Group will meet in specific configurations (e.g. sector-specific), depending on the issue at hand, and is intended to have a consultative role with the objective of increasing consistency between Member States’ plans and what the EDTIB can deliver.
What is meant by European Military Sales Mechanism?
A European Military Sales Mechanism will facilitate the availability of defence products from the EDTIB and will increase awareness of such availability. The Commission and the High Representative/Head of the Agency will cooperate towards its creation.
The Commission proposes to test such a mechanism through a pilot project within EDIP with a view to co-building with Member States and industry a fully-fledged mechanism from 2028 onwards. The pilot mechanism will be organised in four pillars:
- The establishment of a single, centralised, up to date catalogue of defence products developed by the EDTIB.
- The creation of defence industrial readiness pools, to increase availability and speed up delivery time of EU-made defence products (including for government-to-government’ sales).
- Financial support for the purchase of additional quantities for such pools of defence capabilities which Member States have decided to jointly procure within the Structure for European Armament Programme.
- The introduction of a standard regime applicable to future defence contracts and framework agreements with EU-based manufacturers.
Where should we stand in 2035?
Achieving European defence industrial readiness requires more cooperation and a collective effort. In this respect, the Strategy sets three indicators for the next decade to measure Member States’ progress, namely:
- Member States are invited to ensure that, by 2030, the value of intra-EU defence trade represents at least 35% of the value of the EU defence market;
- Member States are invited to make steady progress towards procuring at least 50% of their defence procurement budget within the EU by 2030, and 60% by 2035;
- Member States are invited to procure at least 40% of defence equipment in a collaborative manner by 2030.
Currently only limited budget is devoted to collaborative defence procurement (well below the 35% benchmark set within the EDA framework). Moreover, the majority of defence acquisitions is done from outside the EU, especially since the war against Ukraine started, and the level of intra-EU trade has decreased, notwithstanding a growing EU defence market.
Increased cooperation, as the precondition to overcoming persistent inefficiencies, is key to achieve resilience commensurate with the threat level. Member States should tap the full opportunities offered by the EDTIB by cooperating across the full range of investment and acquisition. In this regard, the significant incentives provided at EU level by EDIRPA and EDIP, combined with experience in the context of the EPF and the greater sense of necessity, urgency and solidarity resulting from the current geopolitical situation, make these indicators both essential and realistic.
What is the relationship between this Strategy and the Strategic Compass and EU defence initiatives such as CDP, CARD, PESCO?
The Strategy aims to underpin the objectives proposed in the Strategic Compass, notably by enhancing defence investment and ensuring better return on investment. It is also built on the strategic objectives and collaborative approaches adopted under the Capability Development Plan (CDP) and the Coordinated Annual Review on Defence (CARD) and provides for measures that can support Member States’ cooperative efforts within the Permanent Structured Cooperation (PESCO) framework. The CDP and its priorities serve as a key reference document for defence planning EU-wide and for all defence-related initiatives and instruments such as CARDPESCO and the European Defence Fund (EDF).
The Strategy puts forward concrete actions, which are in coherence with the PESCO framework and could facilitate and support the implementation of PESCO projects as well as contribute to the fulfilment of the more binding commitments undertaken by the 26 participating Member States. The ongoing PESCO Strategic Review provides the opportunity to enhance the PESCO more binding commitments related to the EDTIB and to consider possible new commitments, notably on joint procurement from the EDTIB, in line with the EDIS’ ambition. These commitments could also be taken into account in the establishment and implementation of the PESCO projects.
What is the added value of the European Defence Industry Programme?
Russia’s ongoing war of aggression against Ukraine has marked the dramatic return of high-intensity warfare on European soil. Although we have already taken action to tackle the most urgent consequences of this war, the EU and its Member States still need to scale up their effort to achieve a real defence industrial readiness. The European defence industry must be able to respond effectively, in time and scale, to an evolving European demand for defence products as well as that of the EU’s closest partners.
Announced by the Joint Communication of May 2022, and called for by the European Council, EDIP will aim to emulate the urgent crisis response mode into a longer-term, more structured, steady-state approach, by maintaining EU support for the EDTIB under this Multiannual Financial Framework (MFF) and strengthening the EU’s defence industrial readiness for the future. In doing so, EDIP will give effect to a number of concrete measures proposed in the European Defence Industrial Strategy.
What is the objective of EDIP?
The EDIP pursues three objectives:
- First, EDIP will strengthen the competitiveness, resilience and responsiveness of the European Defence Industry.
- Second, EDIP will enhance the ability of the European Defence Industry to ensure the timely production, availability and supply of defence products.
- Third, EDIP will contribute to the recovery, reconstruction and modernisation of the Ukrainian Defence industry.
Through the achievement of these three interlinked objectives, the EU will be able to truly scale up its defence industrial readiness.
What support is foreseen for SMEs?
The Fund to Accelerate defence Supply chains Transformation (FAST) will focus exclusively on SMEs and small Mid-Caps in the defence sector. Building on the experience with the set-up of the defence equity facility under the European Defence Fund, FAST will offer support in the form of debt and/or equity to support investment in the ramp up of production capacities.
What is the SEAP? Who can participate to it? What is the relationship to PESCO?
The Structure for European Armament Programme (SEAP) provides a voluntary legal framework for Member States to incentivise and facilitate armament cooperation throughout the life-cycle of defence products. This means that 3 Member States or more willing to cooperate to jointly develop, procure, use and maintain defence equipment will be able to use the SEAP framework to implement their cooperation. The participation in a SEAP requires Member States to invest in Union defence industry. It also provides specific benefits for the cooperation:
- Favourable access to EU funding.
- Harmonised and simplified joint procurement rules.
- VAT waiver in case of joint ownership by the SEAP.
- Incentives to adopt a common approach to export control of the equipment.
The participation in a SEAP will be open to Member States, Associated Countries (e.g. Norway) and Ukraine.
The SEAP framework is complementary to the Permanent Structured Cooperation (PESCO). It represents an opportunity for Member States to build on their collaborative projects within PESCO. The SEAP framework can serve the implementation of PESCO projects, and contribute to the fulfilment of the more binding commitments in this context.
Furthermore, under certain conditions, actions developed in the context of PESCO projects may also benefit from a bonus under the EDIP .
How will the Security of Supply of defence equipment be enhanced through EDIP?
Ensuring the security of European citizens depends, amongst other things, on the timely availability of defence goods and services in sufficient quantities. Therefore, to ensure the functioning of the internal market, by avoiding shortages of defence products in the Union, EDIP will set up an EU-wide security of supply regime for defence equipment. This regime, which is modular and gradual, will involve a number of aspects, including:
- Firstly, EDIP includes measures to enhance the preparedness of Member States in the new geopolitical context, characterized notably by the need to replenish stocks and further expand defence capabilities as soon as possible.
- Secondly, EDIP encompasses measures to perform an identification and monitoring of critical products and industrial capacities in the supply chains of any relevant defence products.
- Thirdly, when a supply crisis arises, EDIP will provide for a modular crisis management framework, to be implemented gradually, with the possibility given to Member States to decide on the most appropriate stage of crisis management and, for the more serious crises, on measures to be activated.
With this regime, EDIP will ensure that supply disruptions are well anticipated and addressed without delay to preserve the functioning of the internal market and enhance solidarity and effectiveness in response to tensions along the supply chains or security crises.
What is foreseen for Ukraine?
EDIP will provide the possibility for Ukraine to participate in joint procurement and for the Ukrainian defence industry to be supported in their industrial ramp up. To this end, EDIP foresees a specific budget line to support such actions. Subject to a decision by the Council upon a proposal by the High Representative, a share of the windfall profits derived by central securities depositories from immobilised Russian sovereign assets could be used (as and when immediate Ukrainian defence needs permit) to fund this budget line.
How do EDIS and EDIP relate to the division of competences under the EU Treaties in the field of defence?
The EDIS recognises that the defence of the Member States’ territory and citizens is primarily a national responsibility, including through allies’ commitments in the context of NATO. EDIP fully respects Member States’ competences in the field of defence. Reflecting the feedback received during the consultation to inform the European defence industrial strategy, EDIP has been designed to build on already established defence initiatives and EU actions to ensure that these instruments are utilised to support the EDTIB in the most effective way, and to create viable choices for Member States regarding the equipment of their armed forces. For instance, with the SEAP framework, EDIP can usefully complement the efforts undertaken by Member States in the context of PESCO and help them deliver on their related more binding commitments.
Moreover, Member States are at the heart of EDIP’s security of supply regime, they will be responsible for identifying defence products for which scrutiny and vigilance of defence supply chains are necessary. Member States are also the final decision makers (through the Council) on the most appropriate crisis stages and proportionate measures to be put in place to address supply crisis of defence products.
Source: European Commission
